Impact of Goods & services Tax in India

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Impact of
Goods & Services Tax
In India

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Table of Contents
Abstract..................................................................................... 3
What is GST? ............................................................................ 4
Pre-GST Indirect Taxation ......................................................... 5
Historical Background............................................................... 6
Levy of GST ............................................................................... 7
How GST Will Work ................................................................. 10
Some Salient Features of the GST Act ..................................... 12
Role of the GST Council .......................................................... 14
Plusses of GST ........................................................................ 15
Minuses of GST....................................................................... 16
Rates of GST............................................................................ 18
Cost Impact of GST on Some Sectors ...................................... 20
Information Technology........................................................ 20
Fast Moving Consumer Goods.............................................. 21
E-Commerce......................................................................... 21
Telecommunications............................................................. 22
Automotive ........................................................................... 23
Media ................................................................................... 26
Insurance ............................................................................. 26
Cement................................................................................. 27
Aviation ................................................................................ 27
Textiles................................................................................. 31
Pharmaceuticals................................................................... 33
Financial Services ................................................................ 35
Real Estate ........................................................................... 36
Travel, tourism and hospitality............................................. 38
Health Care .......................................................................... 38
Alcoholic beverages .............................................................. 39
Education............................................................................. 39
Renewable Energy ................................................................ 40
Non-Renewable Energy......................................................... 41

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Electrical & Electronic Equipment ....................................... 43
Oil & Gas.............................................................................. 43
Goods of Mass Consumption................................................ 44
Jewellery & Bullion .............................................................. 47
Exports................................................................................. 49
Manufacturing Industry....................................................... 51
Engineering, Capital Goods & Power Equipment.................. 54
Roads & Highways ............................................................... 55
Hospitality............................................................................ 56
Importing & Manufacturing by MNCs................................... 56
Infrastructure Projects ......................................................... 58
Conclusion .............................................................................. 60

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Abstract
Although there is a vast volume of online information on the
Internet on India’s forthcoming Goods & Services Tax (GST),
there is no consolidated reckoner of how GST is expected to
impact diverse sectors of the economy. The overriding and
convergent concern of manufacturers, service providers and
consumers is GST’s impact on costs. Since specific goods and
services are yet to be allocated to the four approved GST rates,
the Model GST Law and the 101st Constitution (Amendment)
Act, 2016 have been variously interpreted by experts, leaving
large room for debate and conjecture. However, there is
unanimity in the merits of GST, tempered by initial inflationary
concerns and relatively high costs of compliance.
This paper therefore briefly attempts to outline the historical
background of GST, its methods of calculation and likely impact
on post-GST price levels in thirty different sectors of the
economy. Owing to constraints of length, only few probable
price impacts have been considered. The paper concludes that
while GST is the biggest landmark fiscal reform in India after
Independence (1947), its compliance-promoting revenue-neutral
rates, implementation, exemptions and exclusions, in the
backdrop of repeated political negotiations and resultant
compromise would remain major impediments in its seamless
establishment.

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What is GST?
GST has excited substantial debate over the last over two
decades. India’s Constitution divides taxation powers between
Union and the states each of whom has some exclusive areas
where they can levy tax. The 101st Constitution (Amendment)
Act (2016) for Goods and Services Tax (GST) re-writes hitherto
constitutional indirect taxation arrangements. It is a complex
legislation that amends/adds existing/new provisions in Arts.
246A, 248, 249, 250, 268, 268A, 269A, 270, 271, 279A, 286,
366, 368 and the Seventh Schedule of India’s Constitution1.
The Act defines GST as any tax on supply of goods and services
other than on alcohol for human consumption. GST is a value
added tax, levied at all points in the supply chain with credit
allowed for any tax paid on inputs acquired for use in making
the supply. Exemptions would be restricted to a minimum. GST
is a value-added tax levied at all points in the supply chain with
credit allowed for any tax paid on input acquired for use in
making the supply. It would apply to both goods and services in
a comprehensive manner, with exemptions restricted to a
minimum. The GST structure would follow the destination
principle. Accordingly, imports would be subject to GST, while
exports would be zero-rated. In the case of inter-state
transactions within India, State tax would apply in the state of
destination as opposed to that of origin. GST is neutral to
factors of production, business processes, business models,
organizational structures and geographical locations.
In keeping with the federal structure of India, it is proposed that
GST will be levied concurrently by the Centre (CGST) and the
1 Ministry of Law & Justice (Legislative): THE CONSTITUTION (ONE HUNDRED AND
FIRST
AMENDMENT) ACT, 2016, extracted on Jan. 10, 2016 from
http://lawmin.nic.in/ld/The%20Constitution%20(One%20Hundred%20and%20First%20Ame
ndment)%20Act,%202016.pdf

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states (SGST)2. It is expected that the base and other essential
design features would be common between CGST and SGST
across SGSTs for individual states. Both CGST and SGST would
be levied on the basis of the destination principle. Thus, exports
would be zero-rated, and imports would attract tax in the same
manner as domestic goods and services. Inter-state supplies
within India would attract an Integrated GST (aggregate of CGST
and the SGST of the destined State).
In addition to the IGST, in respect of supply of goods, an
additional tax of up to 1% has been proposed to be levied by the
Centre. Revenue from this tax is to be assigned to origin states.
This tax is proposed to be levied for the first two years or a
longer period, as recommended by the GST Council.
Pre-GST Indirect Taxation
India’s Constitution divides taxation powers between centre and
states. Both levels of government have some exclusive areas
where they can levy tax. Income tax, which includes tax on
company profits, is the exclusive domain of central government.
These taxes are referred to as direct taxes. Indirect taxes are
taxes levied on manufacture of goods, provision of services and
consumption. In India, generally speaking, indirect taxes levied
on manufacture of goods or provision of services is the exclusive
domain of central government. Taxes on consumption are the
exclusive domain of state governments.
There are two important problems with the current
arrangement. For instance, a shirt has to first be manufactured
before it is consumed3. The central government, therefore, levies
its indirect tax called central excise at the factory gate.
2 E&Y: All About GST in India extracted on Jan. 8, 2016 from
http://www.ey.com/in/en/services/ey-goods-and-services-tax-gst
3 Shankaran, Sanjeev: What is GST and how it will affect you extracted on Jan. 8, 2016 from
http://blogs.timesofindia.indiatimes.com/cash-flow/gst-demystified/

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Subsequently, a shirt reaches a retail outlet and is bought by a
consumer. The state government, at this stage, levies a tax on
consumption dubbed value added tax (VAT). Thus there is
another tax at the factory gate which adds to the cost of the
shirt and another tax on the final price. Since states have their
exclusive domain on consumption tax within their borders, they
treat goods coming from other states as “imports.” For example,
if a shirt maker in Maharashtra buys dye in Bihar, he would
have paid central excise and Bihar’s state taxes on the product.
On this cost, the Maharashtra government would levy its tax if
the shirt is sold in the state. If the shirt is sent across
neighbouring Uttar Pradesh’s border and sold in Delhi, an
“export” tax called central sales tax is collected by UP.
India is therefore politically one country, but economically it is
fragmented. There are multiple taxes when there is commerce
across state borders. Consequently, it increases costs for
everyone and makes economic activity within India for Indians
complicated.
Historical Background
The Goods and Services Tax (GST) has a historical timeline that
stretches back to 1994 when the Amaresh Bagchi Report,
suggested the introduction of Value Added Tax (VAT) to act as
the root for implementation of Goods and Services Tax in India4.
VAT was introduced in 2005 by the Ashim Dasgupta empowered
committee that replaced old age taxation system in India. In
2004 the Vijay Kelkar Task Force strongly recommended the
integration of indirect taxes into the form of GST in India. The
Union Government, for the fiRs.t time in the Union Budget for
2006-07 announced that the GST would be applicable from 1st
4 Daniel, Saju: GST: A timeline extracted on Jan. 8, 2016 from
http://www.theweek.in/news/biz-tech/gst-timeline.html

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April, 2010. The government formed various Joint Working
Groups of state finance ministers to study the impact of GST on
the revenue of various States that, after several meetings,
reached a consensus-in-principle for implementation of GST in
India. The Task force of Finance Ministers submitted their
report in December, 2009 on structure of GST in India.
Government of India also issued its fiRs.t discussion paper on
GST in November, 2009. The Constitution (115th Amendment)
Bill was introduced on 22nd March, 2011 and same was
referred to Parliamentary Standing Committee on Finance for
discussion while the then Finance Minister in his speech
announced that the GST would be rolled out by April, 2011.
Owing to consistent and often politically motivated opposition
from some parties this Bill lapsed with the expiry of the tenure
of the Lok Sabha in 2014. Accordingly, the Constitution 101st
(Amendment) Bill was introduced in Parliament on Dec. 19,
2014; since due completion of parliamentary terms. The
Government of India introduced Constitution 101st
(Amendment) Bill that was passed by the Lok Sabha on May 6,
2015 while the Rajya Sabha passed it on Aug. 3, 2016.
Levy of GST
In keeping with the federal structure of India, GST will be levied
concurrently by the Centre (CGST) and the States (SGST) and
would be similar in their design. Both CGST and SGST would be
levied on the basis of the destination (point-of-consumption)
principle. Thus, exports would be zero-rated, and imports would
attract the tax in the same manner as domestic goods and
services. Inter-State supplies within India would attract an
Integrated GST (aggregate of CGST and the SGST of the
Destination State).

