Under the Goods and Services Tax (GST), emphasis on value addition; amalgamation of a large number of central and state taxes into a single tax; and set-off allowance of prior-stage taxes will mitigate the ill effects of cascading, according to a Crisil . This will also allow free flow of tax credit in intra and inter-state transactions, leading to a more efficient and leaner tax structure.
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Accoring to CRISIL that the reform will improve tax efficiency on account of three major changes over the existing system:
—The limitation in central value added tax (CENVAT), pre GST, lied in non-inclusion of several central taxes such as additional customs duty and surcharges. At the state level, there were several taxes, such as luxury tax and entertainment tax, which were not subsumed in the VAT. Pre GST, state VAT was also applied on the value of goods including CENVAT, leading to a cascading effect to the tune of CENVAT load.
—Pre GST, service tax was not allowed for set-off against VAT
—Pre GST, CST was levied on inter-state transfer of goods but did not carry any set-off relief.
CRISIL Research believes that industry stabilisation, under the new tax regime, will take a couple of quarters. However, the benefits of GST
on business practices and company strategies will be seen only in the medium term (1-3 years). The extent of business efficiency is estimated to be higher in goods as compared to services. At present, supply chains across major manufacturing industries are strategised based on tax arbitrage aspect. Seamless tax treatment under GST will eliminate the need of multiple warehouses across states. Furthermore, companies will modify their supply chains based on the assessment of tax saving, inventory carrying cost and response time to meet market demand.
For major sectors, the tax rates announced by GST council are mostly in line with the present effective tax incidences. In sectors such as consumer durables, construction material and FMCG, GST rates have marginal difference. However, for players having higher incidence of CST at present, the saving under the new tax regime will be to the tune of 2%. Specifically for the segments under FMCG, effective tax saving will differ across states due to a wide variation in VAT rates on FMCG items.
On the other hand, tax saving will be relatively higher in automobiles sector, specifically sports utility vehicles (SUVs) as the tax incidence will reduce from current effective tax rate of over 50% to 43% (28% GST + 15% cess). For all other segments, tax incidence is marginally better compared to the previous effective rates.
—Improved demand in select sectors: GST legislation emphasises anti-profiteering measure for companies.
Accordingly, any reduction in the rate of tax on supply of goods or services or the benefit of input tax credit needs to be passed on to the recipient by way of commensurate reduction in prices. Demand improvement is likely in sectors where such tax reduction will be significant. However, these segments may witness an improvement in demand provided companies pass on the tax savings to consumers.
—Manufacturing companies to benefit: While the new regime, in the medium term, will have a structural impact on the supply chains of goods as well as services, the extent of efficiency is estimated to be higher in supply chain of goods. Seamless transport of goods is also estimated to benefit companies/ industries which have pan- India logistic network, wherein supply clusters are concentrated around specific geographies and demand regions are spread across different states.
—Structural changes in supply chains: Many businesses have already been revisiting their supply chain decisions. Other players may do so post stabilisation of GST implementation. This may give a major impetus to the logistic industry at pan India level. Many companies are expected to migrate from a current strategy of ‘multiple warehousing’ to the ‘hub and spoke’ model as tax treatment across India will be same. From now on, most business decisions will be focused on supply chain efficiency and not on state-wise tax arbitrage.
This in turn, may lead to a major business opportunity for organised warehousing players operating large sized warehouses in key geographies.
At present, most warehousing clusters are situated near major demand regions such as NCR, MMR, Kolkata, Bengaluru and Chennai. While these clusters will continue to remain major warehousing hubs, the sector may also witness emergence of other warehousing hubs which will prove effective for pan India logistic players. For example, Nagpur-considered geographical centre of the country- has been witnessing traction for the last few years. Many FMCG and e-commerce companies have already announced their plans to set-up warehousing facilities around the city.
—Increasing share of organised players: Input tax credit, being the crux of GST mechanism, will ensure wider coverage of tax payers in the supply chain. As supply from registered taxpayers only will be allowed for input tax credit, businesses and stakeholders will insist on registration of their suppliers and traders-leading to increase in the share of organised participants. Furthermore, suppliers failing to comply with the timelines of GST returns will have an impact on their compliance rating.