Professional Documents
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INDIA
14 December 2015
Hero MotoCorp, Ultratech Cement, HUL, GSPL, Asian Paints, Rahul Agrawal
Orient, Bata India, Symphony. Telcom and metal sectors are +91 22 6766 3433
likely to be adversely affected. ag.rahul@religare.com
GST biggest indirect tax makeover post the VAT: The Goods and
Services Tax (GST), which has been adopted by 160+ countries in some
form or the other, has been struggling to meet its fate in India for
more than a decade now. The tax reform, which is the extension of the
VAT that was implemented in the mid-2000s, is heralded as the great
hope for simplifying the intricate web of indirect taxes in India.
So near and yet so far: The Constitution Amendment Bill (CAB) has
been passed by the Lok Sabha, but has been stuck in the Rajya Sabha,
where NDA is in minority. There seems to be a meeting ground on all
the three conditions put up by the Congress party. However, even if
the bill receives the RS nod, its a long way ahead. The CAB will need to
be ratified by at least 15 state legislatures before becoming an Act
post which the Centre and the States will have to pass their GST laws.
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The government is unlikely to meet its 1 April 2016 implementation
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timeline. The best case for implementation date is 1 Oct 2016.
A sub-ideal GST: The CAB has many distortionary features that make
the GST regime a sub-ideal one. These include the additional 1% levy,
large exclusions from the GST base, the GST rate structure, and
exemptions on petroleum products and other goods. Nevertheless,
even in its second best avatar, the reform has the potential to deliver
significant efficiency and productivity gains.
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GST Rate, Structure & Rationale Strategy
INDIA
Will it deliver in its current sub-ideal form?
Inflation and GST: The very idea of a Revenue Neutral Rate may imply that the GST
should, in principle, have no aggregate impact on inflation and price level. However,
this need not be always true, especially if the weights of commodities in CPI
consumption basket are different from their contribution to the indirect tax pool.
Sector-wise impact
Fig 1 - Main gainers from GST
Sector Remarks Beneficiaries
Major auto pack including Bajaj Auto, Eicher Motors,
Hero MotoCorp, Maruti Suzuki, Tata Motors. Mahindra &
Automobiles Current tax incidence on passenger cars at 25-40%
Mahindra to benefit the most if SUVs are taxed at
standard rate
Tiles Unorganised segment has a high market share at ~50% Kajaria Ceramics, Somany Ceramics
Pipes Share of unorganised segment ~45% Finolex Industries
Current tax incidence at ~25%; ~50% of industry
Construction chemicals Asian Paints, Pidilite
unorganised
Artificial leather Share of unorganised segment ~50% Mayur Uniquoters
Major cement players including Ambuja Cement, Grasim
Cement Total indirect taxes: 26%, high logistics costs
Industries, JK Cement, Shree Cement, UltraTech Cement
Fans, wires and cables Share of unorganised sector at ~30-40% Bajaj Electricals, Havells
Bearings Share of unorganised sector at 40% SKF India
Air coolers Share of unorganised sector at 75-80% Symphony, Voltas
Footwear Large unorganised sector; +22-24% current indirect tax Bata India
IT Hardware Consolidation in warehouses operations improving Redington India
Logistics and Efficiency improvements to higher utilisation rates and
GATI, Blue Dart, VRL Logistics
warehousing companies increased demand for logistic services
Source: RCML Research
The Congress Party has laid down three conditions to support the bill (a) The maximum
GST rate be capped at 18% (b) the 1% additional levy be scrapped (c) a credible dispute
resolution mechanism be established. While the BJP is expected to agree to the last two,
it is unlikely to relent on the first condition.
Even if the CAB does get the RS nod, it would still be far from becoming an Act. At least
15 state legislatures will have to pass the bill. With the BJP and its allies ruling 11 states at
present, 4 more states would have to pass the bill.
States ruled by BJP allies Punjab, Andhra Pradesh, Jammu & Kashmir 3
Non-BJP/ Non-Congress ruled states West Bengal, Uttar Pradesh, Telangana, Orissa 4
After the Constitution is amended as per the CAB, the GST Council, comprising of the
Finance Minister and nominated State Ministers will be formed within 2 months. It will
deliberate on the specific features of the GST. Besides, the Centre and all the states will
have to pass their respective GST laws.
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Thus, the entire process is a long drawn one and is unlikely to be completed before 1
April 2016, which is the governments intended date of bringing the GST into effect. We
st
believe that the GST will only be able to come into full force from 1 April 2017 (base
case). However, if the government pushes hard, it could manage to introduce it from
mid-FY17 (best case).
To implement the Goods and Services Tax in India, the constitution needs to be amended
to give the central and state governments concurrent power to make laws on taxation of
goods and services. The Constitution (122nd Amendment) Bill, 2014, seeks to do the
same.
Amending the Constitution is a tedious process. A bill to amend the constitution must be
introduced in either house of the Parliament, which must then be passed in both houses
by a special majority i.e. by a majority of the total membership of that House and by a
majority of not less than two-thirds of the members of the House present and voting.
The Constitution does not permit a joint session of the Houses of the Parliament to be
held in order to pass a Constitutional Amendment Bill each House has to pass the bill by
the prescribed special majority.
Once both the Houses have passed the bill, it must be ratified by Legislatures of at least
50% of the States (15 States). Thereafter, it is presented to the President for assent.
The Constitution (122nd Amendment) Bill is only an enabling legislation. Once this goes
through, the central government will have to pass a central GST bill and the States will
pass state GST bills, which will draw powers from the Constitution in order to levy the
Goods and Services Tax. These bills will have to be passed with a simple majority.
After the Centre and all the States enact their respective GST legislatures, the GST can be
levied and the GST regime will come into full effect.
Differentiation between goods and services - they are taxed No differentiation between goods and services; both
Good vs. service
separately subject to one tax
Powers of taxation Only the Centre can tax services Both the Centre and States can tax services
Origin-based (central government excise duty on production and Destination-based (value added tax at point of
Incidence of taxation
States' sales tax at sales stage) consumption only)
Tax rates Different tax rates on products across different states Single tax rate to apply on all goods and services
Exemptions More than 300 for Centre and 90 for states Fewer exemptions envisaged
Input credit set-off not available across different taxes. For Seamless flow of input tax credits (except in the case
Set-offs
instance, set-off not available for excise against state sales tax of the proposed 1% additional levy)
Source: RCML Research
The GST aims to simplify and harmonise Indias current indirect tax regime. The CAB
intends to restructure the current distribution of fiscal powers in the Constitution; post
the bills passage, the Centre and States would be empowered to levy a single tax (GST)
across the value chain right from manufacture to consumption.
Key features of the proposed GST regime: services. The Centre would levy and collect Central
Goods and Services Tax (CGST), and States would levy
Destination-based tax: The GST is a destination-based and collect the State Goods and Services Tax (SGST) on
tax and will be levied at the point of consumption only. all transactions within a State.
The current regime is an origin-based regime, with taxes
levied at the point of origin of goods/supply of services. Inter-state trade: The Centre would levy the Integrated
Goods and Services Tax (IGST) on the inter-state supply
Goods vs. services: The current system taxes goods and of goods and services. The inter-state seller would pay
services separately. The proposed GST regime will not IGST on the sale of goods to the Centre.
differentiate between goods and services with both
being subject to one tax. Besides, it will also empower Taxes to be subsumed: All major indirect taxes levied by
States to tax services, which are currently only subject to the Centre and the States will be subsumed in the CGST
taxation by the Centre. and the SGST (Fig 7).