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Central taxes like, Central Excise duty, Additional Excise duty,
Service tax, Additional Custom duty and Special Additional duty
and State level taxes like, VAT or sales tax, Central Sales tax,
Entertainment tax, Entry tax, Purchase tax, Luxury tax and
octroi will subsume in GST. Petroleum and petroleum products
i.e. crude, high speed diesel, motor spirit, aviation turbine fuel
and natural gas shall be subject to the GST on a date to be
notified by the GST Council. The Act provides for removing
imposition of entry tax/octroi across India.
Petroleum and petroleum products i.e. crude, high speed diesel,
motor spirit, aviation turbine fuel and natural gas shall be
subject to the GST on a date to be notified by the GST Council.
Entertainment tax, imposed by States on movie, theatre, etc.
will be subsumed in GST, but taxes on entertainment at
panchayat, municipality or district level to continue. GST may
be levied on the sale of newspapers and advertisements and this
would give the government’s access to substantial incremental
revenues. For the fiRs.t time, with the exception of J&K, states
will have the right to tax services.
The power to make laws in respect of supplies in the course of
inter-State trade or commerce will be vested solely in the Union
government. States will have the right to levy GST on intra-State
transactions including on services. The Centre will levy IGST on
inter-State supply of goods and services. Import of goods will be
subject to basic customs duty and IGST. Administration of GST
will be the responsibility of the GST Council, which will be the
apex policy making body for GST. Members of GST Council
comprised of the Central and State ministers in charge of the
finance portfolio.
To understand the import of GST, it is necessary to comprehend
the magnitude of revenue collections in the indirect taxes

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category5. In 2014-15 (BE), customs collections were estimated
at Rs. 2.02 lakh crore, Union excise duties at Rs. 2.06 lakh
crore and service tax at Rs. 2.16 lakh crore. Against this,
indirect taxes imposed by states were estimated at Rs. 8.65 lakh
crore. Indirect taxes account for 67% of the total revenue of Rs.
22.38 lakh crore in 2014-15. Thus GST would cover 67% of the
nation’s revenues, hence its criticality to our economy.
Today’s mixed scenario is a mixed one. Currently, India has
Value-Added Tax (VAT) systems both at the central and state
levels. But the central VAT or CENVAT mechanism extends tax
set-offs only against central excise duty and service tax paid up
to the level of production. CENVAT does not extend to value
addition by the distributive trade below the stage of
manufacturing; even manufacturers. cannot claim set-off
against other central taxes such as additional excise duty and
surcharge. Likewise, state VATs cover only sales. Sellers can
claim credit only against VAT paid on previous purchases. The
VAT also does not subsume a host of other taxes imposed
within the states such as luxury and entertainment tax, octroi,
etc.
Once GST comes into effect, all central- and state-level taxes
and levies on all goods and services will be subsumed within an
integrated tax having two components: a central GST and a
state GST. This will ensure a complete, comprehensive and
continuous mechanism of tax credits. Under it, there will be tax
only on value addition at each stage, with the producer/seller at
every stage able to set off his taxes against the central/state
GST paid on his purchases. The end-consumer will bear only
the GST charged by the last dealer in the supply chain, with
set-off benefits at all the previous stages. GST will replace the
following central taxes:
5 Ministry of Finance, Govt. of India: Public Finance Statistics 2014-15 extracted on Jan. 8,
2016 from http://finmin.nic.in/reports/IPFStat201415.pdf p. 4

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i. Central Excise Duty
ii. Duties of Excise (medicinal and toilet preparations)
iii. Additional Duties of Excise (goods of special importance)
iv. Additional Duties of Excise (textiles and textile products)
v. Additional Duties of Customs (commonly known as CVD)
vi. Special Additional Duty of Customs (SAD)
vii. Service Tax
viii. Cesses and surcharges in so far as they relate to supply of
goods or services
State taxes that will be similarly subsumed under GST follow:
i. State VAT
ii. Central Sales Tax
iii. Purchase Tax
iv. Luxury Tax
v. Entry Tax (all forms)
vi. Entertainment Tax (not levied by local bodies)
vii. Taxes on advertisements
viii. Taxes on lotteries, betting and gambling
ix. State cesses and surcharges
How GST Will Work
The GST regime goes step-by-step, across three stages, viz.
manufacturing and distribution, wholesale and retail. An
example of the same pre-GST shirt would explain how the
system works at three stages of its levy6.
Stage I: Imagine a manufacturer of, say, shirts. He buys raw
material or inputs — cloth, thread, buttons, tailoring equipment
— worth Rs. 100, a sum that includes a tax of Rs.. 10. With
these raw materials, he manufactures a shirt. In the process of
creating the shirt, the manufacturer adds value to the materials
6Indian Express: Goods and Services Tax (GST) Bill explained extracted on Jan. 8, 2016
from http://indianexpress.com/article/explained/gst-bill-parliament-what-is-goods-services-
tax-economy-explained-2950335/

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he started out with. Let us take this value added by him to be
Rs. 30. The gross value of his good would, then, be Rs. 100 +
30, or Rs. 130. At a tax rate of 10%, the tax on output (this
shirt) will then be Rs.. 13. But under GST, he can set off this
tax (Rs.. 13) against the tax he has already paid on raw
material/inputs (Rs.. 10). Therefore, the effective GST incidence
on the manufacturer is only Rs. 3 (13 – 10).
Stage II: The next stage is that of the good passing from the
manufacturer to the wholesaler. The wholesaler purchases it for
Rs. 130, and adds on value (which is basically his ‘margin’) of,
say, Rs. 20. The gross value of the good he sells would then be
Rs. 130 + 20 — or a total of Rs. 150. A 10% tax on this amount
will be Rs. 15. However, under GST, he can set off the tax on his
output (Rs. 15) against the tax on his purchased good from the
manufacturer (Rs. 13). Thus, the effective GST incidence on the
wholesaler is only Rs.. 2 (15 – 13).
Stage III: In the final stage, a retailer buys the shirt from the
wholesaler. To his purchase price of Rs. 150, he adds value, or
margin, of, say, Rs. 10. The gross value of what he sells,
therefore, goes up to Rs. 150 + 10, or Rs. 160. The tax on this,
at 10%, will be Rs. 16. But by setting off this tax (Rs. 16)
against the tax on his purchase from the wholesaler (Rs. 15),
the retailer brings down the effective GST incidence on himself
to Re. 1 (16 –15). Thus, total GST on the entire value chain from
the raw material/input suppliers (who can claim no tax credit
since they have not purchased anything themselves) through
the manufacturer, wholesaler and retailer is, Rs. 10 + 3 +2 + 1,
or Rs. 16.
In a full non-GST system, there is a cascading burden of “tax on
tax”, as there are no set-offs for taxes paid on inputs or on
previous purchases. Thus, if we consider the same example as
above, the manufacturer buys raw materials/inputs at Rs. 100

KUNAL BASU 12
after paying tax of Rs. 10. The gross value of the shirt (good)
would be Rs. 130, on which the manufacturer pays a tax of Rs.
13. Since there is no set-off against the Rs. 10 he has already
paid as tax on raw materials/inputs, the good is sold to the
wholesaler at Rs. 143 (130 + 13).
With the wholesaler adding value of Rs. 20, the gross value of
the good sold by him is, then, Rs. 163. On this, the tax of Rs.
16.30 (at 10%) takes the sale value of the good to Rs. 179.30.
The wholesaler, again, cannot set off the tax on the sale of his
good against the tax paid on his purchase from the
manufacturer. The retailer, thus, buys the good at Rs. 179.30,
and sells it at a gross value of Rs. 208.23, which includes his
value addition of Rs. 10 and a tax of Rs. 18.93 (at 10% of Rs.
179.30). Again, there is no mechanism for setting off the tax on
the retailer’s sale against the tax paid on his previous purchase.
The total tax on the chain from the raw material/input
suppliers to the final retailer in this full no-GST regime will,
thus, work out to Rs. 10 + 13 + 16.30 + 18.93 = Rs. 58.23. For
the final consumer, the price of the good would then be Rs. 150
+ 58.23 = Rs. 208.23. Compare this Rs. 208.23 — with a tax of
Rs. 58.23 — to the final price of Rs. 166, which includes a total
tax of Rs. 16, under GST. In practice, GST has the potential to
dramatically lower indirect taxes while cheaper compliance
costs may add to the benefits of greater domestic and
international market competitiveness and lower prices for
consumers.
Some Salient Features of the GST Act
Some salient features of the GST Act follow7:
7 E&Y: All About GST in India extracted on Jan. 8, 2016 from
http://www.ey.com/in/en/services/ey-goods-and-services-tax-gst

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i. The power to make laws in respect of supplies in the
course of inter-state trade or commerce will be vested only
in the Union Government. States will have the right to
levy GST on intra-state transactions, including on
services.
ii. The Centre will levy IGST on inter-state supply of goods
and services. Import of goods will be subject to basic
customs duty and IGST.
iii. GST is defined as any tax on supply of goods and services
other than on alcohol for human consumption.
iv. Central taxes such as Central Excise duty, Additional
Excise duty, Service tax, Additional Custom duty and
Special Additional duty as well as state-level taxes such
as VAT or sales tax, Central Sales tax, Entertainment tax,
Entry tax, Purchase tax, Luxury tax and Octroi will
subsume in GST.
v. Petroleum and petroleum products, i.e., crude, high speed
diesel, motor spirit, aviation turbine fuel and natural gas,
shall be subject to GST - date to be notified by the GST
Council.
vi. Provision will be made for removing imposition of entry
tax/Octroi across India.
vii. Entertainment tax,, imposed by states on movie, theatre,
etc., will be subsumed in GST, but taxes on
entertainment at panchayat, municipality or district level
will continue.
viii. GST may be levied on the sale of newspapers and
advertisements. This would mean substantial incremental
revenues for the Government.
ix. Stamp duties, typically imposed on legal agreements by
states, will continue to be levied.
x. Administration of GST will be the responsibility of the
GST Council, which will be the apex policy making body

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for GST. Members of GST Council comprise Central and
State ministers in charge of the finance portfolio.
Role of the GST Council
As per Article 279A (1) of the amended Constitution, the GST
Council was to be constituted by the President within 60 days of
the commencement of Article 279A. The notification for bringing
into force Article 279A with effect from 12th September, 2016
was issued on 10th September, 2016. As per Article 279A of
the amended Constitution, the GST Council will be a joint forum
of the Centre and the States8. This Council shall consist of the
following members namely: -
i. Union Finance Minister: Chairperson
ii. The Union Minister of State, in-charge of Finance
(Revenue): Member
iii. The Minister In-charge of finance or taxation or any other
Minister nominated by each State Government: Members
As per Article 279A (4), the Council will make recommendations
to the Union and the States on important issues related to GST,
like the goods and services that may be subjected or exempted
from GST, model GST Laws, principles that govern Place of
Supply, threshold limits, GST rates including the floor rates
with bands, special rates for raising additional resources during
natural calamities/disasters, special provisions for certain
States, etc.
The GST Council would decide on all future hikes in the basic
GST rate and decide on the quantum to be transferred to states.
The Centre would have 33% of votes while the balance will be
exercised by the States as members. Even if this Council’s
8 Press Information Bureau, Govt. of India: Press release extracted on Jan. 8, 2016 from
http://pib.nic.in/newsite/PrintRelease.aspx?relid=149732

