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Despite pleas from various industry bodies to delay the rollout of the goods and services tax (GST), the government is determined to see through one of India’s most ambitious economic reforms on July 1st.

The long-awaited move is meant to supplant and streamline a web of indirect taxes levied by the central and state governments. This complex framework has been blamed for stifling economic output, alienating foreign companies and causing an administrative nightmare for inter-state business.

What state and central taxes will GST subsume?

At the moment, there is a clear separation of powers between the Centre and states when it comes to taxation. GST will subsume indirect taxes currently imposed by the Centre, such as central excise duty, customs duties, service tax and certain cesses and surcharges.

At the state level, GST will absorb value-added tax (VAT), central sales tax, luxury tax, entry tax and entertainment tax, among others.

Instead, central GST and state GST will replace these myriad indirect taxes. An integrated GST will also apply to cross-border or interstate sales and purchases and will be collected by the Centre. Barring those items exempt from GST, tax rates for goods will fall into four brackets (5%, 12%, 18% and 28%). The Centre will have authority to levy excise duty on certain goods over and above GST (e.g. tobacco).

What positive impact will GST have on Indian business?

Corporate India has generally reacted favourably to GST, as it will rationalize India’s cumbersome tax system. Both domestic and multinational companies have singled out India’s opaque and unpredictable tax regime as a barrier to operating here.

Creating a uniform economic zone with an overarching national sales tax will also make it easier to transport goods within the country and improve supply chain processes by eliminating internal borders and checks. This should reduce the cost of production and boost competitiveness on a local and global scale.

The government has said that indirect tax revenues will decline in the short term on account of GST introduction, but in the long run it’s expected to widen the tax base.

One reason for the immediate hit to indirect tax revenue is that taxpayers with an annual turnover of Rs 20 lakh (Rs 10 lakh in special categories) are exempt from GST, and small taxpayers (those with an annual turnover of up to Rs 50 lakh) have the option to pay a flat tax rate.

What about the drawbacks of GST on industry and individuals?

The government maintains that GST will reduce the overall tax burden on goods, which is between 25%-30%. However, the various cesses meant to compensate states for lost tax revenue within the first five years may lead to a marginally higher tax liability.

According to the latest news on GST, Revenue Secretary Hasmukh Adhia suggested the standard tax rate for services may rise from the current 15% to 18%. If this happens, this may squeeze consumer demand in the short-term.

While the finance minister has tried to allay fears of inflation due to a higher service tax, analysts predict some short-term disruption from such a monumental event. The GST Council has yet to assign rates to each category of goods, but the finance ministry has speculated that essential food items will remain outside the bounds of GST.

The timing of GST implementation coincides with the onset of the monsoon. If weather patterns are unfavourable, this could serve as a double whammy that affects corporate earnings.

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