Input tax credit: Input tax credit of CGST would be recommendations of the GST Council). The proceeds
available for discharging the CGST liability on the output from this levy will be distributed among the States from
at each stage. Similarly, the credit of SGST paid on inputs where the supply originates.
would be allowed for paying the SGST on output. No
cross utilisation of credit (across CGST and SGST) would Compensation to States: Manufacturing States are
be permitted. With respect to the IGST, input tax credit expected to lose revenue owing to the destination-based
would be permitted to the interstate seller on IGST, CGST principle of the GST. As per the Constitution Amendment
and SGST (in that order) on his purchases. Bill, the Centre, for a period of five years, will provide
compensation to the States for loss of revenue due to
Additional tax levy: The CAB allows the Centre to levy of GST implementation.
an additional tax on supply of goods, not exceeding 1%,
in the course of inter-State trade or commerce for a Tax base: As per the CAB, all goods and services (except
period of two years (period may be extended on alcohol for human consumption) will be brought under
the GST purview. While petroleum/petroleum products (c) the threshold limit of turnover below which goods
have been included in the framework, GST would be and services may be exempted;
levied only upon the Councils recommendations,
implying that present taxes (excise duty, sales tax, CST) (d) the rates including floor rates with bands of goods
would continue to be levied on these products. For and services tax;
tobacco and tobacco products, taxes imposed by the
(e) any special rate or rates for a specified period to
Centre would be levied over and above the GST. raise additional resources during natural calamities;
GST rates: The States will be able to fix their SGST rates
(f) dates from when GST will be levied on petroleum
in a band above the floor rate (bands and floor rates will
products; and
be recommended by the GST council). So the GST rate
will not be uniform across the country, but will vary from (g) framing dispute resolution modalities.
state to state (although in a narrow range).
At least 50% of the council members would have to be
GST Council: According to CAB, a GST Council would be present in to conduct business at the meeting of the
created within 60 days of the commencement of the Act, Council. Every decision of the GST Council shall be taken
and would have the Union Finance Minister as the by a majority of not less than three-fourths of the
Chairman. Council members would include the Union weighted votes of the members present and voting,
Minister of State in charge of revenue or finance, and wherein, the Centre shall have a weightage of one-third
ministers nominated by each State and Union Territories. and the votes of all the State Governments taken
The Council would make recommendations on important together shall have a weightage of two-thirds of the total
issues such as: votes cast in that meeting.
(a) taxes, cesses and surcharges levied by the Union, the Goods and Services Tax Network (GSTN): The GSTN is a
States and the local bodies which may be subsumed not for profit, non-government company that has been
in the GST; set up primarily to provide IT infrastructure and services
to the Central and State Governments, tax payers and
(b) goods and services to be exempted from the GST;
other stakeholders for implementation of GST.
Levy of additional 1% Proposed to meet concerns of manufacturing states The additional levy is origin-based and goes against the
duty such as Gujarat, Tamil Nadu and Maharashtra, which fundamental idea of the GST. It will create tax cascading
are expected to lose revenue due to the destination- (as this will not be available as input tax credit) and
based tax principle of the GST impede interstate trade (Fig 9).
Exclusion of items from Alcohol for human consumption, which contributes The Centre should have at included these items in the
GST base significantly to the States revenues, has been kept ambit of the GST, but exempted them from taxation like
outside the purview of the bill, in line with the demand of petroleum products. This would have given it the flexibility
the States. to readily tax these products in future.
Taxes on consumption/sale of electricity and real estate Any exclusion is effectively a permanent one including
have also been left out. any of these items at a later date would mean undertaking
a fresh amendment to the constitution which is a
herculean task.
Exemption on petro- Products like petroleum crude, high speed diesel, motor Petroleum products are directly/indirectly used as inputs
products; current tax spirit, NG and ATF have been kept under the ambit of for a many goods and services. Their exemption would
regime to continue the GST (unlike the 2011 bill) but wont be taxed. mean that the cascading effect of the current tax system
Present taxes (central excise duty on production and would continue as input tax credit would not be available
VAT/CST on sales) will continue to be levied. on these items.