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decisions are made on 66% majority basis, and the ruling party
at the Centre with its same-party/coalition partner states cross
the 15+1 vote mark (29 states and the Union), this could place
states ruled by opposition parties at a distinct disadvantage.
Plusses of GST
Debate on the positives and negatives on the GST Act are evenly
dispersed. On the positive side, experts’ claim that a unified
market would emerge, that would make investment easier and
enable Indian goods and services to compete in the global
market. Manufacturing may become more competitive as GST
addresses cascading of tax, inter-state tax, high logistics costs
and fragmented market. Increased protection from imports as
GST provides for appropriate countervailing duty. It would
dramatically reduce leakage of revenue and cut down on
corruption that is endemic to the present fragmented indirect
taxation structure. Harmonization of centre and State tax
administrations would reduce duplication and compliance costs
while automation of compliance procedures would reduce errors
and increase efficiency.
A current market fragmented along state lines raises costs of
administration and compliance, etc. by up to 20-30%. Checks at
state borders slow movement of trucks. In India, they travel 280
km a day compared with 800 km in the US9. For many capital
goods, input tax credit is not available. Full input tax credit
under GST will mean a 12-14% drop in the cost of capital goods.
Expected objectives are 6% rise in capital goods investment, and
2% overall10. The current 2% inter-state levy implies production
is limited mostly within a state. Under the GST national market,
9 Economic Times: GST: Here are the 10 benefits of the Bill extracted on Jan. 8, 2016 from
http://economictimes.indiatimes.com/slideshows/economy/gst-here-are-the-10-benefits-of-the-
bill/3-a-common-market/slideshow/53518586.cms
10 Note (5)

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this can be dispersed, creating opportunities for others. Inter-
state procurement could lead to consolidated supply chains
while removal of tax at manufacturing point would mean radical
changes in distribution of goods and concomitant reduction in
costs of doing business seamlessly across states. Removal of the
concept of excise duty on manufacturing may improve cash flow
and inventory costs as GST would now be paid at the time of
sale/supply rather than at the time or removal of goods from
the factory. Interest on working capital would therefore decline.
State restrictions and levies have complicated ecommerce with
many sellers not shipping to particular states. This is expected
to end with the emergence of a unified market. All this will end
with GST. HSBC estimates an 80 basis point rise in GDP growth
over 3-5 years11. NCAER pegs this at 0.9-1.7% owing to the
elimination of tax cascading. States and Centre will have dual
oversight of a common pool of larger resources. Principally
therefore, GST is a laudable reform.
Minuses of GST
On the flip side, a substantial percentage of the gross indirect
taxes collection of Rs. 14.89 lakh crore (Centre + States) in
2014-1512, Rs. 3.32 lakh crore, on account of tax/duty on
electricity, POL and alcohol for human consumption (that
accounts for the vast majority of state excise collections) are
presently excluded from the ambit of the GST Act. In effect
about 18-20% of all indirect taxes will be excluded while
computing the basic GST rate. Any hike in these duties/taxes
subsequently will therefore add to the basic GST rate. There is
no agreement on the basic GST rate with ranges of 15-24%
being suggested by the Union and States. The higher the basic
11 Note (5)
12 Ministry of Finance, Govt. of India: Public Finance Statistics 2014-15 extracted on Jan. 8,
2016 from http://finmin.nic.in/reports/IPFStat201415.pdf, p. 4

KUNAL BASU 17
GST rate greater the propensity to evade GST and counter-
productive recourse to generation of black money. Conversely, a
lower GST rate would incentivize mass compliance on
volumetric basis and substantially enhance revenues for
governments.
The destination-based GST may work to the disadvantage of
major manufacturing states like Tamil Nadu that derived their
revenue at the point of manufacture. Now that the GST will be
collected at the final point of consumption, populous and often
averagely administered states like Bihar would generate higher
GST revenue and become eligible for larger share of GST
revenues from the Centre. There would be little incentive for
states to attract investment, instead promote consumption that
is self-defeating. Likewise, states with relatively low populations,
hence lower consumption and GST share, but located in desert,
hilly or remote terrain (such as in NE India) and attendant
higher infrastructure and administration costs may be sufferers.
How GST would tie in with the 14th Finance Commission’s
accepted recommendations also remains to be seen.
Consumption-based GST on a standard formula may prove
deleterious to the needs of states, particularly in NE India. Their
limited GST share may be compounded by virtual nullification
of Centrally-sponsored/aided schemes from 2015-16 and
onward, apart from persisting relatively high inflation. Their
representation on the GST Council is unlikely to help much,
particularly if they are ruled by opposition parties. In the
successful passage of the GST Act, states would indubitably
lose their larger share of the flexibility of targeting development
funds or flexing them to attract investment, both of which are
state-specific. In sum, the Govt. of India with its veto power in
the GST Council assumes an unassailable position in the
finances of a state and, by logical extension, over its politics,

KUNAL BASU 18
enough reason for resistance by states that perceive a ‘raw’ deal
in the process of the state GST Acts. This is probably why
neither the US nor the EU, nor Scandinavia – all federations -
adopted GST.
GST is technology driven. While the Govt. of India proposes to
train about 60000 personnel to operate the collection,
accounting and transfer of state share systems, GST would
require extensive complimentary training at every level of the
procurement-manufacturing-intermediates-sales chain. In
addition, small retailers would have to invest in expensive
electronic hardware and real-time Internet connectivity coupled
with hiring trained personnel that may not be easily available
for the first few years. GST would therefore need a reliable high-
speed backbone and reliable distribution networks with cent per
cent up time in a nation where the frequency of dropped mobile
calls and erratic data transfer lines is amongst the highest in
the world. Similarly, banks in remote parts of the country would
also require trained personnel and hardware (and problematic
maintenance) to receive and account for GST receipts.
Rates of GST
The 13th Finance Commission proposed a Revenue-Neutral Rate
of 12% while the Kelkar Committee proposed 20%. From time to
time the rates proposed by the Govt. of India ranged from 12-
20%. The National Institute of Public Finance and Policy (NIPFP)
proposed GST Rates (based on various assumptions) based on
permutations and combinations of various factors: Sugar and
Textile industry, CST Rates, Entry Tax etc. and derived 16
alternatives in which rates varied from 18.53% to 26.68%13. On
Nov. 3, 2016 the GST Council approved a four-tier GST rate
13 Petroleum Federation of India: Round Table on Impact of GST, presentation by Petrofed,
extracted on Jan. 8, 2016 from http://www.petrofed.org/index.php/round-table-on-impact-of-
gst

KUNAL BASU 19
structure, the final slab rates being agreed upon being 5%, 12%,
18% and 28%. The final GST slab rates are:
i. Zero rated items: Food grains used by common people
ii. 5% Rate: Items of mass consumption including essential
commodities will have low tax incidence.
iii. 12% and 18% Rate: Two standard rates have been
finalised as 12% and 18%.
iv. 28% Rate: White goods like Air conditioners, washing
machines, refrigerators, soaps and shampoos etc. that
were taxed at 30-31% shall be now taxed at 28%.
v. Demerit goods like tobacco, tobacco products, pan
masala, aerated drinks and luxury cars shall be charged
at the highest rate of 28%.
vi. An additional cess on some luxury goods shall also be
imposed.
vii. Services that are now taxed at 15% shall be taxed at a
higher rate of GST @ 18%14.
However, the key to the success or failure of GST is the basic
tax rate and fairness in the distribution of GST revenue. India
has no social security system, hence bears no comparison to
high rates of up to 25% in some developed countries. While
limited exemptions are welcome, yet Australia with a 10% basic
GST rate exempts basic foodstuffs, water, sewerage and
drainage services, health, education, religious and related
supplies, child care, supplies of going concerns, and
international transport and mail, etc. Likewise, New Zealand
with a 15% basic GST rate has generous social security and
health care for its citizens. Likewise Canada’s GST/HST rates
are in the range of 5-15%, Austria and France at 20%, Germany
at 19%, Belgium 21%, Denmark 25%, Japan 5% consumption
14 Fintrakk: GST: What is the impact of GST on the common man? Extracted on Jan. 9, 2016
from http://fintrakk.com/gst-what-is-the-impact-of-gst-on-common-man/

KUNAL BASU 20
tax, Malaysia 5-10%, Netherlands 6-19%, Norway 25%, Russia
18% and China at 17%15. Then, shouldn’t India’s basic GST rate
be in the range of 10-12% without exemptions and no social
security?
Cost Impact of GST on Some Sectors
However, what is intriguing is that the GST Act defines services
as anything other than goods with no clarity on treatment of
works contract, IPR, software etc. Industry experts have
assumed an average rate of 18% as GST16. Based on such
assumption, the succeeding paragraphs briefly analyse the
broad impact of GST on a selected group of Indian industry.
Information Technology
By eliminating multiple levies GST will allow deeper penetration
of digital services. The long disputed issue of canned software
taxation may also come to end as there would be no difference
between goods and services in the GST regime17. On the
negative side, IT companies may have several delivery centres
and offices working together to service a single contract. With
GST, companies might require each centre to generate a
separate invoice to every contracting party. Duty on
manufactured goods is expected to go up from existing 14-15%
to 18%, which means the cost of the cost of electronics from
mobile phones to laptops, may rise.
15 GNV Consultancy & Services Pte. Ltd: World Corporate and Income Tax Comparison
Rates, VAT/GST around the world extracted on Jan. 8, 2016 from
http://www.gnvconsultancy.com/taxation/world_corporate_tax.html
16 Economic Times: GST impact across sectors: Take a look at the winners and losers
extracted on Jan. 8, 2016 from
http://economictimes.indiatimes.com/news/economy/policy/gst-impact-across-sectors-take-a-
look-at-the-winners-and-losers/articleshow/53532907.cms
17 Note (14)

KUNAL BASU 21
Fast Moving Consumer Goods
Companies could potentially generate substantial savings in
logistics and distribution costs as the need for multiple sales
depots would be eliminated. FMCG companies pay nearly 24-
25% including excise duty, VAT and entry tax. GST at 17-19%
could yield significant reduction in taxes. Warehouse
rationalisation and reduction of overall tax rates, is expected to
generate saving which could cumulatively range between 200-
300bps. GST will also address the challenge of tax leakages in
supply chain when procured products through contract
manufacturing. Key beneficiaries could be companies like
Hindustan Unilever, Colgate, GSK, Asian Paints, etc.
E-Commerce
A single unified market across India and free movement and
supply of goods in every part of the country created by GST will
also eliminate the cascading effect of taxes on customers which
will bring efficiency in product costs. On the flip side, tax
collection at source (TCS) guidelines in the GST regime will
increase administration, documentation workload for
ecommerce firms and push up costs. The mandate of tax
collection by states from e-commerce companies could result in
significant compliance burden on e-commerce companies and
credit build-up along with cash flow issues for the vendors
listed on the marketplaces. Also, the supplies reported by the e-
commerce firm will be matched with the details given by the
supplier in the return for outward supplies and in case of a
mismatch; the output liability of the vendor will be re-
determined. This is likely to put a lot of burden on e-commerce
players from documentation and compliance perspective.
Accounting for cash on delivery, returns and cancelled orders
may impact cash flows for e-commerce companies known for
discounting and subsidizing of products or offering free goods.

