The Goods and Services Tax (GST), if and when it becomes a reality, will boost efficiency in the supply chain by doing away with the need to have state branch offices, reduce transactions costs by ensuring seamless trade in commodities across the country, and enhance export competitiveness by providing comprehensive relief from many existing taxes. While the Bill that would introduce the GST regime is being examined by a Select Committee of the Rajya Sabha, Subir Ghosh presents an overview of what has been described as the biggest tax reform since 1947. The textiles and apparel industry, like its cousins, too waits for GST to transform from being a dream into reality.


Hectic parleys are currently on to end the impasse over the Goods and Services Tax (GST) Bill that is hanging fire in the Rajya Sabha. The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 that was introduced in the Lok Sabha on December 19, 2014 by Union Minister of Finance Arun Jaitley, has already been passed by the Lower House of Parliament, and is currently being deliberated by a Select Committee of the Upper House. Exact dates are still uncertain, and it is still early to say what changes might be effected in the Bill. What is certain is that the GST should soon be a reality.


The 30-member select panel to look into the GST dispute has already met officials from the finance ministry, and would have met state and industry officials by the time you read this. The GST Bill, that aims to bring in a single tax in place of a number of state and central level taxes and levies, was referred to the panel after opposition from a number of political parties. The word is that the Union government wants to put in place the high-powered GST Council, comprising Union and state finance ministers, before August-end, so as to meet the GST rollout target date of April 1, 2016. The government wants to move fast on this since it has little time to frame the central CST, state GST and integrated GST bills, which will go to Parliament and various state legislatures for approval. Time is running out.


The GST Bill is considered to be a major improvement over the existing central excise duty at the national level and the sales tax system at the state level. The new tax is said to be a significant breakthrough and the next logical step towards a comprehensive indirect tax reform in the country. This is one tax that will affect one and all from citizens to industry to government. The tax-rate under the proposed GST would come down, but the number of assesses would increase by five times. Although rates would come down, tax collection would go up due to increased buoyancy, experts feel. The Thirteenth Finance Commission estimates that prices of agricultural goods will increase by between 0.61 per cent and 1.18 per cent, while prices of manufactured items would fall by 1.22-2.53 per cent. Moreover, a study by the National Council of Applied Economic Research (NCAER) has estimated that GST could well boost India's GDP growth by anywhere between 0.9 per cent and 1.7 per cent.


Everyone, irrespective of political or ideological affiliations, agrees that the GST would be the biggest tax reform in India since Independence.

 

The reason why e-commerce companies run into problems is because of the way the system currently works. First of all, when goods are sold by state-specific manufacturers, dealers or distributors, they have to pay excise tax (applicable on some goods), state specific VAT (if transaction is intra-state) and central sales tax (CST) at the buyer state (if transaction is inter-state). Moreover, excise is adjustable against further excise a manufacturer might charge from customers downstream.


VAT is adjustable, but CST is not. Once GST replaces CST, such that a trader, dealer or distributor pays VAT on the companies will not need to pay the additional tax when dealing with inter-state transactions. This disentangling of taxes is what will help e-commerce companies the most.


GST will also make logistics a much simpler process. Instead of maintaining several warehouses in different states, companies can now have fewer, bigger ones, strategically located to serve several states together. So, logistics would become simpler, overhead costs will decrease, and paperwork will minimise considerably. It will also become easier to calculate profit margins since goods can be priced without taking into account the destination of the product.


The way of thinking will change, as would strategies. Sourcing, distribution and warehousing strategies designed from the perspective of how tax liability can be minimised will undergo a radical transformation. Companies can now formulate strategies based on their own interests.


A breather for the government

A flawless GST is possibly a chimera, an ideal situation that may not eventually work out. Proponents of the current Bill argue that it is a better idea to move ahead with this Bill, however flawed, and build upon it as time goes on. Critics point out that given the complexities and compulsions that are bound to crop up, it would augur well to start on a note that is as flawless as possible. It is here that the government itself gets some breathing space time, to fill up the loopholes that are rankling many.


The government is not keen on referring the Bill to the Parliamentary Standing Committee. Whether it has to perforce do that, will depend on what the Select Committee concludes.


Till then, businesses, consumers and Union/state governments alike will wait with bated breath.

