Gap Analysis.

Goods & Services Tax is a new tax system in India. This Tax system was introduced in the
country only a few years back, and the system is still evolving. Both the Government, as well
as the Industry are still learning to adjust to various aspects of the new system. Though a few
studies have been carried out on the subject in the past, in view of its vastness, a lot is still to
be explored and learnt. The past studies have been generic in nature as they have covered the
overall features of GST. In my study I have tried to cover this gap by focussing specifically
on the impact of GST on FMCG companies. This will help in throwing new insights which
will be useful for FMCG companies to better handle GST issues.

Introduction of GST

The reference of GST was first made in the Indian Budget in 2006-07 by the then Finance
Minister Mr. P. Chidambaram as a single centralized Indirect tax. The GST Constitution (One
Hundred and Twenty Second Amendment) Bill, 2014 was introduced on December 19, 2014
and passed on May 6, 2015 in the Lok Sabha and yet to be passed in the Rajya Sabha The
Bill seeks to amend the Constitution to introduce Goods and Services tax vide proposed new
article 246A. This article gives power to legislature of every state and Parliament to make
laws with respect to goods and services tax where the supplies of goods or of services take
place. Recently, Union Minister Mr. Arun Jaitley said that GST could be implemented as
early as January 1, 2016 Note: The word “bill” may be interpreted as “the Constitution
(122nd Amendment) Bill, 2014.

Meaning and Purpose of GST

Clause 366(12A) of the Constitution Bill defines GST as “goods and services tax” means any
tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor
for human consumption. Further the clause 366(26A) of the Bill defines “Services” means
anything other than Goods. Thus it can be said that GST is a comprehensive tax levy on
manufacture, sale and consumption of goods and services at a national level. The proposed
tax will be levied on all transactions involving supply of goods and services, except those
which are kept out of its purview. The two important purposes of GST are :
  Single Umbrella Tax Rate: GST shall replace a number of indirect taxes being
levied by Union and State Governments.

 Removing Cascading Effect: GST is intended to remove “Tax on Tax Effect” and
provide for common national market for Goods and Services.

Types of categories under GST rate

The GST tax is levied based on Revenue Neutral Rate (RNR). For the purpose of imposing
GST tax in India, the goods and services are categorised in to four. These 4 categories of
goods and services are as follows:

1. Exempted Categories under GST in India. The GST and council and other GST authorities
notifies list of exempted goods. Such goods are not fallen under payment of GST tax. The
authorities may modify or amend the list time to time by adding deleting any item if required
by notification to public.

2. Essential Goods and Services of GST in India Essential category of goods and services are
charged very lower GST rate. Essential goods and services are the goods and services for
necessary items and items under basic importance.

3. Standard Goods and Services for GST in India A major share of GST tax payers falls under
this category of Standard Goods and Services. A standard rate of GST is charged against the
goods and services under this category.

4. Special Goods and Services for GST tax levy Under special category of goods and
services, GST rates would be high. Precious metals including luxury items of goods and
services fall under special Goods and Services for GST rate implementation.

GST rates in India at a glance:

  0% : Exempted categories

 5% : Commonly used Goods and Services

 12% : Standard Goods and Services fall under 1st slab

 18% : Other Goods and Services fall under 2nd Slab

 28% : Special category of Goods and Services including luxury

Problems In Present Indirect Tax Structure

Complete Analysis As soon as the GST rates were announced a huge wave of curiosity hit
across industry and trade bodies. Everyone is evaluating their position as a result of this
change. So in, we bring our analysis of these GST rates.

What is GST (Goods & Services Tax) : Details & Benefits

The present structure of Indirect Taxes is very complex in India. There are so many types of
taxes that are levied by the Central and State Governments on Goods & Services. We have to
pay ‘Entertainment Tax’ for watching a movie. We have to pay Value Added Tax (VAT) on
purchasing goods & services. And there are Excise duties, Import Duties, Luxury Tax,
Central Sales Tax, Service Tax…. As of today some of these taxes are levied by the Central
Government and some are by the State governments.

What is GST?
It has been long pending issue to streamline all the different types of indirect taxes and
implement a “single taxation” system. This system is called as GST ( GST is the abbreviated
form of Goods & Services Tax). The main expectation from this system is to abolish all
indirect taxes and only GST would be levied. As the name suggests, the GST will be levied
both on Goods and Services.

1. GST was first introduced during 2007-08 budget session. On 17th December 2014,
the current Union Cabinet ministry approved the proposal for introduction GST
Constitutional Amendment Bill. On 19th of December 2014, the bill was presented on
GST in Lok Sabha. The Bill will be tabled and taken up for discussion during the
coming Budget session. The current central government is very determined to
implement GST Constitutional Amendment Bill.

2. GST is a tax that we need to pay on supply of goods & services. Any person, who is
providing or supplying goods and services is liable to charge GST.

How is GST applied?

1. GST is a consumption based tax/levy. It is based on the “Destination principle.” GST is

applied on goods and services at the place where final/actual consumption happens.

2. GST is collected on value-added goods and services at each stage of sale or purchase in
the supply chain. GST paid on the procurement of goods and services can be set off
against that payable on the supply of goods or services. The manufacturer or wholesaler
or retailer will pay the applicable GST rate but will claim back through tax credit
mechanism. But being the last person in the supply chain, the end consumer has to bear
this tax and so, in many respects, GST is like a last-point retail tax. GST is going to be
collected at point of Sale.