KUNAL BASU 22
Under GST, freebies are expected to be taxed creating additional
burden on the sellers18.
Telecommunications
Handset prices may decline/even out across states.
Manufacturers may be expected to pass on to consumers cost
benefits they will get from consolidating their warehouses and
efficiently managing inventory. For handset makers, GST will
bring in ease of doing business as they may no longer need to
set up state specific entities and transfer stocks to them and
invest heavily into logistics of creating warehouses in each state
across the country. The Telecom sector which is paying 14% tax
will rise to 18% and companies would expectedly pass the
burden on to post-paid customers. There will also a lower input
tax credit in this sector’s capex cost. Overall, this regime will be
negative to the industry and the sector will also be in state
where they cannot pass the entire tax burden to the consumers
especially their prepaid segment with lower average
revenue/user (ARPU).
One of the biggest impact areas of GST is the compliance
requirements that the tax reform brings with it. As against a
single registration and merely two-three returns, the proposed
legislation would require telecom companies to file manifold
returns per year, apart from separate assessments and audits
in each of the States. The concept of credit matching being
ushered in with GST, is likely to add to transparency, but would
be tough to implement. Besides, the new regime may open a
Pandora’s Box relating to taxability of SIM cards, recharge
coupons etc.19
18 Note (14)
19 Sapra, Bipin: Impact of GST on the Telecom sector in the Economic Times extracted on
Jan. 8, 2016 from http://telecom.economictimes.indiatimes.com/tele-talk/impact-of-gst-on-
the-telecom-sector/1702

KUNAL BASU 23
Automotive
Under the GST regime, with no embedded tax costs on inter-
state movement of goods (CST or entry taxes) and a shift in the
point of taxation to the consumer ultimately, businesses shall
have greater flexibility to re-design their supply chains and
thus, optimize logistics costs. Since their vendors are also likely
to benefit from the transition, companies could negotiate with
their vendors to pass on those benefits in terms of input prices.
However, there are various aspects which need to be resolved in
order for the auto industry to be geared for the GST regime.
Some prime issues being treatment of ongoing area based
exemption schemes (from Central Excise perspective) and the
State level incentives in form of subsidy or deferment,
continuation of end use based exemptions (e.g. for vehicles used
as taxis or ambulances) and the continuation of export
incentives linked to indirect taxes.
At present the automobile OEMs transfer vehicles from their
manufacturing units to their dealer network spread across the
country through one of the following modes:
i. Direct transfer of vehicles to the dealer (dealer liable to
pay CST)
ii. Stock transfers to own warehouses in the consumption
state and further transfer from the warehouse to the
dealer (no CST applicable on the transfer of vehicle from
the manufacturing unit to the warehouse, hence no input
credit available to the OEM. Dealer is not liable to pay
CST.
In the first scenario, though the dealer pays CST, it cannot set-
off the same against its VAT liability (VAT is payable by the
dealer in both the above scenarios). The GST will enable the
auto dealers to get input tax credit for the GST paid by them at

KUNAL BASU 24
the time of acquiring the vehicles from the OEMs. Similar
benefit will accrue to them on the spare part/service
businesses20.
Currently, automobile sector pays around 30 to 47% tax which
is now expected to be in the 20-22% range, after the
implementation of GST. Overall cost benefit can be expected for
the end user by around 10%. Transportation time should also
be reduced as the check points and octroi is cleared hands
before. Under GST, importer-distributors as well as domestic
resellers should be able to claim credit of GST paid on all
business procurements of goods and services, as opposed to the
current scenario, where they cannot claim a credit for the
duties/ taxes paid on capital assets and input services availed.
With no embedded tax costs on inter-state movement of goods
(CST or non-creditable entry taxes), automakers would have
greater flexibility to re-design their supply chains and thus,
optimize logistics costs. Automobile exports should also benefit
with the elimination/ reduction in embedded tax costs. On-road
price of vehicles could drop by 8%, as per a report by Motilal
Oswal Securities, providing indirect stimulus to boost volumes.
Key beneficiaries would include Maruti Suzuki, M&M; Eicher
Motors', etc. whose profit margins may expand. The following
graphic provides a quick view calculation of pre- and post-GST
on the price of a small budget car21:
Current GST
In Rupees
Manufacturer’s price 3,00,000 300000
Total taxes at manufacturing
stage (*includes excise duty,
infra cess, VAT, octroi)
141690
(47.23% total tax)*
54000
(18% GST)
Cost to dealers 4,41,690 3,54,000
Margin @10% 44169 35,400
20 CARE Ratings: GST Impact on various sectors extracted on Jan. 9, 2016 from
http://www.careratings.com/upload/NewsFiles/SplAnalysis/Impact%20of%20proposed%20G
ST%20on%20select%20industries.pdf, pp. 2-3
21 FAPL: Is Goods & Services Tax (GST) Simply Overrated? Extracted on Jan. 9, 2016 from
https://www.falconautoonline.com/goods-services-tax-gst-simply-overrated/

KUNAL BASU 25
Sale price for dealers 4,85,859 3,89,400
VAT/GST 60732
(12.5%)
70,092
(18%)
Net VAT/GST (after claiming
credit)
12,558 16,092
Price to retail customers 5,46,590 4,59,493
On the negative, demand for commercial vehicles may be hit in
the medium term. GST will subsume local taxes, reduce time at
check-posts, and ease logistics hurdles. With fleet productivity
increasing, operators may not feel the need to expand mid-term,
choosing instead extract greater benefit from their existing fleets
whose mileage per day would substantially increase.
However, the main issue facing the auto sector is the ambiguity
regarding rate of GST - whether there would be a differential
rate for mid-segment/ luxury-segment cars, as recommended by
the CEA's report on GST rates? If yes, how would the segments
be defined and what would be the delta in the rates vis-à-vis
small cars or the RNR, is the big question on industry's mind.
Debate also centres on the fate of incentives that have been
promised to various automakers while setting up of their
manufacturing plants by respective State Governments in the
form of VAT/ CST linked subsidies and/ or deferment of taxes.
Any change in the agreed terms for disbursal of such incentives
would have an impact on the ROI from manufacturing
operations; consequently also impacting decision-making by the
Auto sector on infusion of additional capital investments in
India22.
The Model GST Law is also silent on the treatment of used-car
sales. A major part of the pre-owned vehicle sales presently take
place in the unregulated market space and the GST rules
22 Businessworld: Impact Of GST On Various Sectors In India extracted on Jan. 8, 2016 from
http://businessworld.in/article/Impact-Of-GST-On-Various-Sectors-In-India/04-08-2016-
104041/

KUNAL BASU 26
regarding the same would be a determinative factor for inclusion
of this segment within the GST net.
Media
DTH, film producers and multiplex players are levied service tax
as well as entertainment tax. GST will bring major change and
uniformity in businesses with taxes declining by 2-4%.
Multiplex chains are expected to save on revenues as there
would be a uniform tax, unlike currently high rate of
entertainment tax levied by different states. It may lower the
average ticket price, and increase the footfalls in multiplexes.
DTH and cable television services are expected to become cost
effective under the GST regime. However, the quantum of DTH
and cable bill would depend on the levy of entertainment tax.
While service tax and state level entertainment tax will be
subsumed in GST, the effective entertainment tax incidence is
expected to decline. However, the overall impact on the tax and
revenue side will depend on the quantum of entertainment tax
imposed by local bodies. Further, under the GST regime, the tax
cost on procurements for DTH and cable service providers
should reduce on account of larger availability of credits. GST
may also be a big boon to film producers and studios that
currently pay service tax on most of their cost, but cannot
charge input credit on creative services (payments to artists etc.)
as they fall under the negative list. Under GST, they will be able
to claim credit of these services also, which will help is lowering
the overall cost. Key beneficiaries are expected to be Dish TV,
PVR, etc.23
Insurance
Life, health and motor insurance policies: will cost more from
April 2017 as taxes will go up by up to 300 basis points from
23 Notes (13) & (14)

KUNAL BASU 27
15% to 18%. Insurance premium apart from including risk
element also includes expenses related to policy issuance,
intermediary commission, etc. which could be lowered by the
insurers to compensate the effect of enhancement of service tax
in the new GST era. However, with the increase in insurance
premiums, there will be close competition among insurers for
offering the best insurance proposition to the consumer, which
would be beneficial for the consumer24.
Cement
Currently this sector is taxed at 27-32%. Post- GST, this will
improve the sector growth in various terms, like transportation
by 20-25% per cent and in the warehouse scheme as the
rationalization would be easy in an unified market and also in
the transportation cost as also reduced transit time25.
Aviation
Aviation Turbine Fuel (ATF) outside the purview of GST:
ATF will not be included within the GST regime and therefore
the Central and State governments will continue to impose
excise duty and Value Added Tax (VAT), respectively. Since the
levy of these taxes will not be creditable for carriers under the
GST regime, it will result in a cascading effect of taxes. While
the current service tax abatements are conditional on carriers
not availing credit of ATF, the increased GST rate coupled with
the non-inclusion of ATF (which forms 30-35% of the input cost
for carriers) will significantly burden the aviation sector and
24 Moneycontrol: How does GST impact your insurance premium? extracted on Jan. 8, 2016
from http://www.moneycontrol.com/news/insurance/how-does-gst-impact-your-insurance-
premium_7444121.html
25 SAG Infotech: Impact of GST Bill on Different Sectors in India extracted on Jan. 8, 2016
from http://blog.saginfotech.com/impact-gst-bill-different-sectors-india

KUNAL BASU 28
therefore, there is a strong case for a merit rate of GST for air
travel26.
Increased compliance costs: Under the existing tax regime,
carriers are only required to take a single service tax
registration. The Model GST Law prescribes registration in each
State where a carrier undertakes a supply. Carriers will thus
have to register in every State where the registered passenger is
located and also in each State from where its flights originate.
Further, the carrier will also be required to upload onto the GST
Network, invoice wise details of supplies made to registered
persons. These compliance requirements will result in
escalation of costs of doing business27.
Possible increase in ticket prices: Flying is expected to
become more expensive as service tax will be replaced by GST.
Service tax on fares currently ranges between 6% and 9%
(depending on the class of travel). With GST, the rate will
surpass 15%, if not 18%, effectively doubling the tax rate.
Currently, air travel attracts service tax @ 6% for economy
travel and 9% for non-economy travel. Though the GST rate has
not been announced, the Chief Economic Advisor has suggested
a rate of 17%/18%. A GST rate of 18% may lead to a 9% to 12%
increase in the cost of air travel for passengers, thus hampering
the growth of the industry28.
It may be relevant to note that the lower rate of service tax for
air travel is subject to the carriers not availing credit of inputs,
which primarily comprises the aviation turbine fuel (accounting
for approx. 35% of the cost of the carriers). Under the GST also,
the carriers would not be able to take credit on aviation turbine
26 Trilegal: Impact of GST on the Aviation Sector extracted on Jan. 8, 2016 from
http://www.legallyindia.com/views/entry/impact-of-gst-on-the-aviation-sector
27 Note (20)
28 PWC: Decoding the draft GST law: Impact on Aviation sector extracted on Jan. 8, 2016
from
https://www.pwc.in/assets/pdfs/services/tax/indirect_news_alert/2016/decoding_the_draft_gst
_law-impact_on_aviation_sector.pdf, p. 3

