One of India’s biggest tax reforms, the Goods and Services Tax (GST), is expected to bring in a much awaited change, replacing an existing indirect tax regime which varies across states. It is hoped that the introduction of a nationwide sales tax will put Indian businesses on a high growth trajectory globally. By definition, GST is a single tax on supply of goods and services and while applicable in International jurisdictions, it has yet to be introduced in India.
The current position
Currently, under the scheme of indirect taxation, both the Central and State governments have the powers to tax businesses. Due to the possibility of an overlap, there is a significant increase in compliance and administrative costs. Further, it is a cumbersome process wherein a business needs to account for and pay separately for various taxes and duties. As the marketplace evolves, differentiating between goods and services is difficult, making separate taxation of both, tougher.
How will GST impact businesses?
GST is proposed to be implemented in India from April 2016. It would be a complete overhaul of the current indirect tax system with a comprehensive indirect tax levy on the manufacture, sale and consumption of goods and services nationally. It would result in ease of administration for the government, owing to its transparent nature. The deployment of technology in an effective manner will be the key to make proposed GST regime efficient and cost effective as far as compliance and administrative costs are concerned. Globally, GST has shown increased revenues, partly due to improved compliance, leading to a significant increase in output and productivity.
Implications on Financial Services
An important area to look at would be to ascertain how fee-based activities are treated, as currently they are generally liable to service tax. With GST being an all-encompassing levy, it may apply to all services, albeit with a list of exclusions. Thus, it would be important for fund-based activities to be a part of the list of exclusions to have the effect of continuing the current “no-tax” situation. Hence the classification of income between interest and fees need to be clearly defined.
Place of Supply (PoS) rules will impact calculation of GST on outbound and inbound transactions, as current location of the client is immaterial. If not clearly defined, operational costs of investment banks and other firms will go up, thereby increasing the total cost of providing service to a client. For example, if a Mumbai-based bank conducts a transaction for a Bangalore-based firm, for computing GST – whether it would be charged in the state that the service provider is located, or the client – needs to be determined.
Moving to input tax credits, under the current regime financial services typically get 50% set-off against output tax liability. Under the GST regime, it may move to actuals or be restricted to percentage recovery. If on actuals, the determination of exempt income would be paramount.
Overall, GST will benefit the economy across sectors, with minimisation or elimination of taxation-related inefficiencies.
GST in the news
To make GST successful, a reasonable GST rate will make it good for businesses and the economy as a whole. Internationally GST rates ranges from 16-20%. The GST rates would be in two components – Central GST and State GST. For manufacturers the current rate of the various indirect taxes in India amounts to roughly 25% and a GST rate at 20% would contain inflation. The government would stand to gain in medium to long term due to widening of tax
base. Thus efforts are on to ensure a taxpayer-friendly administration.
As of today, the implementation of GST is on hold due to parliamentary impasse between the ruling government and the Opposition. While the GST was passed in May 2015 by the Lok Sabha, it has currently been stalled in the Rajya Sabha owing to a political logjam. The Opposition has been demanding three major changes to the Bill. The government may now instead look at proposing a joint parliamentary session and also alternative options to roll out GST such as evaluating a two-rate structure, wherein key services would be taxed at a lower rate to give relief to consumers.