GST Council meeting
Rolling out GST
The wait is over: India has cleared the way for the biggest tax reform since independence in 1947.
The grand federal bargain on the goods and services tax (GST) over the weekend will take the country a step closer to the eventual goal of a unified national market. A reform that was first proposed at the turn of the century is finally becoming a reality—an indication of how complicated policy change in India can be.
The Goods and Services Tax (GST) has been one of the key things that has caught the attention of the market given its implications on earnings of companies. The government has kept a large number of items under 18% tax slab. The government categorized 1211 items under various tax slabs. Here is a low-down on the tax slab these items would attract:
Here are the winners and losers :
The main beneficiaries of the new goods and services tax (GST) rates include steelmakers and some consumer goods, though personal care items including sanitary ware will be taxed at the top rate.
Fast-Moving Consumer Goods
The sector is a clear winner. Consumer staples including milk, fruits and vegetables, grain and cereals have been exempted.
Sugar, tea, coffee and edible oil will be taxed the lowest rate of 5%. Companies that may gain include Hindustan Unilever, Nestle India and Dabur India.
Automakers
Here the impact is likely to be marginal. Vehicles already attract different levies, which add up to 28% — the peak GST rate fixed for the sector. Gains derived from a unified tax system may still be passed on to consumers, analysts say. Maruti Suzuki India, Tata Motors and Mahindra & Mahindra could benefit.
Consumer Durables
Appliances such as air-conditioners, refrigerators and washing machines will attract the peak rate, which is slightly higher than the existing tax slab. Companies may increase prices to preserve margins, Nirmal Bang Equities said in a note. Whirlpool of India, Voltas and Havells India could be impacted.
Metals, Cement
A reduction in tax on coal and metal ore to 5% will cut input costs for steelmakers, benefiting companies including JSW Steel, Vedanta, Tata Steel and Hindalco Industries.
Renewable Energy
A 5% tax rate on equipment like solar panels and wind turbines may help keep a lid on project costs for developers such as Inox Wind and Suzlon Energy
Exporters to get tax refund under GST within 7 days says Nirmala Sitharaman.
“The state is reducing taxes on the condition that the benefit may be transferred to consumers. If businesses do not respond, the government has to intervene,
Jammu and Kashmir finance minister Haseeb Drabu, who hosted the 14th meeting of the GST Council in Srinagar last week, also said that the most important GST implementation issue is making sure that the benefit of tax reduction reaches consumers.
While the lower Goods and Services Tax (GST) rates may lead to a decline in inflation, economic growth may not improve significantly in the short term even though it will benefit both India Inc and the government in the medium term.
Economists forecast inflation to come down as GST rates for most goods have been fixed at a lower rate.
India Inc will have to reorganise their businesses as the country switches to the GST regime, which will bring in more small companies into the tax net.
Here are five impacts GST will have in the near term:
1.Shaking up corporate operations
The new tax regime will force many companies to restructure their operations.Companies will now insist vendors and suppliers to furnish invoices as GST will make it impossible for firms to evade taxes.
Big companies stand to benefit as they have a supply chain in order and can offset taxes paid on inputs.Smaller firms may end up spending more as compliance cost will rise.
2.Passing on the benefit of lower tax
While the GST Council, headed by finance minister Arun Jaitley, will keep a close vigil on whether companies are passing on the benefit of lower taxes to consumers, experts expressed doubt on the implementation of anti-profiteering norm. While GST laws include anti-profiteering measures—the benefits of the reduction in the tax rate and input credit shall be passed on by a commensurate reduction in prices—such measures are difficult to implement and would be a retrograde step, similar to price controls, if implemented in haste.
3.Inflation may remain low
Analysts have no doubt that inflation will remain low as GST rates on essential goods such as food grain, household consumer items and essential services have been either exempt or kept lower.However, assuming that GST does have the intended effect of increasing tax compliance, the tax burden would increase. Most of the services are not accounted in the consumer price CPI inflation basket and hence the higher GST rates may not get reflected on the retail price movement as measured by the government data.
4.RBI may not cut rates in June
While inflation is expected to ease further with GST rollout from a record low of 3% in April, analysts expect RBI may not immediately lower policy interest rates.
In the last policy review, RBI had flagged concerns that the “one-off” impact GST may be inflationary. The central left policy rates unchanged in April.
5. Economic growth may not jump immediately
Economists are not sure of the immediate impact of GST and some even say it may impeded growth in the short term as big companies reorganise their businesses and as small firms lose revenue.
“The GST implementation will be disruptive as there will be a major change in the supply chain,” India Ratings’ and the tax reform will be beneficial to the economy in the medium to long term.
While GST is unlikely to be a “positive” for economic growth in the short term. The reform will improve the ease of doing business, bolster investor sentiment and lure more foreign investment in coming years.