KUNAL BASU 29
fuel (which would be kept outside the ambit of the GST). In such
circumstances, it is imperative that the carriers ask for a lower
rate of GST on passenger travel. Further, the Model Law
contains provisions for zero-rating on exported goods or
services. However, the Model Law does not envisage zero-rating
of international air travel. Lastly, the Model Law is silent on
whether the current service tax exemption on flights to/ from
specified airports in the North East region would continue
under the GST.
Issues around valuation to continue and may get
aggravated: Another key concern for the carriers is the
valuation of their service. At present, most carriers are litigating
on the aspect of valuation of their service. It is the contention of
the carriers that levies by Governments and airports on the
passengers, which are collected by the carriers, do not form a
part of revenue of the carriers, and should not be included in
the service value. The current regime has a specific exemption
for taxes levied by Governments on the passengers.
However, the Model Law stipulates that taxes, duties, fees and
charges levied under any statute would be included in the value
of the service. This seems to indicate that the intent of the
Government is to tax all such duties and levies, irrespective of
the fact that such levies may be by an overseas Government or
airport.
This valuation issue gets further compounded by the fact that
valuation provisions brought in for services/ goods in a similar
manner as they exist under the current Customs law for import
of goods. Under these valuation provisions, the value can be
rejected on the basis of different prices charged for
contemporaneous services. Tickets sold at varying prices to
customers may be rejected by the authorities and taxed at a
higher price. The tax authorities also seem to have been given

KUNAL BASU 30
overarching powers to reject the value declared for the services.
This specific provision can play mischief for the carriers.
Aircraft lease/ purchase now taxable: Currently, carriers are
not required to pay any indirect taxes on lease of aircraft into
India (as Customs duty on import of aircraft is exempt and the
transaction is beyond the jurisdiction for levy of VAT). Only in
case of a finance lease arrangement, service tax is applicable on
10% of the lease rentals.
Under the Model GST law, leasing of goods (i.e. aircraft) would
qualify as a service and attract GST in the hands of the carrier,
unless a specific exemption is provided. Though the carrier may
eventually be able to take input tax credit of the GST paid, the
upfront payment is likely to have huge cash flow implications.
Similarly, purchase of aircraft would qualify as a sale of goods
and would attract GST in the hands of the carrier. Though the
carrier may eventually be able to take input tax credit of the
GST paid, the upfront payment is likely to have huge cash flow
issues.
Increase in maintenance costs: Currently, maintenance and
repair of aircraft undertaken outside India do not attract service
tax in the hands of the recipient carrier. However, per the Model
Law, services rendered by overseas MROs attract GST in the
hands of the domestic carriers even if the services are performed
outside India. Though the carrier should be entitled to input tax
credit of the GST paid, it could impact cash flows. Further,
parts/ spares imported into India and supplied to the carrier
(for use in repair/ maintenance of the aircraft) are currently
exempt from levy of customs duties. However, as yet, no specific
exemption has been envisaged under the GST on such supplies.
Multiple taxation on maintenance removed: Currently, both
VAT and Service tax is applicable on maintenance activities

KUNAL BASU 31
undertaken in India (referred to as ‘works contract’). This has
resulted in higher tax burden for the MROs. The Model GST Law
specifies that works contract (including any transfer of property
in goods in the execution of such contract) would be taxed as a
service. This is a welcome move and should provide certainty on
taxability of the MRO sector.
Import of parts costlier in absence of duty exemption:
Parts/spares imported into India for use in repair/ maintenance
of the aircraft are currently exempt from levy of customs duties.
However, as yet, no specific exemption has been envisaged
under the GST on such supplies.
Textiles
Presently, the textile industry has been divided into 9 broad
categories for the purpose of taxation. These include cotton
textile, woollen textile, silk textile, artificial silk, synthetic fibre
textile, khadi and handlooms, jute, hemp and mesta textiles,
carpet weaving, ready-made garments and miscellaneous textile
products. The current taxes vary from 4% to 12% based on
these categories. Further, textile sector is dominated by
unorganized players who are given tax exemptions on the basis
of size of their operations. All these factors result in a number of
key concerns for the textile sector which include:
i. Dispute over fabric versus garment classification: e.g.
Sarees
ii. Differential taxation for cotton and manmade fibre: Zero
duty for cotton fibre as compared to high excise duty
structure of nearly 12.5% on manmade fibre segment
iii. Composite mills are taxed at a higher rate than the power
looms discouraging integration of production

KUNAL BASU 32
iv. Also, the current taxation is production based leading to
blocked input taxes which results in higher cost of
production.
With the implementation of GST, there will be a uniform rate of
tax which will result in:
Blocked input taxes will be eliminated as GST is a consumption
tax
Zero rating on exports under GST will boost exports further
without the need for explicit subsidy schemes
Level-playing field will be provided to all textile segments
Integration of production will be encouraged resulting in
increased efficiency
Goods movement within the states will also be much easier as
lot of local state taxes which are levied on the borders of states
which inhibit free movement of goods will be removed. This will
help in improving the productivity & efficiency of the textile
industry as now more factories/manufacturing units can be set
up in various textile hubs across India without worrying for
various state taxes which were earlier levied indirectly29.
Furthermore, under GST, textile players which are oriented
towards domestic markets will be able to avail input tax credit
(ITC) on domestic capital goods (but not the import duty) as
their sales will be subject to GST. Accordingly, this will reduce
the cost of capital investments and hence will be positive for the
players operating in domestic markets. However, there is no
clarity about the impact of GST on this sector but the output
tax rate will be negatively impacted. Therefore, various export
29 CARE Ratings: GST Impact on various sectors extracted on Jan. 9, 2016 from

KUNAL BASU 33
companies, will get some extra benefit from the duty drawback
from the new GST implementation30.
In ICRA's31 view, a 12% (lower) rate recommended by the Arvind
Subramanian Committee is likely to have a negative impact on
the textile sector, especially the cotton value chain, which is
currently attracting zero central excise duty (under optional
route); unlike the man-made fibre sector, where the fibre
attracts excise duty at the manufacturing stage (unlike cotton).
Hence there is an incentive for the downstream players in
manmade sector to avail ITC. ICRA points out that the most of
the cotton based textile players in the value chain operate
through the optional route, thereby resulting in lower duties.
The key reasons for the same are exemption on cotton and
hence the lower ITC for cotton spinning mills; as a result cotton
yarn manufacturers opt for the optional duty route without
claiming ITC and pay zero excise duty32.
Pharmaceuticals
The biggest advantage to the industry would be that of
reduction in transaction cost, with an immediate impact coming
from the discontinuance of CST. The multistage taxation along
with the inability to take full benefit of the CENVAT credit
/refund has been an issue for the industry. With central GST
expected to be a single rate for goods and services, going
forward credit accumulation may not be an area of concern.
Furthermore, the legislation provides for carrying forward of the
unutilised credit that would be an additional boost to the
industry. Furthermore, the pharmaceutical sector currently
30 Note (18)
31 ICRA: Indian Textile Sector: Impact Analysis of GST extr5cated on Jan. 8, 2016 from
http://www.icra.in/Files/ticker/Impact%20of%20GST.pdf, p. 3
32 Ghoshal, Sutanuka: GST rate at 12% will negatively impact textile sector: ICRA,l
Economic Times, extracted on Jan. 8, 2016 from
http://economictimes.indiatimes.com/industry/cons-products/garments-/-textiles/gst-rate-at-
12-will-negatively-impact-textile-sector-icra/articleshow/53652607.cms

KUNAL BASU 34
enjoys various location based tax holidays on its manufacturing
activities. Under the proposed structure of GST, such area
based exemption will be done away with. However, taking into
account past precedents suitable work around/refund process
would be constituted to ensure that any existing hubs do not
get impacted and continue to get the agreed benefits. GST would
bring everything on a single and same platform for all. It would
bring more transparency in the system. However, GST is not
likely to impact financial or operational performance of the
companies in a notable manner33.
The impact could be neutral as the sector only pays 6% tax. It
also avails incentives in tax benefits arising from geographical
location. There are various concessional benefits and
exemptions held for this sector and will extend till the expiry of
the assured period. The implications of GST would however,
reduce the logistics cost and inverted duty structure34.
Transition provisions for imported goods35: The transition
provisions provide that the credit balances which were
admissible under the present regime would be carried forward
under GST. In case of stocks of imported finished goods,
Countervailing Duty is not admissible under the present regime,
and in case of goods procured from contract manufacturers
also, Excise Duty credit is not available. Accordingly, based on
these provisions, under the GST regime, such stocks would
suffer double taxation.
Taxability of Free Supplies: Supply of goods between persons
without consideration is deemed to be a ‘supply’. Accordingly,
33 CARE Ratings: GST Impact on various sectors, extracted on Jan. 9, 2016 from
34 Note (18)
35 PWC: Decoding the Model GST law: Impact on the Pharma sector extracted on Jan. 8, 2016
from
https://www.pwc.in/assets/pdfs/services/tax/indirect_news_alert/2016/decoding_the_draft_gst
_law-impact_on_the_pharma_sector.pdf, p. 3

KUNAL BASU 35
stock transfer of promotion materials/ free samples will be
subject to GST. Subsequent supply of the said promotion
materials to stockists/ end customers will also attract GST.
Financial Services
In India, most of the banking and financial services are exposed
to service tax, at the rate of 14.5 percent, while GST is expected
to be 18 percent to 20 percent. Thus, services are likely to get
costlier. GST may make things cumbersome as financial service
providers may be required to adhere to compliances across
multiple states instead of the current single, centralised
registration compliances. Also, as GST is a destination-based
tax, it might be a challenge to determine the destination of
certain services (at present, services are taxed at the place of
rendering the service). This may lead to a difficulty in
determining state GST, central GST or inter-state GST on B2B
and B2C transactions.
Interest on loans, trading in securities, foreign currency and
retail services are also expected to fall within the ambit of GST.
Recommendations by the banking industry suggest that such
services and income should not come under GST. It is still to be
seen whether these recommendations will be accepted.
Presently, as per the definition of the term, ‘service’, only those
activities which have a consideration are liable to service tax.
However, the Model GST Law also proposes to tax services by a
taxable person to another person in the course of furtherance of
business, without any consideration. This proposal could have
far reaching implications, as identification and value attribution
for such supplies could be challenging. For example, customers