A brief legislative history of GST

The present GST Bill is an outcome of an extended process of negotiations, during the course of which governments have changed both at the Centre as well as in the states.


The proposal for an integrated GST in India can be traced back to the report of the Kelkar Task Force on the implementation of the Fiscal Responsibility and Budget Management Act, 2003, published in July 2004. Around 2006, the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government of Atal Bihari Vajpayee Government set the ball rolling by setting up an empowered committee, which was headed by West Bengal finance minister Asim Dasgupta. The panel was tasked with designing the GST model and overseeing the IT back-end preparedness for its rollout.


An announcement was made by the Congress-led United Progressive Alliance (UPA) government (with P Chidambaram as finance minister) in the Union Budget of 2007-08, that GST would be introduced with effect from April 1, 2010, and that the Empowered Committee of State Finance Ministers, on his request, would work with the Union government to prepare a road map for introduction of GST. The Empowered Committee in May 2007 set up a Joint Working Group with the Advisor to the Union Finance Minister and Member-Secretary of the Empowered Committee as its co-convenors and four joint secretaries of the department of revenue and all finance secretaries of states as members. On basis of discussions and interactions, the sub-groups submitted their reports which were then integrated and consolidated into the report of Joint Working Group in November 2007.


This report was discussed in detail by the Empowered Committee, and states were also requested to communicate their observations on the report. Subsequently, certain modifications were considered necessary which were duly made. A final version of the views of the Empowered Committee on the model and road map for the GST was prepared in April 2008. The views of the Empowered Committee were then sent to the Union government of India, which sent in its comments in December 2008.


Soon, a committee of principal secretaries/secretaries of finance/taxation and commissioners of trade taxes of states was set up. This panel too submitted its views. These were accepted in principle by the Empowered Committee in January 21, 2009. Then, a Working Group consisting of the officials of various state governments was formed who, in association with senior representatives of Government of India, submitted their recommendations in detail on the structure of GST. The First Discussion Paper of the committee was submitted in November 2009 to Union finance minister Pranab Mukherjee.

 

The Constitution (One Hundred and Fifteenth Amendment) Bill, 2011 was later introduced in the Lok Sabha. The Bill sought to introduce the GST to give concurrent taxing powers to both the Union and States. The Bill suggested the creation of Goods and Services Tax Council and a Goods and Services Tax Dispute Settlement Authority. This, however, did not make any headway. The Parliamentary Standing Committee on Finance headed by former Union finance minister Yashwant Sinha submitted its report on the 115th Amendment Bill only in August 2013.


How GST fares elsewhere

France was the first country to introduce GST in 1954. The world over, almost 150 countries have introduced GST in one form or the other. Most have a unified GST system. Brazil and Canada follow a dual system which India plans to introduce. Singapore and New Zealand tax almost everything at a single rate, while Indonesia has five positive rates, a zero rate and over 30 categories of exemptions. In China, GST applies only to goods and the provision of repairs, replacement and processing services. It is only recoverable on goods used in the production process, and GST on fixed assets is not recoverable.


When GST was introduced in New Zealand in 1986, it yielded revenues that were 45 per cent higher than anticipated, primarily because of improved compliance. GST in Canada replaced the federal manufacturers' sales tax which was then levied at the rate of 60 per cent and was similar in design and structure as the CENVAT (Central Value Added Tax) in India. This replacement resulted in an increase in potential GDP by 24 per cent consisting of 12.4 per cent increase in national income from higher factor productivity and 50 per cent increase from a larger capital stock (due to elimination of tax cascading).


The 2014 GST Bill

The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 is a modified version of the 2011 Bill. The GST subsumes various central indirect taxes including Central Excise Duty, Countervailing Duty, Service Tax, etc. It also subsumes state value added tax, octroi and entry tax, luxury tax, etc. It gives the central and state governments the concurrent power to make laws on the taxation of goods and services. Only the Centre will be able to levy and collect GST on supplies in the course of inter-state trade or commerce. The tax collected would be divided between the Centre and the states in a manner to be provided by Parliament, by law, on the recommendations of the GST Council.


