Impact of GST on key sectors and its ripple effect on the ordinary consumer
The Goods and Services Tax (GST) regime which was introduced in India on July 1 will unify India as a homogenous market. Consumers may have better access to goods and services as bottlenecks are eliminated and supply chain is re-organised. This is an opportune moment to assess the impact of GST on key sectors in the Indian economy. It can also help gauge how the ordinary consumer will be impacted:
GST is expected to improve the competitiveness of the manufacturing sector by easing the compliance burden. This, in turn, will reduce administrative costs and boost growth. The service sector that contributes to a significant part of the Gross Domestic Product (GDP) will see tax compliance burden increasing. This is because most services now come under the 18% bracket of the four tier GST structure. However, in the long run, the ease of doing business in a unified and homogenous market may result in gains for the sector.
Let's take a closer look at GST impact on the key sectors of the economy:
Banking, Financial Services and Insurance (BFSI)
The BFSI industry can be primarily affected by GST in two ways: 1) The GST rate is higher than the current service tax rate. 2) Registration process for every bank and Non-Banking Financial Company (NBFC) in each state they operate in.
The current transaction fee for banking services is 15%. This includes services like loan applications, getting a demand draft, foreign exchange and so on. The same is applicable for insurance products as well. Term and health insurance are currently charged at 15% of the entire premium amount. Unit-linked Investment Plans (ULIPs) are also charged with 15% on premiums minus the investment amount.
This present rate of 15% is likely to be hiked to 18% in both the insurance as well as the banking sectors. Hence, for every Rs.1,000 you pay for banking purposes, there would be an additional 3 percentage point tax. This means, you pay a total of Rs.180 as GST. Also, commodities such as gold and silver have concessional GST rates applicable on them. Thus, you would have to be careful not to pay higher taxes while purchasing such commodities from banks.
Impact on the Consumer:
Policyholders might have to pay higher premiums post-GST implementation. Experts also suggest that the working capital of businesses could be affected. This can lead to a liquidity crunch for businesses. However, you can always consider business loans to meet these working capital needs. These loans can then be easily repaid at attractive interest rates and flexible tenor. Business owners can also claim input tax credit on all the services paid on their business account.
The agriculture sector is the largest contributor to the Indian GDP. One the major problems plaguing the sector has been the transportation of goods across states. GST is likely to address this issue and create a unified market for agricultural goods.
Agricultural products are subject to several indirect taxes under the present tax regime such as service tax and excise duty and Value Added Tax (VAT). State level VAT is applicable to all food items. For instance, cereals and grains are subject to a state level VAT of 4%. However, exemptions are available for some unprocessed food items such fruits and vegetables, meat and eggs. Similarly, wheat, rice, flour salt and sugar are exempt under Central Value Added Tax (CENVAT).
GST is expected to create India's first National Market for agricultural goods which is a positive sign for the sector. However, at this stage, a lot of clarifications are required on different rates applicable on agricultural products under the various GST slabs. For example, while there is no GST on fresh milk, skimmed milk falls under the 5% bracket and condensed milk under the 12% slab. With GST, there will be a higher levy on some elements of agriculture. For instance, fertilisers an indispensable element of agriculture which was previously taxed at 6% (VAT-5%+Excise duty 1%) will now be taxed at 12% under the GST regime.
Impact On the Consumer:
An increase in the prices of a few agricultural products is anticipated in the short term. However, the creation of a unified national agricultural market will benefit farmers and distributors in the long run.
The Fast-Moving Consumer Goods (FMCG) sector is expected to be one the key beneficiaries of GST as it will benefit from the lowering of logistic costs. Further, streamlined supply chain management, the benefit of input credit and removal of cascading effect of taxes will result in lowering of overall costs for FMCG companies. It can thus be expected that the end consumer will benefit from GST over the long term.
The FMCG sector has to pay a host of taxes under the current regime that includes excise duty, service tax, VAT and central sales tax. The current tax rate for the FMCG industry is in the range of 22-24%.
With the implementation of GST, the overall tax rate for the FMCG industry would come down to 18-20%. Further, FMCG companies will gain from the availability of input credit. Also, cost reduction owing to cheaper distribution costs (from 2-7% to 1.5%) and easier storage and transportation of goods would result in considerable savings for FMCG companies.
