By Samonway Duttagupta
Manufacturers, distributors and consumers in the country have been making a unified appeal for a centralised taxing system for some time now. A major reason for this is the widespread confusion and high probability of red tape associated with the current central sales tax (CST) regime. The CST not only increases the price of a finished product for the end consumer but also adversely affects the profitability of manufacturers and others involved in the distribution chain. As a solution to this, there’s been a united demand for the roll-out of the goods and services tax (GST), which is expected to reduce the mounting burden of multiple taxes. In spite of strong opposition from the states, the GST is finally on course for a rollout —union finance minister Arun Jaitley recently stated that the government aims to get it implemented by April 2016. The minister announced that the government would soon release one-third of the compensation that is to be given to the states, amounting to Rs 110 billion, for what they lose when the GST replaces the Central Sales Tax. Even though the total amount of compensation promised is Rs 340 billion, what needs to be seen is how the GST rollout will affect the Indian electronics industry.
CST: The cause of losses and a lack of competitiveness
Pressure has been mounting on the government to implement the GST because of the numerous hassles, confusion and even losses caused by CST. The electronics industry has fallen prey to this process of multiple taxation. In an industry that has a significant distribution chain across the country, electronic products pass through the borders of different states in their journey from the manufacturer or importer to the end customer – getting taxed as they cross each state border.
It is, therefore, important to understand that the CST creates a lot of uncertainty and lacks clarity as the rate of tax varies from one state to the other. Added to that are the hassles created by various other taxes, including value added tax (VAT), excise duty and service tax. At times, it gets difficult for the companies to get clarity on the amount of tax to be paid. This either puts pressure on the end consumers who pay higher prices or results in some electronics firms losing their competitive edge to suppliers from a particular state that has comparatively lower taxes. Commenting on the complexity of the CST (of which the VAT is a major chunk), Anil Kumar Muniswamy, director, SLN Technologies, says, “In many cases, customers refuse to pay the VAT since it increases the price of the finished product. That affects our balance sheet hugely as we have to pay the VAT from a portion of our profits. In a way, CST is making us incur losses.” He feels that a number of large companies are opening small manufacturing units in different states just to get the benefits of a lower tax rate.
Sources from the electronics industry reveal that CST has led to increased levels of corruption, including the generation of fake bills in an attempt to lower the tax that needs to be paid. Such practices will definitely stop when a centralised taxing system comes into operation.
Concerns about the potentially high percentage of GST
On the whole, the impending implementation of the goods and services tax (GST) has got a positive response from the industry because it is expected to usher in a very efficient and easy system of paying taxes. But there are some concerns, nonetheless.
One of the major concerns, naturally, is with respect to the rate at which the GST will be levied. The Electronics Industries Association of India (ELCINA) has recommended that the GST should be pegged at 12 per cent. But that seems to be very unlikely. Sunil Hasija, managing director, Electronika Sales Pvt Ltd, says, “At a training session organised by the Centre and the Confederation of Indian Industry (CII) for the accounts teams of electronics firms on the methods of filing GST returns, it was revealed that the GST is expected to be around 17 per cent. The reason for such a high rate could be to avoid the objections raised by the states.” He adds, “Recent reports indicate that octroi charges in Maharashtra are slated to go up. Maharashtra already levies VAT plus octroi. But if there’s GST, there shouldn’t be any other taxes. Each state has its own reasons for not giving support to the GST. If it is as high as 17 per cent, then the states’ problems will be solved but if it is 12 per cent, they will have objections. I think the states will come up with a lot of corrections to the GST.” However, the Maharashtra government has given the freedom to the municipal corporation to choose between octroi and local body taxes.
Anil Kumar Muniswamy, director, SLN Technologies, says, “We don’t know if the GST percentage is more than the VAT and the service tax. If the GST is a higher percentage than expected, then it will hurt the industry in the short run, but the electronics industry will get adjusted to the new tax regime in less than five years. However, if the GST regime has a negative impact on the industry, then state governments should think of new ways to compensate the losses, like reducing industrial land prices, electricity and water costs, and transportation charges, among others.”
More clarity needed on transition issues
Since the CST includes a number of indirect taxes, which differ from one state to the other, the electronics industry has so far been asking for greater clarity on this tax. Anoop Mehrotra, country manager and director, Jabil Circuit India Pvt Ltd, says, “Measures will now need to be taken to help the industry transition from the existing indirect taxation regime to the GST regime. Clarity needs to be provided with respect to what would happen to available VAT and Central Value Added Tax (CENVAT) credits. The central board of direct taxes (CBDT) and the central board of excise and customs (CBEC) should focus on how the GST can result in minimum litigation by laying down clear-cut guidelines and circulars. It is a once-in-a-lifetime opportunity for the electronics industry to improve the ease of doing business.”
Centralising the taxation system is appreciated
In spite of all the concerns regarding the GST, most players in the electronics industry acknowledge that the biggest advantage of the GST is that it is a centralised system. Sunil Hasija says, “If the government is bringing in GST, it’s a very positive change for the industry. Taxation procedures will become simplified. I have regional offices all over India and for every office, I am filing a separate VAT return. The overhead expenses will come down drastically due to GST. For instance, with GST in operation, I can easily close down the transit warehouses located in different states.”
Anil Kumar Muniswamy adds, “A study by the National Council of Applied Economic Research has estimated that the roll out of GST would boost GDP growth by anywhere between 0.9 and 1.7 per cent. A CRISIL report has also said that GST is the best way to mobilise revenue and reduce the fiscal deficit. Removing cascading taxes makes the manufacturing sector more competitive and cuts down on the tax compliance burden.”
However, Rathindra Kumaar, country manager, Ramakrishna Electro Components Pvt Ltd, has an interesting take. He says, “GST is very good and encouraging and is long overdue, but it may not be enough. The government should also look for ways and means to create an ecosystem for manufacturers and encourage exports.”
The impact on consumers
Says Anil Kumar Muniswamy, “As far as the consumers are concerned, with the cascading taxes gone, over a period of time, the lower tax burden will translate into lower prices of goods.”
However, Sunil Hasija does not feel prices will fall substantially. He says, “The impact on the cost of finished products won’t be much because the tax rate might keep changing from time to time. So we will have to wait and watch. But the workload, manpower and efficiency in distribution will definitely improve with GST.”
To sum it up, the implementation of the GST is expected to result in a lot of good things in the future. But for now, what the electronics industry needs most is more clarity on the new taxation system.