The Goods and Services Tax Council would have to be constituted within 60 days of this Act coming into force. The main aim of the GST Council is to develop a harmonised national market of goods and services. It will consist of the Union finance minister (as chairman), the Union minister of state in charge of revenue or finance, and the minister in charge of finance or taxation or any other minister, nominated by each state government.


The task of the Council will be varied. Its functions will include making recommendations on: (i) taxes, cesses, and surcharges levied by the Centre, states and local bodies which may be subsumed in the GST; (ii) goods and services which may be subjected to or exempted from GST; (iii) model GST laws, principles of levy, apportionment of IGST and principles that govern the place of supply; (iv) the threshold limit of turnover below which goods and services may be exempted from GST; (v) rates including floor rates with bands of GST; (vi) special rates to raise additional resources during any natural calamity; (vii) special provision with respect to Arunachal Pradesh, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and (viii) any other matters.

 

Since the Constitution imposes certain restrictions on states on the imposition of tax on the sale or purchase of goods, the GST Bill will amend this provision to restrict the imposition of tax on the supply of goods and services and not on its sale. An additional tax (not to exceed 1 per cent) on the supply of goods in the course of inter-state trade or commerce would be levied and collected by the Centre. Such additional tax shall be assigned to the states for two years, or as recommended by the GST Council.


There are exemptions, of course. Alcoholic liquor for human consumption has been exempted from the purview of the GST. Further, the GST Council is to decide when GST would be levied on: petroleum crude, high speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel.


There are three major differences between the Bills drafted in 2011 and 2014. The first one relating to the 1 per cent origin tax, which is non-creditable; the second is the rate band between which the indirect tax can be levied by states instead of having a single tax rate as suggested earlier, and the third minimises the veto power of the Union government in order to balance it with state governments.


As of now GST is a work in progress. The Rajya Sabha Select Committee is expected to submit its findings and suggestions on the last day of the first week of the monsoon session, which is likely to begin in July. The government will need the support of two-thirds of the members in both Houses of Parliament to get the constitution amendment bill passed (The Lok Sabha has already cleared it). This will then have to be ratified by 50 per cent of the state legislatures as well. Only then can GST come into effect.


How GST works out worldwide

Country

Rate of GST

Australia

10%

France

19.6%

Canada

5%

Germany

19%

Japan

5%

Singapore

7%

Sweden

25%

India

27%

New Zealand

15%

Pakistan

18%

Malaysia

6%

Denmark

25%

Note: The Indian figures are "proposed".

Source: Collated from the Internet

 

Textile outputs

Relative shares in estimated GST tax base (%)

Khadi, cotton textiles (handlooms)

1.2

Cotton textiles

39.5

Woollen textiles

4.3

Silk textiles

1.6

Art silk, synthetic fibre textiles

18.7

Jute, hemp, mesta textiles

0.8

Carpet weaving

1.0

Readymade garments

16.3

Miscellaneous textile products

16.6

Total

100.0

Source: Ernst and Young


Current effective tax rates (RNR) - Combined for Centre and states

Textile Categories

RNR (%)

Khadi, cotton textiles (handlooms)

4.0

Cotton textiles

7.1

Woollen textiles

9.3

Silk textiles

9.6

Art silk, synthetic fibre textiles

10.2

Jute, hemp, mesta textiles

9.0

Carpet weaving

5.6

Readymade garments

10.5

Miscellaneous textile products

12.0

All segments

9.3

Source: Ernst and Young


Concerns and misgivings

For a country as big and heterogeneous as India, it is only natural that there would be differences in opinion and conflicts of interest. There are innumerable as far as GST is concerned.

 

Most critics argue that Central GST (CGST), State GST (SGST) and Integrated GST (IGST) are nothing but new names for Central Excise/Service Tax, VAT and CST, and hence GST is old wine in new bottle.


At the meeting between the Union finance minister and state finance ministers just before the GST Bill was presented in the Lok Sabha, states like Haryana and Punjab had opposed a proposal to subsume purchase tax in GST. They felt this would lead to revenue losses. On the other hand, manufacturing states like Maharashtra and Gujarat felt that an additional 1 per cent tax on production would be needed beyond the two years stipulated in the Bill. They contended that ideally this tax should be increased to 2 per cent. The additional 1 per cent tax is to be levied on the inter-state supply of goods, which would be paid to states where goods originate, as compensation for the lost central sales tax revenue in the first two years of the change to GST. West Bengal, Mizoram and Tamil Nadu demanded that they should be allowed to levy higher taxes on tobacco and tobacco products.