Rate Structure As per the CAB 2014, States would have the freedom to An ideal GST structure calls for a single national tax rate.
set the SGST rates between a floor and ceiling rates (to Multiple GST rates across States would impede the
be recommended by the GST Council), with the band formation of a common national market.
currently proposed at 2%. This implies a single uniform
States would be able to retain some amount of fiscal
GST rate will not exist across India, but would vary
autonomy because alcohol and petroleum which account
across States (though in a limited range).
for ~30% of the indirect tax revenue of all states together
will remain out of the GST regime (apart from electricity
and real estate).
Multiple exemptions exist under the present tax system If majority of the items exempted will be food/essential
the Centre has ~300 items exempted from central items consumed by the lower strata, it is an acceptable
Exemptions on certain
excise duty, while the States (together) have ~90 items compromise to make. Besides, imposing the GST on
goods to continue
exempted from VAT. These will be merged into a essential goods that are currently exempted from either
common list under the GST regime - the GST council, excise or VAT or both would be regressive in nature as
once constituted, will make recommendations on the list their prices would shoot up.
of items to be excluded.
Nevertheless, the government must limit exemptions to
As per the CEA Panels Report, government estimates only essential goods in order to widen the tax base and get
suggest that excise duty exemptions (plus lower rates as close to the ideal GST regime as possible.
on items) result in foregone revenues of Rs 1.8tn,
equivalent to 80% of actual collections. Similarly, states
lose out Rs1.5tn. Altogether India loses 2.7% of GDP
due to exemptions.
Minimum thresholds for Currently the threshold prescribed in different State VAT If threshold levels are raised, it will effectively reduce the
GST to be applicable acts (below which VAT is not applicable) is Rs.0.5 number of firms that pay GST, thereby narrowing the tax
million for most the bigger states and Rs.0.5 million for base. For instance, at a threshold of Rs.4 million, 79% of
the North Eastern and special category states. The the entities accounting for 1.4% of the total turnover would
central excise duty threshold for goods is at Rs.15 be left out of the GST net (Fig 11).
million, while the service tax threshold is Rs.1 million.
The government must bring as many firms under the tax
The CEA led-Panel proposes to raise these to a net as possible in order to widen the tax base and comply
common threshold of Rs.2.5 million for goods and with an ideal GST regime. Excluding such a large
services (which can be raised to Rs.4 million if needed) proportion of tax paying entities will reduce the
in order to protect the interests of small traders and effectiveness of the GST
small scale industries. The Empowered Committee of
State Finance Ministers had also proposed to raise the
threshold limits
GST council and The GST council can only make recommendations the The CAB empowers the GST council to ``decide about the
dispute settlement CAB does not give it the power to enforce these. This modalities to resolve disputes arising out of its
authority is necessary to ensure that States implement a recommendations. The Centre/States would be party to
homogenous GST model. any dispute arising out of GST implementation, implying
that they will hear their own case, given the composition of
the GST council. Hence, there is a case for having a
dispute settlement authority (as proposed in the 2011 bill).
Fig 10 - Petroleum products account for 46% of the Centres excise collections
Excise collections in 2013-14 Rs bn % share
Total central excise collections 1,941 100.0
Mineral fuels, mineral oils and products, etc. 886 45.6
Motor spirit 224 11.6
Kerosene 3 0.2
R.d. oil 271 14.0
Diesel oil, n.e.s 2 0.1
Furnace oil 25 1.3
Petroleum gases and other gaseous hydrocarbons 16 0.8
Others, of mineral fuels, mineral oils and products etc 344 17.7
Source: RCML Research
The collection efficiency ratio is defined as the ratio of actual revenue collected to total
potential revenue. The committees preferred RNR is at 15%, which has a collection
efficiency ratio of 0.56, which compares well with several emerging market economies
(Fig 12) as well as other approaches.