3. The GST is an indirect tax which means that the tax is passed on till the last stage
wherein it is the customer of the goods and services who bears the tax. This is the case
even today for all indirect taxes but the difference under the GST is that with streamlining
of the multiple taxes the final cost to the customer will come out to be lower on the
elimination of double charging in the system.

4. The current tax structure does not allow a business person to take tax credits. There are
lot of chances that double taxation takes place at every step of supply chain. This may set
to change with the implementation of GST. Indian Government is opting for Dual System
GST. This system will have two components which will be known as

 Central Goods and Service Tax (CGST)

 State Goods and Service Tax (SGST). 
5. The current taxes like Excise duties, service tax, custom duty etc will be merged under
CGST. The taxes like sales tax, entertainment tax, VAT and other state taxes will be
included in SGST. 

6. GST will be levied on the place of consumption of Goods and services. It can be levied
on :

 Intra-state supply and consumption of goods & services

 Inter-state movement of goods
 Import of Goods & Services
How to differentiate SGST and IGST

1. SGST and IGST are part of GST, Goods and Service Tax. SGST expands as State
Goods and Service Tax and IGST is the short form of Integrated Goods and Service
Tax.

2. Different indirect taxes like State Sales Tax, VAT, Luxury Tax, Entertainment tax
(unless it is levied by the local bodies), Taxes on lottery, betting and gambling, Entry
tax not in lieu of Octroi, State Cesses and Surcharges in so far as they relate to supply
of goods and services etc. are subsumed with SGST.

3. Under IGST, the taxes for movement of goods and services from one state to another
are collected. The tax revenue collected under SGST is meant for State Government
whereas the tax revenue of IGST is shared between State government and Central
government as per the rate fixed by the authorities.

4. Different indirect taxes of Central Excise Duty, Central Sales Tax CST, Service Tax,
Additional excise duties, excise duty levied under the medical and toiletries
preparation Act, CVD (Additional Customs duty – Countervailing Duty), SAD
(Special Additional Duty of customs) surcharges and cesses are merged with CGST.
 5. The major share of tax revenue under CGST is meant for central government where
as SGST tax revenue is for state government.

GST impact across sectors:

1. GST will turn India into one common market, leading to greater ease of doing business and
big savings in logistics costs from companies across all sectors. Some companies will gain
more as the GST rate will be lower than the current tax rates they pay, others will lose as the
rate will be higher than the present effective rate.
2. TECHNOLOGY
 Positive Impact. GST will eliminate multiple levies. It will also allow deeper
penetration of digital services.
 Negative Impact. IT companies can 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 going to go up from existing 14-15% to 18%, which means the
cost of electronics from mobile phones to laptops- will rise.
3. FMCG
 Positive Impact. Companies could generate substantial savings in logistics and
distribution costs as the need for multiple sales depots will 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.
 Negative Impact. If the recommended 40% "sin/demerit" GST for aerated beverages
and tobacco products is levied, then prices may increase by over 20%. Food
companies: many see increase in effective tax as many companies enjoy concessional
rate of excise.
4. ECOMMERCE
 Positive Impact. GST will help create a single unified market across India and allow
free movement and supply of goods in every part of the country. It will also eliminate
the cascading effect of taxes on customers which will bring efficiency in product
costs.
 Negative Impact. The tax collection at source (TCS) guidelines in the GST regime
will increase administration, documentation workload for ecommerce firms and push
up costs.

5. TELECOM
 Positive Impact. Handset prices likely to come down/even out across states.
Manufacturers are also likely 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.
 Negative Impact. Call charges, data rates will go up if tax rate in the GST regime
exceeds 15%. Tower firms won't be able to set off their input duty liabilities if petro-
products continue to stay outside GST framework.
6. AUTOMOBILES
 Positive Impact. On-road price of vehicles could drop by 8%, as per a report by
Motilal Oswal Securities. Lower prices can be construed as indirect stimulus to boost
volumes.
 Negative Impact. Demand for commercial vehicles may be hit in the medium term.
GST will subsume local taxes, reduce time at check-posts, ease logistics hurdles. With
fleet productivity increasing, operators may not feel the need to expand mid-term.
7. MEDIA
  Positive DTH, film producers and multiplex players are levied service tax as well as
entertainment tax, GST will bring major change and uniformity in businesses. Taxes
could go down by 2- 4%. Multiplex chains will save on revenues as there will be a
more uniform tax, unlike current high rate of entertainment tax levied by different
states. It may lower the average ticket price, and increase the footfalls in multiplexes.
8. INSURANCE
 Negative Impact. Insurance policies: life, health and motor will begin to cost more
from April 2017 as taxes will go up by up to 300 basis points.

9. AIRLINES
 Negative Impact. Flying to become 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.

10. CEMENT

o Positive Impact. The effective rate of tax for cement companies is now 25%.
If GST rates are fixed at 18-20% then the overall tax incidence will be lower
GST IS expected to lead to savings in transportation cost, which currently
comprises up to 20-25% of total revenue. One common market will bring
down the number of depots in the country. Ultratech states that its depots will
come down to 100 from 550 at present.