It is the 1 per cent additional tax that is being seen by many as something that goes against the very spirit of GST. Chief economic advisor Arvind Subramanian, at a press meet in May, felt that the 1 per cent additional tax on supply of goods could undermine the 'Make in India' programme by encouraging imports rather than the inter-state movement of goods that GST is supposed to facilitate.


"GST is a destination-based tax. This (1% additional tax) is an origin-based tax. So it sits very uncomfortable with the fundamental principle of GST. Second, the irony would be that sort of a provision would favour international trade over intra-national trade because every time a product crosses the border, it would have to pay extra non-vatable tax," Subramanian said. "Think of a product going to Gujarat from Tamil Nadu crossing four states, the product will embody additional tax of 4-5 per cent. That might make it easier to import to Tamil Nadu from Bangkok or wherever. So in a sense it has the potential to undermine 'Make in India'. So that's why we need to look at this provision carefully. The period that we have gained to re-examine GST, some of these issues need to be looked at again."


Benefits of GST

For business and industry

  • Easy compliance
  • Removal of cascading
  • Improved competitiveness


For Union and state governments

  • Simple and easy to administer
  • Better controls on leakage
  • Consolidation of tax base
  • Higher revenue efficiency


For consumer

  • Single and transparent tax proportionate to the value of goods and services
  • Reduction of prices

 

The Revenue neutral rate

A sub-committee comprising Union and state government officials recommended a revenue-neutral rate (RNR)a rate at which there will be no revenue loss to the states after the adoption of GSTof almost 27 per cent under the proposed GST regime. While the SGST component is proposed to be 13.91 per cent, the CGST component will be 12.77 per cent. The rate was derived on basis of revenue collections for 2011-12. The National Institute of Public Finance and Policy (NIPFP) is reported to be updating this based on 2013-2014 figures.


The proposed RNR is contended to be too high, and not practical. The highest RNR being followed is 25 per cent that too in affluent Scandinavian countries like Denmark and Sweden. Globally, the average GST/VAT rate is around 16.4 per cent. The average rate in Asia-Pacific is 9.88 per cent, and Canada and Nigeria have the lowest rate of 5 per cent. If reports are to be believed the RNR might be brought down to 22 per cent. In fact, the first official recommendation of the Thirteenth Finance Commission Report of the Task Force on Goods and Services Tax had proposed taxation of all goods and services at a single GST rate of 12 per cent comprising 5 per cent for CGST and 7 per cent for SGST.


This is one problem area that the government will need to find a solution for. Historically, countries have embraced a modest rate, usually in single digits. Singapore introduced GST in April 1994 at 3 per cent, which has now risen to 7 per cent. The recommended RNR in India is almost 150 per cent higher than rates historically discussed, and more than double than that recommended by the Finance Commission.


One of the reasons why the RNR has had to be so high is that extra revenue needs to be mopped up in view of the fact that large and lucrative sectors like petroleum and alcohol have been exempted.


States had insisted that petroleum products should be kept out of the GST ambit. After all, taxes from petro products yield more than a third of states' indirect tax revenues. Clearly states did not think that the compensation package being offered for potential revenue loss could offset the losses accrued if petroleum products were not exempted. The compensation package that has been proposed will come with a sunset clause of five years. In the first three years, the Centre will reimburse 100 per cent of the revenue loss, 75 per cent in the fourth year and 50 per cent in the fifth year.