Fig 13 - Collection efficiency in major VAT/GST economies
On the standard rate too, it may be noted that GST is intrinsically a regressive tax and the
higher the rate, the greater the regressivity. The committee is of the view that countries
with well-developed social safety nets can better offset this regressivity; however, given
the lower level of development in India, it needs to keep the standard rate in line with
international rates while also ensuring that it is as low as possible.
Fig 14 - Standard rate of VAT in high income and Emerging Market Economies
Key recommendations
RNR and rate structure: The CEA-led panel has recommended a RNR of 15-15.5%. It
also proposes a three-rate structure with a low, standard and high rate.
Fig 15 - Committees estimates of RNR and GST rates
Rate on precious Low rate Standard rate (goods High/Demerit
RNR
metals (goods) and services) rate(goods)
6 16.9
Preferred 15 4 12 17.3 40
2 17.7
6 18
Alternative 15.5 4 12 18.4 40
2 18.9
Source: Report of the CEA Panel on GST rates, RCML Research
o The exemptions list be narrow, restricted to a few goods, that are merit goods
which feature prominently in the consumption basket of the poor (such as food
items, especially cereals, pulses, edible oils, vegetables)
Other proposals
Alcohol should be included in the law while petroleum should not be exempted
While these recommendations do carry weight to the extent that state government
representatives were also consulted in the exercise, the final GST model will be the
prerogative of the GST council.
If the GST is levied at 18% (in line with the CEA panels recommendations), the final
price for the consumer would come down (Fig. 17, 18) owing to a lower tax incidence
and the absence of a tax-on-tax due to a seamless flow of credits across the value
chain. Besides, the IGST mechanism would also facilitate full tax credit transfers
across states.
Fig 17 - GST on trade within a state
Current regime GST regime
Input Manufacturer Input Manufacturer For intra-state trade, a GST levy of 18%
Value Added 1,000 Value Added 1,000 would lead to consumer savings of
Rs 201. Even at a GST rate of 25%, the
Excise (@12.5%) 125
consumer would save Rs 117
Total 1,125 CGST (@9%) 90
VAT(@12.5%) 141 SGST (@9%) 90
Invoice 1,266 Invoice 1,180
Output Manufacturer Output Manufacturer
Cost of goods 1,000 Cost of goods 1,000
Value Added 100 Value Added 100
Total 1,100 Total 1,100
Excise (@12.5%) 138
Total 1,338 CGST (@9%) 99
VAT (@12.5%) 167 SGST (@9%) 99
Invoice 1,505 Invoice 1,298
Dealer Dealer
Cost of goods 1,338 Cost of goods 1,100
Value Added 100 Value Added 100
Total 1,438 Total 1,200
CGST (@9%) 108
VAT(@12.5%) 180
SGST (@9%) 108
Invoice 1,617 Invoice 1,416
Savings for final consumer 201
Source: RCML Research
b. Prices of some currently exempted goods may rise: The prices of goods that are
currently exempt from central excise duty or sales tax (or both) or are subject to
concessional VAT/excise rates are set to increase if these are not exempted from the
GST. The CEA has recommended that the number of exemptions be lowered,
implying that some of the items that were currently exempt will come under the GST
purview.
Fig 19 - List of items exempted from VAT (not exhaustive)
Agricultural implements manually operated or animal driven Fresh vegetables & fruits
Aquatic feed, poultry feed and cattle feed Goods, except kerosene oil, sold through PDS
Bread except pizza bread containing any type of fruit or vegetable. Handicrafts, household articles made of brass and bell metal
Paddy, rice, wheat, pulses, flour, atta, maida, suji, besan and
Electrical energy
sattu.