KUNAL BASU 36
maintaining minimum account balance are eligible for certain
benefits and such free services could be subject to GST36.
Sale of Repossessed Assets: Under the VAT laws, taxability of
sale of repossessed assets in the hands of Banks/ NBFCs has
been a contentious matter. Various courts have confirmed the
applicability of VAT on Banks/ NBFCs and the matter is now
pending before the Supreme Court. In the Model GST Law, if
Banks/ NBFCs are treated as suppliers of such assets, the
overall cost of operations for Banks/ NBFC’s would go up, as it
is expected that the rate of GST would be higher than the
present VAT rate.
Overall, it appears that imposing GST on banking and financial
services may become a challenge and India, if successful, will
chart a new course, which could well become a model for the
rest of the world37. Overall operations costs will likely increase
leading to a concomitant rise in loan processing fees,
debit/credit charges, insurance premium, etc.38
Real Estate
Implementation of GST will result in reduction in property
prices. At present, the developers pay various non-creditable
taxes like excise duty, customs duty, CST, entry tax, etc. on the
procurement side, and the buyers pay service tax and VAT on
purchase of residential units when booked prior to their
completion. GST will replace these multiple taxes with a single
tax and will also ensure smooth flow of credits through the
chain. Hence, it is expected that GST will reduce the
36 PWC: Decoding the Model GST Law: Impact on Financial Services sector extracted on Jan.
8, 2016 from
https://www.pwc.in/assets/pdfs/services/tax/indirect_news_alert/2016/decoding_the_draft_mo
del_gst_law-impact_on_the_financial_services_sector.pdf , p. 4
37 Forbes India: Rajya Sabha passes GST Bill: How it will impact various sectors extracted on
Jan. 8, 2016 from http://www.forbesindia.com/article/real-issue/rajya-sabha-passes-gst-bill-
how-it-will-impact-various-sectors/43877/1
38 Note (18)

KUNAL BASU 37
construction cost incurred by the developers and thereby help
in reducing the current level of property prices. However, high
GST rates may offset any possible gains on incremental credits.
GST may also result in improved inflow of foreign funds in the
real estate sector, as implementation of GST may attract
overseas investors for its relative ease of business39.
Yet, transfer of (completed) properties may continue to be
outside the purview of GST and be liable only to applicable
stamp duties, a dampener for buyers. In case this sector is
brought within the ambit of GST, it is likely to result in
transparency, which would significantly reduce tax evasion
through more efficient transaction-tracking methods, and
improved enforcement and compliance. Since GST may be levied
on a single value, the current issue of levying tax on tax (VAT on
central excise duty) is likely to be removed. At present,
developers pay various non-creditable taxes on supplies. GST
may replace these multiple taxes with a single tax; credit on
supplies may also be available, thus reducing costs for all
players. However, if real estate output is exempted, then input
GST credit could be a substantial cost for the sector, resulting
in blockage of credit and higher costs to end consumers40.
The Model GST law clearly mentions input credit will not be
available for goods and services purchased for execution of work
contracts. There are two classes of judicial opinions of whether
construction of residential complex is a work contract or not. If
it is treated as a work contract, cost of developer may not
reduce at all after GST implementation. Presently government
no input credit is allowed if the composition scheme (i.e.,
abatements for cost of land and goods) is used by developers for
39 CARE Ratings: GST Impact in India, extracted on Jan. 9, 2016 from
ST%20on%20select%20industries.pdf, p. 4
40 Note (21)

KUNAL BASU 38
calculating service tax and VAT. Therefore it is probable that
cost of under construction residential unit may increase post-
GST implementation.
Travel, tourism and hospitality
India’s travel, tourism and hospitality industries have multiple
taxes, levied by both the centre and the states. It is expected
that under GST, supplies of hotels and restaurants will be
subjected to a single tax. At present, no credit is available on
input services related to renovation or construction of hotels
and resorts. This is expected to change under GST. R&D cess,
payable on franchise fees and technical know-how, is likely to
be subsumed under GST, thus simplifying compliance
procedures and reducing multiple taxes. However, it is unclear
whether various benefits available under the existing Foreign
Trade Policy will continue under GST. If such benefits are
provided, input credit may not be available, resulting in higher
costs. On the whole, GST is likely to eliminate multiplicity of
taxes and lack of credits. However, it may also lead to increase
in tax rates41.
Health Care
One of the major concerns of this industry is the current
inverted duty structure that adversely affects domestic
manufacturers, cost of inputs being higher than output. This
discourages investment in this industry. GST may either remove
the inverted duty structure or allow refund of accumulated
credit. This would be a boon for this industry and can act as its
growth catalyst.
The current cascading tax structure on import duty makes it
expensive for the industry to import machinery. GST is likely to
reduce this cost. This sector enjoys several tax exemptions and
41 Note (21)

KUNAL BASU 39
benefits. It is still not clear whether these benefits will continue
under GST. Health insurance and diagnostic centres, which are
mainly service-oriented, may fall under higher tax rates, thereby
making such services more expensive for consumers42.
Alcoholic beverages
Alcohol for human consumption is proposed to be kept outside
the GST regime, and will hence continue to attract state excise
and VAT; however, inputs are likely to fall under the ambit of
GST. Consequently, there may be blockage of input credit,
leading to increased production cost and inefficiency in
production and distribution. higher input costs and its
cascading effect on taxes may push prices upwards, and may
also hit exports. Restaurants and bars serving alcohol, and
selling both GST and non-GST products, may be required to
undertake dual compliance (for GST and non-GST products)43
that may raise operating costs and make F&B dearer for
consumers.
Education
The education sector currently enjoys various tax exemptions
and benefits; services provided by schools and colleges are
either not taxed or are covered in the negative list. The situation
is likely to continue even after the implementation of GST. In
case it does not, the sector may be able to avail of input credit
or CENVAT credit on the duty paid on purchase of inputs and
services. These are likely to bring down the final cost for the
industry44. If not, tax component will also increase by 3-5%
resulting in an increase of cost of services to the end user i.e.,
students45.
42 Note (21)
43 Note (21)
44 Note (21)
45 GST Taxation : Impact of GST on Education sector extracted on Jan. 8, 2016 from
http://www.gsttaxation.com/impact-gst-education-sector/

KUNAL BASU 40
Renewable Energy
One of the main energy sub-sectors to be impacted post the
implementation of GST is renewables. The sector currently
enjoys various fiscal incentives like 100% tax holiday on
earnings for ten years and concessional excise and custom
duties and consumer subsidy, etc. These incentives would end
in the new GST regime raising renewable energy costs and
pricing and hit investors.
The Ministry of New and Renewable Energy (MNRE) has already
worked out a possible scenario of these impacts. Various
exemptions are provided currently to capital goods and inputs
used in renewable energy projects. The foundation of GST is
based on pruning of exemptions as far as possible. Hence, if
exemptions are pruned for goods used in renewable energy
projects, there would be a significant increase in tax cost on
procurements. Since all such taxes are (and would continue to
be) non-creditable for renewable energy players, the same would
be a cost and hence, increase cost of renewable energy.
Currently, different tax rates are applicable depending on the
nature of procurement. GST aims to provide a single rate for
goods and services. The Select Committee has recommended
that the standard GST rate should not exceed 20%. A GST rate
of 20% would also be substantially higher than the rates
currently applicable on procurement of goods and services in
the renewable energy sector. This would have an adverse impact
as the taxes paid on procurements would increase the tax cost
burden for the renewable energy sector.
In case of inter-State purchases, a concessional rate of CST of
2% is provided against issuance of statutory form (Form C) in
case the goods are to be used in generation or distribution of
electricity. GST is expected to be levied on all inter-State
supplies, with availability of credit in destination States. It is

KUNAL BASU 41
likely that statutory forms (eg Form C) would be done away with
under the GST regime. Hence, concessional rate of tax may not
be available even if the goods are to be used in generation of
distribution of electricity. IGST at 20% would be applicable on
inter-State procurements along with an additional tax of 1%.
This would lead to a substantial increase in tax costs as
compared to the current regime having a direct impact the cost
of renewable energy.
The GST's effect on cost of setting up of renewable projects
would vary across segments, MNRE said in a recent report. The
impact includes a 16-20% rise in solar off-grid costs; 12-16%
rise in Solar PV Grid installations and a 11-15% jump in the
cost of setting up wind energy projects. Biomass projects could
see their costs rising by 11-14% while setting up small hydro
projects could become costlier by up to 11%46.
Non-Renewable Energy
Increased cost of energy projects: While goods and services
required for setting up energy projects will be subject to GST,
they will not be creditable for the generating entity leading to a
cascading of indirect taxes. Under the current indirect tax
regime, various concessions and exemptions are available for
setting up energy projects, especially in the renewable energy
space to counter such cascading effect. However, there is no
clarity on whether these concessions/ exemptions will continue
under the GST regime.
Removal of concessional rate for inter-State procurement
for EPC contracts: To take advantage of the concessional 2%
rate provided for procurements by entities engaged in the
generation or distribution of electricity, project owners are
46 Ministry of New and Renewable Energy, Govt. of India: Implications of GST on delivered
cost of renewable energy extracted on Jan. 8, 2016 from http://mnre.gov.in/file-
manager/UserFiles/Implications-of-GST-on-delivered-cost-of-Renewable-Energy.pdf

KUNAL BASU 42
currently able to structure their procurements as inter-State
sales to reduce tax costs. This 'in-transit sales' exemption on
inter-State sales is also available on second (and subsequent)
sales undertaken during the direct movement from a
manufacturer to the principal (with title passing through
contractors and sub-contractors). However, the Model GST law
provides no such concessions or tax planning opportunities. In
the absence of such tax exemptions and concessions, there is a
possibility of a significant increase in project costs.
Power Purchase Agreements (PPAs): These generally provide
for pass-through of existing indirect taxes by way of
incorporating the costs thereof into the contract price. However,
PPAs generally provide for contract prices to be adjusted on
account of any increase in taxes or introduction or change in
taxes (these are covered as 'Change in Law' or 'Force Majeure'
clauses under the PPAs). Generally, introduction of GST would
be seen as 'Change in Law' or 'Force Majeure' event under most
PPAs. However, for those PPAs that do not provide an
adjustment to cover increase or introduction of taxes, the
introduction of GST would result in an escalation of contract
prices. Further, ambiguity remains in cases where GST is
brought into force after the pre-bidding stage of a project but
before the signing of the PPA. In such a situation, an issue may
arise on whether such change in tax legislation would be
considered as a 'Change in Law'.
Any tax distortion faced by this sector on account of electricity
being outside the ambit of GST, will have a cascading effect on
the rest of the economy, negating some of the very benefits
sought to be brought about by the introduction of GST.
Government may have missed an opportunity by not integrating
generation and distribution of electricity with other supplies
which interact with it, under the umbrella of GST. Therefore,

