It has been fifty days since India’s most awaited and ambitious tax reform was rolled out. The tax in its current form is far from perfect and the Council revised the rates for 66 items last week. Except the strike by the textile traders of Surat, the month was relatively calm with minor disruptions. Let’s assess the impact GST has had on the following sectors in the first month.
Automobile Industry: A range of sales, discounts and price cuts had been announced before the onset of GST. Under the previous system, the taxes levied on automobiles included Excise, VAT, Road tax, motor vehicle tax, National Calamity Contingency Duty and auto cess. These have now been subsumed under GST. Small family cars like Santro, Nano, Alto with engine capacity less than 1200 cc which were earlier taxed at approximately 28% now attract a slightly higher levy of 29%. On the other hand, luxury cars witnessed drops in prices and consumers are enjoying significant prices cuts. Cars costing over Rs. 5 crores became cheaper by over Rs. 1 crore thanks to the drastic reduction in tax rates. Luxury cars earlier attracted a levy as high as 55% and now the effective tax rate has become 43%.
Similarly, SUVs which were taxable at 50% are now taxed at 43%. Hybrid cars on the other hand have seen a steep increase in from the previous 30% to current 43%, thereby making Hybrid models of Ertiga and Ciaz expensive. There has been a marginal decrease in the tax rates for two wheelers from 30% to 28% which was evident on day 2 of GST roll out. Hero MotoCorp, based in New Delhi, reduced the prices of its two wheelers by Rs. 400- Rs. 4000. When it comes to batteries which were previously taxed at 27%, the tax rate has gone up a mere 1%. However, approximately 40% of the market for car batteries is unorganized. This ratio is expected to shrink.
Fast Moving Consumer Goods: Fast Moving Consumer Goods (FMCG) or Consumer Packaged Goods (CPG) essentially refer to products that sell quickly, in higher volumes, and have a short shelf life. They are generally cheap. FMCG include non-durable items like soft drinks, toiletries, over the counter drugs and many other consumables. Contrary to claims, GST isn’t inflationary for the FMCG sector since the rates on most products are more or less similar than previous rates. There has been hardly any impact on the demand. On the contrary, a market research survey by Brickworks stated that the overall sales volume rose by 5.4% in the first week of July.
Most products were placed in either the 12% slab or the 18% slab. Toothpaste, soap, hair oil, detergent bar, baby food, sanitary napkins, household insecticides and biscuits have been placed in the 18% slab. The tax rate on toothpaste is significantly lower than the previous 28% and is beneficial for Colgate which was outside excise benefits. Cashew nuts and ayurvedic medicines will now be taxed at 12%. There is no significant change in tax rates for shampoo, hair dyes, paints and detergent powder – the GST rate is 28% and the previous tax rate was approximately 27-28%. The weighted average VAT on cigarettes was 28.7% and GST rate was fixed at 28% with an additional cess of 5%. However, the total tax incidence came down consequently bringing down the prices. To correct the error, the GST Council increased the compensation cess from 485 per 1,000 sticks for filter cigarettes of up to 65 mm length for those of 70-75mm. For other filter cigarettes, the cess will rise by 31%.
Cement: The finance minister Arun Jaitley announced in his Budget speech of 2017 that the government is focused on developing infrastructure, roads and affordable housing. The government has also taken up infrastructure projects. Under the previous tax laws, a tariff of 26-28% was applicable depending on the types of cement and purpose. Theoretically, there should be no impact since the GST rate is 28% but stricter compliance will lead to an increase in operating costs. Mortars, refractory cement, and concrete which is mainly use for building furnaces are now taxed at 18% whereas Cement Bonded Particle Board now attracts 12%.
Electricity, limestone and coal are the main raw materials for cement. The GST rate for limestone and coal are 5% each while electricity is outside GST’s ambit. With the abolition of toll nakas after GST roll-out, the movement of goods has become considerably easier. Logistics cost which account for 20-25% of operating costs are expected to come down by at least 30%. There has been a price reduction of around 5% on bagged cement which is sold in the open market.
Larger companies are better prepared as compared to the Small and Medium Enterprises. In words of the Finance Minister himself, GST is not an easy reform to implement but it has evoked great public support. He also said that the Centre is aware of several issues being raised and that he is conscious of the difficulties. On 28th July, the Commercial Taxes department in collaboration with District Administration organized a daylong awareness workshop at Rajouri. Knowing about the impact of GST on different departments is important so that business owners can plan their moves accordingly. Factors like availability of Input tax credit, lesser stocking points, ease in transport will bring down operating costs, which have to be reflected in the final prices.
There is a plethora of regulations that tax payers have to comply with and accuracy is of paramount importance. Even the smallest mistake, accidental or intentional, will cost more than just monetary fines. With Goods and Services Tax, the government has taken a humongous step towards digitization. As such, entrepreneurs – traders and service providers alike – should take heed and invest in technology that enables them to adhere to regulations, streamline processes, decrease time and resources spent on tax processes and provide access to important data from anywhere on the globe.