Fresh plants, saplings and fresh flowers Sugar manufactured or made in India, misri and batasa
Source: RCML Research
Wheat, Paddy, Rice, Jute, Oilseeds and all kinds of dals and pulses Electrodes including welding electrodes and welding rods
Vegetable Oils including solvent oils and Coconut Oil Ferrous and non-ferrous metals and alloys
All intangible goods including copyright, patent, rep license, DEPB Fibres of all types and fibre waste
Bicycles, tricycles, cycle rickshaws & parts and accessories thereof Kerosene sold through public distribution system
Centrifugal, monobloc and submersible pumps Printed material like diary, calendar, etc
Vanaspathi, Hydrogenated Vegetable Oil Silk fabrics other than Handloom silk fabrics
Coal Including coke in all its forms, but excluding charcoal Sports goods excluding apparels and footwear
c. Negative impact on services: Under the current tax system, taxation of services is
under the ambit of the Centre, with a service tax rate of 14%. Post GST, the States
will also have the power to tax services. While this would widen the tax base for
States, it would lead to a higher tax rate (18% proposed GST rate) and push up prices
of services, hurting demand. Higher taxes could also lead to under-invoicing and
generation of black money.
It is not yet clear if services under the negative list or services which are currently
exempted (such as education, medical and health services) would be taxed under
GST. If these are taxed, their final prices would rise. However, they will have some
relief coming from the availability of input tax credits.
Currently, although these services are not taxed, they are not zero-rated either; they
cannot claim refund of inputs (excise duty paid on goods and services tax paid on
services) and those remain stranded costs for them. So costs would decline and
providers would be able to partially offset the tax incidence by lower pre-tax prices.
Basic Custom Duty will continue to there under GST system. However, the additional
custom duty in lieu of CVD /Excise and the Special Additional Duty (SAD) in lieu of
sales tax/VAT will be subsumed in the import GST. Both CGST and SGST will be levied
on import of goods and services into the country. The incidence of tax will follow the
destination principle and the tax revenue in case of SGST will accrue to the State
where the imported goods and services are consumed. Full and complete set-off will
be available on the GST paid on import on goods and services.
As per the World Banks India Development Update released in October14, the cost of
logistics is relatively high in India, and ranges from over 10% of net sales for auto
components to over 14% for electronics higher than employee, power & fuel and R&D
costs put together. As against this, best-practice global benchmarks for logistics costs are
~3% of net sales for auto components and ~4 % for consumer durables.
The report also notes that most transportation in India is by truck, but hard road
infrastructure is just one of the many constraints for shipping goods. Of the 69 firms
surveyed, 36% felt that State border check-post clearances were the major reason for
freight delays.
As per the World Bank, halving the
delays due to road blocks, tolls and
The World Banks study suggests that the average speed of a truck on a highway is just
other stoppages could cut freight times
~20-40km/hour and trucks travel just 250-300kms per day in India. This raises costs due by ~30% and logistics costs by 40%
to higher inventories and locational inefficiency (locating close to suppliers/customers
instead of low-cost locations in terms of rent).
Fig 25 - Average distance travelled by a truck Fig 26 - Only 40% of the total trip time is spent driving
(Kms/day)
Driving
1,200
Driving Checkposts
1,000 40%
Other official stoppages
800
Repairs en route
600
Fueling en route
400
Rest and meals
200
Traffic hurdles
0
USA Australia Brazil World India Other halts
Average
Source: RCML Research, World Bank Source: RCML Research, World Bank
The World Bank estimates that as much as 60% of the journey time, the truck is not
moving, with 25-30% of the time spent at checkposts, state borders and city entrances.
Thus, regulatory impediments increase truck travel time by a quarter as over 650
checkpoints slow freight traffic at state borders.
GST implementation could reduce these logistics issues, leading to lower travel time
which could lower inventory stocking needs. Further, the transformational impact of GST
could be enhanced by focused government efforts towards systematic dismantling of
inter-state check-posts. As per the World Bank report, halving the delays due to road
blocks, tolls and other stoppages could cut freight times by ~30% and logistics costs by
40%. This would translate into a gain of ~3-4% of net sales for key manufacturing sectors.