Price and Income Effects

Net effect on demand due to a shift to GST from the current indirect tax structure

Category

Base price

Base + Present Taxes

Base + GST

Increase in price (%)

Change in demand (own price relative to all prices effect) (%)

Change in demand (income effect (%)

Net Change in demand (%)

Khadi, cotton textiles (handlooms)

100

104.0

112

7.7%

-2.2%

0.8%

-1.4%

Cotton textiles

100

107.1

112

4.6%

-1.3%

0.8%

-0.5%

Woolen textiles

100

109.3

112

2.4%

-0.7%

0.8%

0.1%

 

Art silk, synthetic fibre textiles

100

110.2

112

1.6%

-0.5%

0.8%

0.3%

Jute, hemp, mesta textiles

100

109.0

112

2.8%

-0.8%

0.8%

0.0%

Carpet weaving

100

105.6

112

6.1%

-1.7%

0.8%

-1.0%

Readymade garments

100

110.5

112

1.4%

-0.4%

0.8%

0.4%

Miscellaneous textile products

100

112.0

112

0.0%

0.0%

0.8%

0.7%

Total

100

109.3

112

2.5%

-0.7%

0.8%

0.0%

Source: Ernst and Young


How textiles-apparel can make the best of things

What's good for the industry as a whole is also good for the textiles-apparel industry to a large extent. But given its scale and spread, the textiles-apparel industry's health will have an overbearing effect on both the economy as well as consumers/farmers alike. Broadly speaking, GST reforms will pave way for improved resource allocation, leading to higher productivity, and in turn to improved competitiveness (especially regarding exports). The bottomline will be higher output and turnover. This will also work in a different way GST will result in lower price of capital goods, which can lead to larger capital stock.


The current bouquet of taxes creates enough disputes and leaves room for inordinate confusion. For instance, one might wonder whether sarees should be treated as fabric or readymade garments. Then again, cotton fibres get a better deal compared to man-made fibres. Also, effective tax rates for composite mills are higher than that of powerlooms. This hampers production integration considerably.


According to Ernst & Young, the introduction of GST will eliminate any blockage of input taxes caused due to break of input tax credit chain; provide level-playing field to all segments of textile industry; shift in tax burden from production to consumption (since GST is a consumption tax).

 

At an event organised by the Federation of Indian Chambers of Commerce and Industry (FICCI) in Delhi earlier this year, a presentation made by Ernst & Young outlined that if all textile categories are put at the lower CGST and SGST rates, key effects will be as follows:

  • Transparency effect: Tax burden will be more transparent since blocked input taxes will be eliminated, all input taxes will be fully rebated;
  • Automatic zero-rating of exports: Some of the present export-subsidy schemes may need to be redesigned or eliminated; thus, exports will be encouraged under GST without the need for explicit subsidy schemes;
  • Additional revenue effect: The overall tax incidence on textile products will increase; the additional revenue can be used to redesign subsidy scheme for mitigating adverse impact on lower income groups; a distinction may need to be made between product groups where RNRs are close to the average and products where they are considerably lower;
  • Rebates: Present zero-rating of textile outputs in the case of state VAT will go away and taxes paid on capital goods and textile machinery will also be rebated;
  • Improved compliance effect: With input tax credit at each stage of value added and creation of information chain, there would be automatic improvement in compliance;
  • Freedom for innovation: Keeping the same GST rate for all textile segments will facilitate further experimentation in mixing and blending as it can be done without any tax implication;
  • Cascading effect: The present GST discussions indicate that cascading may continue with respect to petroleum products that serve as inputs; to that extent the burden on artificial silk and synthetic fibres will continue; since much of these products are exported, this disadvantage may continue unless a suitable mechanism is found to rebate input tax on petroleum products.


In simple words, GST is the booster dose that the textiles-apparel industry is in dire need of.


A lot will happen online

Eyes of the textiles and apparel industry will remain fixed on e-commerce. Online fashion has emerged as the fastest growing category in India's booming e-commerce market. In March this year, Google India announced that online fashion retail market was expected to touch $35 billion in India by 2020, riding on the back of increasing Internet penetration and growing preference for online shopping. By 2020, India is expected to generate $100 billion online retail revenue out of which $35 billion would be through fashion e-commerce. Every third shopping search (from India) on the world's largest search engine is fashion related, and the queries in the category are growing at 66 per cent year-on-year.


At the moment, there are no specific tax laws governing the e-commerce industry. This often leads to confusion, since taxes are imposed according to the interpretation of local taxation authorities in different states. This was the reason why Amazon had a showdown with the Karnataka government. Since GST would not make any difference between a good and a service, e-commerce companies can now breathe easy. Therefore, e-tailing is bound to get a boost since most supply chain issues will be resolved with introduction of GST. The efficiency in the supply chain will also mean quicker deliveries.