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Small & medium food industry unhappy over GST regime; wants discussion
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Ashwani Maindola, New Delhi
April 28 , 2015
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The food industry, which is run primarily through small- and
medium-scale enterprise, is seeking further discussions on the proposed
Goods and Services Tax regime.
According to industry insiders,
the proposed GST will not change the fate of MSMEs (micro, small and
medium enterprises) as several of its provisions will play a spoilsport
for their growth and hamper the ease of doing business as well as the
Make in India campaign.
“GST proposals were worrisome,” said one
industry representative while commenting on the proposals. He stated
that although the GST was aimed at simplification of taxation system,
the division into State GST and Centre GST would make things
complicated.
He stated, “The change from Sales Tax to VAT
(value-added tax) has increased the paperwork manifold. There needs to
be clarity on the proposed GST regime.”
Meanwhile, industry
representatives further raised concern on the silence on Excise Duty
exemption under the GST for MSME sector. It was exempted to Rs 1.5 crore
turnover which the industry wanted to be raised to Rs 5 crore.
The GST Promise
According
to one discussion paper - right from inception, GST has been hailed as
one of the game- changing reforms which aim to make India a single,
seamless market. Implementation of a well-designed GST model that
applies to the widest possible base at a low rate can provide
significant growth stimulus to the business and contribute to the prime
minister’s mission of “Make in India.”
The fundamental objectives
of GST - remove the cascading impact of taxes, bring about transparency
in compliance, and provide a boost to investments thereby enable a 1-2%
increase in the economic growth of the country.
The discussion
paper says, “In the currently tabled Constitutional Amendment Bill,
there are certain areas that vitiate the principles of GST given above
and could potentially hamper the ease of doing business in addition to
increasing the costs for the business significantly, rendering the
transition to GST highly inflationary for the country.”
Key concern
Additional non-creditable 1% Tax on interstate supply of goods – Inflation risk, Impacts ease of doing business
Clause
18 of the Bill proposes an additional tax of one per cent on supply of
goods in the course of inter-state trade or commerce which will be
levied at source. The Bill provides the term of the additional tax as
two years or such other period as the GST Council may recommend. The
proposed levy of 1% additional tax by the Central government for the
benefit of originating states is detrimental to the industry and defeats
the objectives of GST.
The 1% additional tax retains the
characteristics of origin-based CST levy thereby hampering the business
efficiencies and free cross border movement of goods.
One of the
promises of GST is to make India a common market and remove the
cascading impact of taxes. The proposed additional tax levy not only
distorts this promise but also results in cascading where goods move
inter-state on account of multiple stock transfers to own depots,
job-work, sales returns, etc. which are all business imperatives.
Any non-creditable tax levied in the origin state is inflationary.
Goods move inter-state several times in the production & distribution process
Industry
rues that currently warehouses are located in different states because
they are tax optimal. However warehouse location should be driven by the
needs of the business and not taxation. GST should provide the industry
an opportunity to plan the location of the warehouse which is not based
on tax consideration but on logistics flow.
Goods move several
times from one state to another during the production & distribution
process. The goods are produced in various locations for reasons of
availability of raw materials and manpower, and stored at common
distribution centres for ease of distribution and marketing. The
cumulative burden of 1% on interstate movements would far exceed the
statutory rate of 1% and would be crippling.
“Therefore, the
additional cost burden of the tax will be a direct hit for the domestic
manufacturers making us economically unviable and will be against the
spirit of ‘Make in India.’ It will apply to domestic manufacturers only
and not to goods imported directly into the destination state – a
serious competitive disadvantage to the domestic manufacturers,” says
the industry.
The objective behind levying the 1% additional tax
is to provide compensation to the states for any losses under the GST
regime. However, the Constitutional Amendment Bill already contains a
provision for compensating the states for any losses under GST for five
years. Further, the states’ share of taxes has already been increased
after the Bill has been tabled.
The industry’s recommended, given
that any loss for the states is already compensated, and the fact that
the 1% non-creditable tax flies in the face of what GST aims to achieve,
the proposal to levy the additional tax should be altogether repealed.
Exclusion of Real Estate and petroleum from GST – Growth & Inflation risk
According
to the industry, if real estate is excluded from the GST purview, it
would mean that credit would not be available for the input used in
construction of factories, offices, civil structures and even plant and
machinery which may be considered a part of real property, being
attached to land.
The real estate industry was included in the
VAT net on introduction of VAT; excluding this from GST would be a step
in the reverse direction. Exclusion of Real Estate and Petroleum (for
the initial years) from the GST levy and continuing with the current
taxation regime for these sectors will significantly increase the cost
of doing business and drive inflation higher as these are key inputs for
the businesses. Additionally, keeping them out would increase the
compliance costs for the businesses due to multiple tax rules and
complicate the overall tax regime in India resulting in administrative
difficulties for both industry and governments.
Currently
industries are using diesel for generating power required to operate the
plant in the absence of adequate continuous power from the state grid.
Furnace Oil and LPG are also used as an input in manufacture of certain
products. In the absence of usage of any alternate source of energy in
generating power or in the manufacture, exclusion of petroleum products
in the initial phase of introduction of GST will cause financial
hardship to the industry.
Moreover, the real estate sector is a
significant contributor to the gross domestic product and a contributor
to growth. It serves as a foundation for virtually all industrial and
commercial activity. Hence excluding real estate from the scope of GST
would result in a major erosion of the tax base, causing distortion and
denying the full economic benefits of the GST structure envisaged
originally. Internationally, in the modern VAT jurisdictions such as
Australia, New Zealand, Canada and South Africa, land and property
supplies are inseparable and indistinguishable from supplies of other
goods and services and India should also follow suit, says the industry.
Recommendation: Commercial real estate and petroleum should be brought under the GST umbrella.
Subsume additional taxes / cesses in the GST (Research & Development Cess, Mandi Tax etc.)
Further,
the industry pointed out that the existing Research & Development
Cess (R&D Cess) payable on the import of technical knowhow is a cost
to businesses. In the existing Service Tax regime, the Service Tax
payable on payment of royalties / technical knowhow is reduced to the
extent of R&D Cess paid. However, no credit of the R&D Cess is
available to the businesses.
The R&D Cess, being a central
levy should be subsumed in the Central GST. This will simplify the
overall tax regime and compliances. Further, for agriculture purchases, a
Mandi Tax is levied in many of the states. This also needs to be
subsumed in the state GST.
Besides, the industry also pointed out general issues for consideration.
The
Revenue Neutral Rate needs to be kept low to spur growth, contain the
inflationary pressure, achieve higher compliance and contribute to the
prime minister’s mission of “Make in India.”
All the states need to go live at the same time to avoid operational issues for the industries.
The
design and structure of the proposed GST has undergone significant
change since the time the First Discussion paper on GST was released by
the Empowered Committee (EC) of the State Finance Ministers (November
2009). A directional clarity is urgently required for businesses to gear
up to be GST ready on April 1, 2016. It is critical to note that
businesses need 6-9 months to configure their IT systems, testing them
for compliance and impart training to the users.
There is a need
to release the second discussion paper on GST jointly by the Central
government and the EC covering all the above failing which, despite best
intentions, execution of GST could create significant business
disruption, according to the industry.
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