1% additional levy, compensation to pacify producer states: The Centre enticed states
via the 1% additional levy, an origin-based tax. It also agreed to compensate all their
losses for five years post GST implementation, although it is still not clear how the
shortfall would be calculated. During the transition to state VAT, the three top annual
growth rates during the last six years were averaged and used to project revenues, which
was then compared with the actual revenue to calculate the shortfall. However, the CEA
panel has recommended against such an origin based levy, as it goes against the basic
principle of the GST.
States with large service sectors to gain: Once the GST comes into force, States will be
able to tax services. Thus, the tax base for all states will widen this will partially offset
the revenue losses that producer states will have on goods due to the destination-based
nature of GST. However, states with a larger services sector vis--vis manufacturing
sector would gain more. Example would be states with large tourism revenue like Kerala
and Goa.
Fig 28 - Sectoral share in NSDP (%)
Manufacturing Services
Gujarat 20.6 45.9
Maharashtra 15.2 64.6
Punjab 14.0 48.6
Haryana 13.7 54.7
Tamil Nadu 13.2 63.0
Karnataka 11.7 62.4
Rajasthan 10.9 44.2
Uttar Pradesh 8.6 51.9
Chattisgarh 7.1 45.2
Madhya Pradesh 6.6 42.4
West Bengal 6.3 61.8
Andhra Pradesh 5.9 53.7
Kerala 5.9 66.8
Orissa 3.8 52.3
Bihar 3.0 60.6
Source: RCML Research, CSO
Reduced fiscal autonomy of states: As per CAB, the GST rate will be uniform across the
country and states would have a limited amount of flexibility to vary the SGST rates
within a narrow band. Such harmonization would reduce the fiscal autonomy of the
States to fix rates. At the same time, GST implementation (in its current form) will not
take away fiscal powers completely as petroleum has been exempted and alcohol kept
out these two items account for ~30% of indirect revenue of states.
Revenue shortfall to hurt Centre: Given that the tax base for the Centre and States
would be common post GST implementation, any shortfall in revenues would be also be
common. Thus, fund transfers to the States would imply a fall in the Centres revenue
this could pose a risk to the central governments fiscal targets.
4. Inflation impact
The very idea of a Revenue Neutral Rate may imply that the GST should, in principle, have
no aggregate impact on inflation and price level. However, this need not be always true,
especially if the weights of commodities in CPI consumption basket are different from
their contribution to the indirect tax pool. Lets look at the current tax structure of the
CPI consumption basket.
Large part of CPI basket not taxed: The CEA-led panel estimates that average effective
current tax rate on CPI consumption basket is 10.4%. If we exclude alcohol, petrol and
diesel, this effective rate drops to 7%. Further, a large part of the consumption basket is
either exempted or taxed at a very low rate. For example, 75% of the CPI is exempted
from excise and 47% of the CPI is exempt from sales tax. Besides, 32% of the CPI is taxed
at a low rate, 15% is taxed at a normal rate and 4% is taxed at a high rate (this includes
petrol, diesel and alcohol items kept out of GST). Excluding taxed items that are to be
kept outside the GST purview, 54% of the CPI consumption basket would be GST exempt.
No impact on food inflation: Food has the largest weight in the consumer basket, at
~ 40%. Food items are exempt from most taxes in the current regime and these
exemptions are expected to continue post GST. The CEA-led panel has also
recommended that exemptions on food items continue, as they affect the poor more.