KUNAL BASU 43
the viability of the energy sector, under the current GST regime,
would depend upon the exemptions and concessionary tax
which may be put in place to counter the impact of different tax
regimes on the input and output side. Exemptions in
renewables will need to be grandfathered for this sub-sector to
remain viable47.
Electrical & Electronic Equipment
The new GST regime is likely to benefit the lighting as well as
electrical sector significantly through an overall reduction in tax
rates. Under the new tax structure, the overall incidence of
effective indirect taxes on the companies in the sector will be
lowered to around 18% from the current 29 to 30%48.
Oil & Gas
With the exclusion of Crude oil, Natural gas and major
petroleum products from the ambit of GST for the time being,
the Petroleum Industry will take a major hit. This hit will come
in the form of stranded taxes as input credit would not be
available in the hybrid regime of taxation. Compliance challenge
in a dual regime is another issue that could somewhat be offset
by “Zero rating” of the excluded goods that is not there in the
present GST scheme.
The five petroleum products—crude, natural gas, Aviation
Turbine Fuel, diesel and petrol—are excluded from the coverage
of GST for the initial years while the remaining petroleum
products — kerosene, naphtha and Liquefied Petroleum Gas—
are covered within the coverage of GST. This may result in non-
creditable tax costs which would have an inflationary impact on
the overall economy. For instance, a refinery producing diesel
47 Trilegal/Mondaq: GST Impact: Energy Sector extracted on Jan. 8, 2016 from
http://www.mondaq.com/india/x/531272/Renewables/GST+Impact+Energy+Sector
48 Dynamic Levels: GST’s impact on India’s Energy Sector extracted on Jan. 8, 2016 from
https://www.dynamiclevels.com/en/blog/gsts-impact-on-indias-energy-sector

KUNAL BASU 44
and petrol will pay GST on the procurement of plant, machinery
and services. However, this tax would not be creditable against
the excise duty and VAT which would be levied on petrol and
diesel49. These issues assume extraordinary importance since in
2013-14, this sector contributed about Rs.1.07 lakh crore
(29.70% of all indirect revenue) and Rs. 1.52 lakh crore (2.30%
of all own tax revenue) to the central and state exchequers
respectively50.
Goods of Mass Consumption
A study on the impact of proposed GST structure on goods of
mass consumption by the Tax Research Unit of the Dept. of
Commercial Taxes of the Govt. of Orissa51 showed the pre- and
post-GST price effect in the following table for goods procured
from outside the state. This study assumed that there would be
three rates under GST, lower rate of 6% and a standard rate of
10% on goods and 8% for services both for Central GST and
State GST. Hence combined GST rate would be 12%, 20% and
16%. It was further assumed that the selected commodities
would be placed in the lower tax category of 12%.
Item Retail Price in (in Rupees) %age
(+)/(-)
VAT Regime GST Regime
Suji/100 kg 1680 1773 5.54
Maida/100 kg 1638 1729 5.56
Atta/100 kg 1769 1866 5.48
Besan/100 kg 3608 3808 5.54
Vanaspati/15 kg 811 857 5.67
Mustard Oil/100 kg 6401 6764 5.67
49 Energy Infrapost: Implications of GST: A Big Negative on Oil & Gas Sector extracted on
Jan. 8, 2016 from http://energyinfrapost.com/implications-gst-big-negative-oil-gas-
sector/?print=pdf
50 Sacchidananda Mukherjee: GST in the Petroleum Sector: Revenue Neutrality and States’
Concerns, National Institute of Public Finance and Policy (NIPFP)
New Delhi extracted on Jan. 8, 2016, from http://www.petrofed.org/index.php/round-table-on-
impact-of-gst, slide 4
51Govt. of Orissa, Commercial Tax Dept.: Study of the impact of proposed GST structure on
the prices of Goods of Mass
Consumption extracted on Jan. 9, 2016 from
https://odishatax.gov.in/publication/Impact_of_GST_on_Commodities.pdf

KUNAL BASU 45
Palmolein Oil/100 kg 5231 5528 5.68
Tea/kg 252 267 5.95
Arhar Dal/100 kg 5937 6277 5.73
Moong Dal/100 kg 6149 6500 5.71
Footwear (plastic)/18 pairs 4476 4552 1.70
Footwear (leather)/60 pairs 40402 37942 -6.09
Ready-mades/20 pairs 15426 14665 -4.93
Exercise Book/50 doz 18233 19466 6.76
Paper/metric ton 194307 199218 2.53
Made-up textiles/10 pcs. 7459 7092 -4.92
On the other hand, the same report in surveying some goods
procured from within the state arrived at the following tabular
findings:
Item Retail Price in (in Rupees) %age
(+)/(-)
VAT Regime GST Regime
Black Gram/100 kg 5132 5526 7.68
Moong Dal/100 kg 4152 4471 7.68
Rice/100 kg 2114 2274 7.57
The Report concludes that there will be decrease in price of
leather footwear, readymade garments and made up textiles as
these are excisable goods. Presently, excise duty and CST are
collectable on these goods. Since excise duty and CST is not
VATable, the tax paid on these goods gets embedded in the cost
price which causes cascading. Under GST regime CST and
excise duty shall be subsumed and input tax credit will be
available on sale of those commodities. Hence, price of these
commodities will decrease. Plastic footwear and paper are also
excisable goods. There will be marginal price rise by 1.70% and
2.53% respectively in case of plastic footwear and paper. The
other commodities do not attract excise duty. Hence, the price
rise in case of the other commodities is found to be about 5.5%
to 8%.
According to the presentation at the GST Council meeting on
Oct. 18, 2016, of the 29 items (part of Consumer Price Index
basket) that are proposed to be taxed at 6%, 19 items are set to
witness an increase in their tax incidence as currently they

KUNAL BASU 46
attract a lower combined tax rate. Within this group, however,
the tax rate on items such as vanaspati, butter, ghee, taxi and
auto-rickshaw fare and coffee powder is set to come down from
the current combined tax incidence of 7-9% to 6%.On the other
hand, in case of CPI basket products that currently fall in tax
rates of 25% per cent and above, most items will witness a drop
in tax rates. As per the agenda papers which listed 50 items in
this category (total CPI weight of 45.86%), while the combined
tax incidence for cold beverages (bottled and canned) currently
stands at 38%, it may come down to 26% if the Council agrees
to the proposal — these may, however, fall in the demerit goods
category and attract additional cess.
If taxes on cars and jeeps are proposed to come down from 31%
to 26%, that on motorcycles and scooters will come down from
28% to 26%. The Centre has, however, proposed to impose
additional cess on high-end cars. Other important items that
have higher weightage in CPI and are likely to see a decline in
prices are washing soap, soda and powder, toilet soap, hair oil,
shampoo and hair cream, powder, lotion, perfume, toothpaste,
toothbrush (aggregate weight of 2.71% in CPI). Their tax rate
will come down from the present combined tax incidence of 29%
to 26%. The following table shows changes in some items:

KUNAL BASU 47
In this presentation, the Centre said the total impact of the
proposed rate structure on CPI-based inflation rate will be (-)
0.06 per cent. While the inflation impact on constituents of CPI
such as health services, fuel and lighting and clothing is
estimated to be 0.56 per cent, 0.05 per cent and 0.23 per cent,
respectively, that for transport is estimated at (-) 0.65 per cent,
education at (-) 0.08 per cent and housing at (-) 0.09 per cent52.
Jewellery & Bullion
At present, the Centre and States tax precious metals at rates
between 1-1.6%. Currently, about 70% of goods and services get
taxed at an average rate of 27%. To protect their revenues,
States have sought that the standard GST rate, which will fall
on the bulk of goods and services, be fixed at 20% or higher53.
GST implementation may make household jewellery 18%
cheaper, which in turn will discourage sales of used ornaments
52 Indian Express: Chicken to tea: Many mass items to cost more, extracted on Jan. 9, 2016
from http://indianexpress.com/article/business/economy/gst-council-meet-rate-difference-on-
everyday-products-3092481/
53 The Hindu: Gold key to lower GST rate, extracted on Jan. 9, 2016 from
http://www.thehindu.com/business/Economy/Gold-key-to-lower-GST-
rate/article14981885.ece

KUNAL BASU 48
freely to jewellers. Jewellers will not get input credit on gold
procured through melting of used jewellery. Hence, they would
prefer to pass on the loss to customers. Since, the GST Council
is contemplating 18% tax on gold ornaments, jewellers will get
18% lower input credit. Currently jewellers avail input credit
from banks as working capital in commensurate with gold
collected through melting of scrap jewellery.
In case of price rise, quantity of used jewellery increases. Scrap
jewellery collection declines with fall in gold prices. On passing
18% lower input credit, customers will get lesser amount
equivalent to the tax that may discourage sale of used jewellery.
Hence, customers may get 18% lower realisation from their used
gold jewellery. Since most jewellery sales take place in distress,
jewellers might even take advantage of the situation in the name
of GST and lower prices further. Gold recovery through melting
of used jewellery stands between 5% and 10% in India,
depending upon price volatility54. Branded jewellers fear that if
the government fixes GST on gold jewellery at 4-5%, several
customers, particularly those in rural areas, may prefer the
parallel market to the organised sector, because of a likely price
difference of Rs 30-50 per gram55. However, an expert states
that comparing with the present indirect tax structure the
effective GST rate for precious metals (even assuming the
highest rate of 6%) actually is slightly higher than the current
indirect tax rate burden. Hence, it is unlikely that the GST rate
54 Business Standard: GST rollout to make household jewellery 18% cheaper, extracted on
Jan. 9, 2016 from http://www.business-standard.com/article/specials/gst-rollout-to-make-
household-jewellery-18-cheaper-116080400238_1.html
55 Economic Times: Higher GST on gold jewellery may make rural customers prefer parallel
market, fear branded jewelers, extracted on Jan. 9, 2016 from
http://economictimes.indiatimes.com/industry/cons-products/fashion-/-cosmetics-/-
jewellery/higher-gst-on-gold-jewellery-may-make-rural-customers-prefer-parallel-market-
fear-branded-jewellers/articleshow/53549574.cms

