Feeds:
Posts
Comments

Archive for the ‘Standardization of taxes’ Category

The Goods and Services Tax is one of the biggest reform agendas of the BJP government. The Finance Minister has indicated that it can raise India’s GDP by one to two per cent per annum, which is very substantial. So what really is GST and how does it work?

Why GST?

Currently, indirect taxes are imposed on goods and services. In the current system, taxes applicable to the manufacturing sector are Central Excise Duty, Value Added Tax( VAT), Central Sales Tax and a range of cesses. Other taxes like Entry Tax, Octroi, State cesses ,etc. are also applicable. For the services sector, service tax and cesses are applicable. Some of these taxes are levied by the centre and some by the states. For taxes imposed by states, the tax rates may vary across different states. Further, goods and services were taxed differently, thereby making the taxation of products complex. Some of these challenges are sought to be overcome with the introduction of the Goods and Services Tax (GST).

How much will the GST rate be?

This is currently yet to be decided. As per a survey by a leading tax firm, the top 10 tax rates across the globe range from 18 per cent to 27 per cent. Thus, the choice on the rate of the GST is fairly important, as in a services driven economy, a high GST rate could cause inflation initially, resulting in interest rates once again starting to rise, which could be negative for bonds. It is therefore critical for the GST rate to be set in a manner where the significant efforts of both the government and the RBI to control inflation are not negatively impacted as a result of a high GST rate. In addition, there could be challenges around the implementation due to the plethora of taxes involved, and it could take a couple of years before the benefits are completely visible.

Of course, with respect to businesses, since we have a very complex tax structure in India, it makes it difficult for businesses as they are expected to fulfill multiple legal obligations. GST will simplify the process as a result reducing the operating cost which can be passed on to consumers. This could be beneficial for equity investors, once the teething challenges are addressed.

 Impact on certain sectors

Initially, GST may not apply to: (a) petroleum crude, (b) high speed diesel, (c) motor spirit (petrol), (d) natural gas, and (e) aviation turbine fuel. The GST Council will decide when GST will be levied on them.

GST implementation may have an impact on certain sectors. Auto sector could benefit from reduction in duties on large SUVs and cars as GST rate is likely to be lower than the present excise plus VAT rate. There could also be lower entertainment taxes. This may lead to increase in margins of companies in the entertainment industry. In the telecom sector increase in service tax will be passed on to the consumers.

Let’s take a look at impact of GST to a home buyer. Service tax is applicable on under-construction property. This is so because, in case of an under-construction property, the developer is deemed to be the provider of construction services to the home buyer, and hence service tax is charged on the cost of construction. It is not charged on the entire value of the property but only to the extent of cost of construction. This means that cost of land is excluded.

Besides the basic cost of the unit, a home buyer also has to pay additional charges for facilities such as preferential location, car parking, club membership, rain water harvesting and others. All these are subject to service tax, which could see an increase due to the introduction of GST instead at a higher rate than the current rate of service tax.

Moreover, if one has taken a loan to buy the property then service tax relating to loan processing fees and home insurance are applicable. With respect to stamp duty on immovable property there is no clarity up till now.

With the implementation of GST, there could be uniformity in prices of gold all over the country. Right now taxes like Octroi and VAT are applicable which differ from state to state. This standardization will make consumers in some states pay more than they were paying before and vice versa.

All in all, it does seem like GST could be great news for the Indian economy and Indian equity markets in the longer term, but could trigger higher inflation and higher costs for services, including real estate in the shorter term.

Advertisements

Read Full Post »

%d bloggers like this: