India Ratings and Research (Ind-Ra) believes that the four-rate tax slabs of 5%, 12%, 18% and 28% in GSTwould have a bearing on the profitability of most industries. Further, additional cess on some of the products, if absorbed by the respective businesses, would impact their margins.
GST would benefit industry as it would eliminate the cascading impact of taxes and allow unrestricted flow of input tax credit, and lower the compliance cost through simple tax regime as against the current multiple tax slabs and laws. In general, industries currently subject to taxes at a rate higher than the rates proposed in the GST Act would benefit and see margin expansions and improvements in their working capital, while those subject to a tax rate lower than the GST rates may face challenges on the margin front and increased working capital requirements.
Ind-Ra also believes that the service industries would see an increase in tax rates for most services under the new GST regime, which might have a bearing on the margins and the working capital cycle. Further, factors such as abatements, concessional duty structure, and area-wise exemptions, if not continued under GST, would have a significant bearing on the profitability of many industries.
Industries that would benefit from lower GST tax rates include cement and auto manufacturers, while those that could be impacted negatively due to GST include the cotton and downstream value chain and apparel segment of the textile industry and print media, which are currently either tax exempted or subject to concessional rates of taxes.
Abatement of tax, if not continued under the GST regime, would have a bearing on the profitability of logistics and real estate industries, while the impact on the infrastructure industry with high value contracts spanning across years would have to be assed contract-wise. Within the infrastructure industry, contracts in project phase can face viability issues if they are unable to pass on the increase in cost due to higher taxes or if the government incentives are discontinued under GST.
The central government would compensate for any revenue loss to the state governments during the first five years of the GST regime. The GST council has agreed to factor in the tax exemptions given to the industries in the eight north eastern states and the three hilly states while calculating revenue loss for determining compensation. The governments’ (both states and central) decision to continue with the area-based exemptions from central and state taxes can also impact the profitability of factories set up in the specified areas based on these exemptions.
The compelling rationale to switch from the current regime to the GST regime is to eliminate the cascading impact of taxes or simply put tax on tax which leads to increase in the price of the end product. Other equally important areas which the GST would address are the multiplicity of taxes at central and state levels, leading to cumbersome and cost bearing compliance exercise for businesses, by bringing about uniformity in tax rates and structure.
Since, the input credit would be available only on taxes paid to the central or state government and after an automated reconciliation through an IT infrastructure, users of input supply would insist on tax invoices to claim the input credit, there by plugging the leakage due to non-payment of taxes or Kaccha Bills as it is popularly known in India.
Business Standard, 18 November 2016