KUNAL BASU 49
proposed on precious metals would actually adversely affect the
sector56.
Exports
For the manufactured product exporters, the most significant
impact would be the increased requirement and blockage of
working capital. For manufacturing a product, a firm buys
locally or imports raw material and machinery. The current
export schemes allow firms to buy these without payment of
applicable duties through ab-initio exemption or subsequent
refund of duties. The proposed GST system mandates that all
duties must be paid at the time of a transaction while refund for
these can be obtained after exports. This means the exporter
will have to arrange money for the inputs, manufacturing and
payment of duties and taxes.
SEZs, EOUs, deemed exports: Currently, the SEZ developer
and units can import their requirements duty-free. Also, the
supplies made by the domestic units to SEZs are considered
exports and hence are free from payment of taxes and duties.
However, the model GST law defines exports as taking goods
and services out of India to a place outside India. India is
defined to include the Exclusive Economic Zones lying at 200
nautical miles beyond territorial waters. Since SEZs are located
on Indian Territory these would be reduced to the status of a
normal domestic firm. This means, no duty or tax exemptions
on imports or exports would be admissible. Imports into SEZ
will attract IGST while supplies to SEZs will attract CSGT and
SGST or IGST. With average value addition at SEZ already less
than 10%, the new law may make many SEZs unviable.
56 Financial Express: Will higher rates under GST regime affect precious metals like gold,
silver?, extracted on Jan. 9, 2016 from http://www.financialexpress.com/economy/higher-
rates-under-gst-regime-not-to-impact-precious-metals-services-experts/177225/

KUNAL BASU 50
GST will also affect the supplies defined as deemed exports.
Currently, the supplies to projects under International
Competitive biddings (ICB), mega power plants and World Bank
funded projects are exempted from central taxes. This has been
done to enhance competitiveness of Indian firms participating in
global tenders or large scale bids. Post-GST, these supplies,
currently termed as deemed exports, will become taxable where
no refund would be available.
The provision of no exemption and only refund will lead to
blockage of about Rs. 185500 crore annually for the
manufactured goods exporters. This figure considers export
value of $200 billion, an average 30% value addition over the
inputs and cost of capital at 12 per cent. Capital at 12% in India
is way too high compared to 0-1% in most developed countries.
Moreover, most SMEs cannot get capital even at 12% interest.
The more sophisticated a product, higher is the need for
external sourcing of inputs, leading to higher requirement and
blockage of working capital.
A domain expert has proposed an unconventional solution to a
vexatious problem. The working capital blockage issue can be
resolved without compromising the integrity of the GST model.
Firms may be permitted to pay tax on transactions leading to
exports through e-currency. This would be of the nature of an
IOU where a firm would agree to set off its IOUs with the actual
payment within a year or at the time of the completion of
exports, whichever is earlier. A firm can be allowed to use IOUs
equal to the value past year’s export performance. This solution
keeps the current GST framework of making payment first,
refund later, intact57.
57 Srivastava, Ajay: Exporters need to prepare for GST, extracted on Jan. 9, 2016 from
http://www.thehindubusinessline.com/opinion/gst-and-exports-in-india/article9226928.ece

KUNAL BASU 51
However, some exporters of capital goods, like Thermax, state
that GST will reduce tax outgo. Currently, capital goods
industry pays 24-25% for goods sold in same state as
manufactured whereas the industry also pays central sales tax
(CST) for goods sold in another state58.
Manufacturing Industry
State incentives: Companies have set up units with significant
investment outlays based on incentives offered by States under
their respective investment promotion policies. These incentives
are usually in the form of tariff incentives (lower tax rates,
refund/deferment of taxes etc.) and non-tariff incentives
(economical land lease terms, lower electricity duty etc.). At
present, States have the flexibility to offer such incentives.
However, under the GST regime, such flexibility given to the
States is likely to be curtailed to achieve the intended effect of
uniformity. Further, the Model GST Law does not clarify the fate
of current incentives. Companies which have based their
financial projections around these fiscal incentives may have to
reassess their projections.
The implementation of GST will also signal a move away from
the producer State tax system to a consumption State tax
system. Producer States will have a lower financial incentive to
offer such concessions, as GST will only be credited to the State
where the supplies are consumed, as opposed to the present
situation where the Producer State is credited with central sales
tax on inter-state sales. This would lead to a loss of revenue for
the producer States and therefore such States may not be in a
financial position to continue offering such incentives, even
though there may be other compelling reasons such as
58 Moneycontrol: GST will help exports for capital goods industry: Thermax, extracted on Jan.
9, 2016 from http://www.moneycontrol.com/news/business/gst-will-help-exports-for-capital-
goods-industry-thermax_7200701.html

KUNAL BASU 52
generation of labour, improvement of infrastructure, market
creation etc. However, it is likely that future incentives may
only be non-tariff based.
Area based incentives: Manufacturing units enjoy exemption
of taxes based on their location in specified backward areas,
capital investment etc. There is no clarity under the Model GST
Law on the treatment of such area based exemptions.
MRP valuation: Currently, various pre-packaged products for
retail consumption are subject to excise duty not on the ex-
factory transaction value but on a specified percentage of the
maximum retail price (MRP) printed on the package. The MRP
based value (which is usually between 30%-35% of the MRP) is
in most cases, much higher than the ex-factory transaction
value leading to a higher excise duty liability than would
otherwise be the case. This increased excise duty itself, results
in a higher MRP, ultimately leading to a higher cost burden for
the consumers. Under the GST regime, GST is payable by the
manufacturer at the transaction value, and is creditable for all
subsequent resellers up to the final consumer. Accordingly, the
unnecessary tax burden of the MRP regime will no longer be
relevant.
Working Capital: The impact on working capital may be
significant for the manufacturing sector. Under the current
regime, stock transfers are not subject to tax. However, under
the GST regime, stock transfers are deemed to be supplies and
are subject to GST. Though GST paid at this stage would be
available as credit, realization of this GST would only occur
when the final supply is concluded. This would likely result in
cash flow blockages and therefore companies would have to
rethink their supply chain management strategies to minimize
this impact on their cash flows.

KUNAL BASU 53
Reduction of Cascading Taxes: Under the present indirect tax
regime, the manufacturing sector is able to set-off most input
taxes levied in the production value chain. However, Central
taxes cannot be set-off against State taxes and vice versa. This
often leads to a situation where manufacturers are unable to set
off excess credit of central or state levies. Further, central sales
tax paid on inter-state procurements is also not creditable and
are costs for the company.
Another issue faced currently is the cascading of taxes at the
post manufacturing stage. Dealers, retailers etc. are subject to
taxes on their input side which are not creditable (service tax on
input services, excise duty on capital goods). This leads to an
increase in the cost of goods, ultimately affecting the
competitiveness of Indian manufactured goods vis-à-vis imports.
All of the above issues are addressed under the Model GST Law,
which permits tax set offs across the production value-chain,
both for goods and services. This will result in a reduction of the
cascading effect of taxes and bring down the overall cost of
production of goods.
Reduction of classification disputes: Currently, due to
varying rates of excise duty and VAT on different products, as
well as several exemptions provided under excise and VAT
legislations, classification disputes are a regular cause for
litigation under both central excise and VAT, especially for the
manufacturing sector. It is expected that the inception of GST
which is based on the principles of a simplified rate structure
and minimization of exemptions will significantly reduce
disputes regarding classification of products.
Supply chain restructuring based on economic factors:
Current supply and distribution models are structured to

KUNAL BASU 54
optimize indirect tax impact arising at various levels of value
addition. Transition to GST should hopefully result in such
decisions being taken to optimize business efficiency (as
opposed to indirect tax efficiency). For instance, currently
warehousing choices are often based on arbitrage between VAT
rates in different States/ between applicable VAT and CST rates.
With the advent of GST, it is hoped that such warehousing and
logistics decision would be based on economic efficiency such as
costs and locational advantages vis-a-vis key customers.
However, a key hindrance could be the proposal to levy a 1%
origin tax on inter-state supplies.
The manufacturing sector stands to benefit significantly with
the introduction of GST. The overall reduction of cascading
effect of taxes, especially on the post-manufacture stage of the
supply chain should have a positive effect on the cost of
manufactured products in the hands of consumers. However,
concerns remain on specific issues such as the additional 1%
origin tax, increased cash flow issues on account of GST
payable on stock transfers, and increased costs owing to
exclusion of petroleum fuels from the ambit of GST59.
Engineering, Capital Goods & Power Equipment
Introduction of GST is expected to improve the prospects of
engineering, capital goods and power equipment (ECPE) sector
by simplifying the tax structure. The complexity in this sector is
that companies are involved simultaneously in manufacturing of
goods and rendering of services. For example a company
engaged in manufacturing of transmission towers also does EPC
of entire transmission lines which not only involve
manufacturing of transmission towers but supply of bought out
59 Mondaq-Trilegal: India: GST Impact: Manufacturing Sector, extracted on Jan. 9, 2016 from
http://www.mondaq.com/india/x/514010/sales+taxes+VAT+GST/GST+Impact+Manufacturin
g+Sector

KUNAL BASU 55
items and rending of services. The EPC players pay service tax
at present while the manufacturers pay excise duty. However, in
general, a comprehensive tax like GST which would combine the
state and central taxes in a single structure and where tax
credit would be available at each stage of production and final
sale so that double taxation is avoided. This would bring in
more cost competitiveness to the domestic players.
In this sector indirect tax range is much wider as compared to
the other sectors where the product ranges is limited. Hence,
depending upon the products manufactured by the company
and services rendered, basket of goods provided in the EPC
contract, it goes up to around 30% and any GST below this
could improve the cost competitiveness of players in this sector.
Roads & Highways
There are no major implications of GST on toll and annuity
based road projects. Further, road construction sector is
currently exempt from the preview of excise and service tax.
However, EPC contractors are currently paying indirect taxes
(mainly on key inputs and service tax to be paid to transporters)
at average rate of 9-11% net of credit availed. This is expected to
continue under GST. However, processes are expected to be
streamlined with implementation of single point tax system
which can result in lower cost for the compliance. Moreover,
extent of liberalization in credit available under GST against
various input used for the civil construction is crucial for EPC
contractors60.
60 CARE Ratings: GST Impact on various sectors, extracted on Jan. 9, 2016 from
ST%20on%20select%20industries.pdf, p. 3

Impact of Goods & services Tax in India

Impact of Goods & services Tax in India

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