Fig 29 - Food accounts for a high weight in CPI
Others
9%
Health
6%
Education
4%
Housing
10% Tobacco & intoxicants
Clothing
2%
7%
Hike in tax rate on services unlikely to significantly affect CPI: Services account for 22-
23% of the CPI basket. Housing has the highest weight within services (~45%), which
predominantly comprises house rent receipts (weight in CPI: 9.51%). Currently, no service
tax is levied on house rent. Even among the remaining components, multiple services
across the healthcare, education and transport and communication segments escape
taxes. Thus, even as the tax incidence on services generally goes up due to a higher tax
rate, because of continuation of exemptions on most of these services in the basket, it is
unlikely to affect the CPI significantly.
Fig 30 - Share of services in CPI (%)
Services 22.37
Housing 9.83
Transport and communication 4.59
Healthcare 1.83
Entertainment 1.07
Education 3.52
Others 1.53
Source: RCML Research
Overall impact on CPI: The impact on other items in the CPI basket will depend on the
tax incidence post GST vis--vis current incidence, whether producers pass on benefits of
lower rates and the pricing power of producers in passing on higher taxes in case of
increase in taxes and continuation/removal of exemptions.
The CEA panel would like us to believe that the overall impact of GST on CPI inflation is
likely to be minimal, given the high share of food in the basket. However, experiences in
a number of economies like Australia, New Zealand and Canada shows that GST
implementation led to a step increase in prices, boosting inflation in the first year. In
India, given that prices have been more inflexible downwards, probability of adverse
impact on prices is higher. This requires setting up of robust monitoring and rectifying
mechanisms to be in place well ahead of GST implementation, especially for prices of
sensitive essential commodities.
Compensation to
States for revenue No provision in the bill to provide compensation to the States Provide for compensation to States for 5 years.
losses
Set up Dispute Settlement Authority to settle disputes No Dispute Settlement Authority. GST Council to decide upon
Dispute Resolution
between Centre and States. the modalities to resolve disputes
Source: RCML Research
The Kelkar Task Force on implementation of the FRBM Act, 2003 suggests a comprehensive Goods and Services Tax
July, 2004 based on VAT principle
February, 2006 Finance Minister, P. Chidambaram introduces GST in the budget for FY07 and proposes to rollout GST by 1st April, 2010
Announcement to set up an Empowered Committee of State Finance Ministers (ECSFM) to prepare roadmap for introducing
February, 2007 GST
May, 2007 Joint working group set up by ECSFM with finance ministry officials
November, 2009 ECSFM, based on inputs from Centre and States, releases First Discussion Paper on GST in India
February, 2010 Finance Minister, Pranab Mukherjee proposes to roll out GST by April, 2011 in the budget for FY11
February, 2011 Finance Minister, Pranab Mukherjee proposes to roll out GST by April, 2012 in the budget for FY12
March, 2011 Finance Minister, Pranab Mukherjee introduces Constitution (115 Amendment) Bill,2011 to introduce GST in constitution
May, 2014 The constitutional amendment bill lapses with the dissolution of the 15th Lok Sabha
December, 2014 Finance Minister, Arun Jaitley introduces Constitution (122nd Amendment) Bill,2014 to introduce GST in constitution
February, 2015 Finance Minister, Arun Jaitley proposes to roll out GST by April, 2016 in the budget for FY16
May, 2015 Lok Sabha passes the Constitution (122nd Amendment) Bill,2014
May, 2015 Constitution (122nd Amendment) Bill,2014 referred to a Select Committee of Rajya Sabha
July,2015 Rajya Sabha Select Committee submits report endorsing majority of proposals. Congress, AIADMK and left parties oppose
Source: RCML Research
Mihir Jhaveri Auto, Auto Ancillaries, Cement, Logistics mihir.jhaveri@religare.com +91 22 6766 3459
Siddharth Vora Auto, Auto Ancillaries, Cement, Logistics siddharth.vora@religare.com +91 22 6766 3435
Misal Singh Capital Goods, Infrastructure, Utilities misal.singh@religare.com +91 22 6766 3466
Prashant Tiwari Capital Goods, Infrastructure, Utilities prashant.tiwari@religare.com +91 22 6766 3485
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