Impact on the Consumer:
Basic food items such as rice, wheat, vegetables and milk are outside the purview of GST, which is a big relief to the common man. The urban consumer has reason to cheer as well as items such as paneer and frozen food items are in the 5% bracket. This is close to the current rates of around 4%. However, there will be a rise in the price of dry fruits, cheese, butter and ghee have been placed in the 12% bracket as compared to 5% earlier. However, on the whole, GST will benefit the end consumer in the long run as the FMCG sector reaps several benefits.
Manufacturers in the telecom sector can save on logistics costs by efficient management of inventory. However, in the short term, GST may prove to be marginally negative for the telecom sector.
Under the current regime, the telecom industry is plagued by the cascading effect of indirect taxes. Service tax of 14% is available on telecom services along with Swachh Bharat cess (SBC-0.5%) and Krishi Kalyan cess (KKC -0.5%). ITC is not available on SBC and can be set off only against KKC.
Under the GST that tax liability on telecom services goes up to 18% from the earlier 15%. Further GST rate on mobile handsets has been fixed at 12% that deprives local manufacturers of lower tax rates.
Impact on the consumer:
Post-paid customers will have to shell out Rs.30 extra on bills of over Rs.1000. Prepaid customers will bear the brunt of a lower talk time. Further, handsets may get costlier by 4-5% as they now fall in the 12% bracket of GST.
GST is expected to bring about accountability and transparency in the sector. This would help to boost its long-term prospects.
The real estate sector reels under the pressure of multiple taxes under current tax laws such as excise duty, octroi and entry tax to mention a few. This is apart from VAT and service tax that is charged by different contractors.
Developers will benefit from a unified tax regime as it will subsume 16 indirect taxes that the sector is subjected to. A single GST rate of 12% will now be applicable on the sector inclusive of land value and benefit of input credits. Another major change is the GST rate on work contracts which can also be offset by input credit.
Impact on the Consumer:
While there is a relief to developers under the GST regime, it is too early to state whether or not prices of residential units will come down. However, greater accountability and transparency driven by GST in the sector is a much-required shot in the arm. This will prove to be beneficial to consumers in the long run.
The implementation of GST is a mixed bag for the automobile sector. It benefits from the removal of the cascading effect of taxes. However, the standardisation of GST for automobiles at 28% will mean higher prices of two wheelers and small and medium sized cars.
Under the current tax laws, several taxes such as VAT, sales tax, road tax, registration duty is applicable on the automobile sector. As a result, the end customer is charged a combination of these taxes that to an average of 26.50-44% depending on the state that they are applicable in.
GST will subsume multiple taxes and bring the automobile industry under a unified tax regime. Further, an easier credit mechanism has been put in place wherein all input taxes (services, capital goods and manufactured products) can be offset against output liability. This enhances the efficiency of the sector as a whole. Thus, manufacturers can now expect to procure auto parts due to improved supply chain management. Different GST rates have been announced for different kind of vehicles and cess of 1-15% has been levied on a range of automobiles. As a result, small cars under 1200 cc will a cess of 1%+28% GST, and vehicles (motorcycles, cars) under 1500 cc will attract a GST of 28%+ 3% cess and vehicles of 1500 cc and above will attract a GST of 28%+ 15% cess.
Impact on the Consumer:
GST spells good news for small car aspirants. Those who wish to purchase motorcycles of higher engine power and luxury vehicles will have to pay a larger cess component in addition to 28% GST.
Also Read: Is Your Business GST Ready?
Ripple effect on the ordinary consumer
GST is the most significant tax reform that India is set to witness post-independence. With the many lessons learnt from international experiences in GST, the objective of the Indian Government is introducing anti-inflationary measures from the very start. While in some sectors the tax incidence seems to have increased, they will also benefit from input credit claims that were previously not available.
The message from the Government is very clear. While GST creates a unified and homogenous market, the ordinary consumer should not have to bear any extra tax burden. Business organisations across the sector are expected to pass on benefits they receive in the form of input credits, to the end consumer. This may take a time to turn into a reality for the consumer.
To sum it up
It may, thus, be fair to conclude that there might be no immediate gains visible to the ordinary consumer after the implementation of GST. On the contrary, there may be some nominal price increase for goods and services that fall into the 28% category. However, GST will still be benefiting the consumer due to enhanced transparency and a uniform taxation regime.
GST implementation also results in the shrinking of the unorganised sector and provide the consumer with better choices in products and services. In the end, it can be said that short-term pains will result in long-term gains for the end consumer as GST is implemented in the country.