Not merely tax, but a major business reform

GST is a major business reform and not merely a tax reform. The benefits flow from both, a more streamlined business flow and a more efficient and simpler tax. The 13th Finance Commission Report estimates that GST will boost India’s GDP by 0.9% to 1.7%.
India is the second largest producer of food in the world, next only to China. Indian population is likely to exceed that of China by 2030. Therefore, growth in Indian agriculture is critical to meet the rising demand for food, feed and fiber for the large and growing population. With rising urbanisation, the number of urbanites is expected to grow from 400 million urbanites today to 600 million by 2030.
This situation is a major challenge. But it is also an opportunity to build food value-chains linking farms in rural areas to urban centers of demand. In the fast globalising world, these value chains will need to be efficient and competitive. GST can make or break this opportunity.
GST is expected to remove ‘speed breakers’ like octroi/entry tax/local cess posts. This will make the movement of goods faster. Agricultural products will therefore be able to reach a wider area, as trucks carrying perishable commodities will be able to cover longer distances without hindrances. It is a single tax without the cascading effect of multiple taxes on the same goods, only the value addition at each point being taxed. This makes the tax fairer and more predictable, in line with healthy international practices.
The GST regime is hard coded into legislations, and therefore is not easy to change. This provides stability of course we are assuming that it is a fair legislation. GST will be a tax on consumption & hence all stages of production and distribution will be mere pass-through. Therefore business decision making will be tax neutral.
GST will create a common market across India; all players in India will have access to it, without being bothered by local tax considerations. This unification is a great business booster, especially to thousands of ethnic food producers across India. The wider GST tax net will be revenue accretive it will boost indirect tax revenue. In addition, the GST-triggered wider revenue database will boost income tax collections.
Inflation is likely to rise as hitherto untaxed goods and services will now be brought under the tax net. Further, any-thing more taxing than a Revenue Neutral Rate structure (RNR) comprising a lower rate of 12% and a standard rate of 18% will raise inflation.
There is also the fear of job losses. Whilst the formal sector (especially large-midsized companies) will benefit from GST (due to scale economies around manufacturing and logistics), the casualties will be the mom & pop companies which currently fly under the radar of the taxman. The formal sector creates only about 15% of total jobs, while the informal sector creates about 85%.
While dealing with these, at the political level, the original proposal of a healthy GST may morph into an unusual animal. Also, these may trigger populist pro-electorate measures in the form of higher revenue expenditure as the Central government begins preparing for the 2019 general elections.
Food includes a variety of items from grains, meat, vegetables to candy & confectionary, snacks and even restaurant meals and beverages. It also includes high value added products like functional foods, nutraceuticals and dietary supplements. In India, while food is generally exempt from the CENVAT, many of the food items, including food grains and cereals, attract the state VAT at 4%. Exemption under the state VAT is restricted to unprocessed food, e.g., fresh fruits and vegetables, meat and eggs, and coarse grains. Beverages are generally taxable, with the exception of milk.
There is also the likelihood, almost a certainty, that GST implementation will cause issues between the tax payers and the GST administration, simply because there are too many changes being attempted, such as merging of many taxes, many tax authorities, and changes in the methods of giving input tax credit.
In the rural sector, the predominant distribution channel for unprocessed food would be either a direct sale by the farmer to final consumers or through small distributors/retailers. Even where food is within the scope of the GST, such sales would largely remain exempt because of the small business registration threshold.
GST would lead to increase in tax on food (from 4% state VAT to a combined & concessional GST rate of 8%).The alternative of exempting food altogether (or zero rating) would not be any better as it would have an adverse impact on revenue neutral rate. Thus, prices of the agricultural items and services are expected to rise after the implementation of the GST.
As a result, under GST, primary food based players are likely to face some challenge to their profitability, especially if they cannot pass on the incidence of higher GST to their consumers. Processed foods with a higher value add will be able to bear the GST transition better and actually emerge more profitable.
Under the current tax regime, the cumulative rate of tax on goods (both at the Centre and the state) is approximately between 20%-22%. For services the present rate of tax is only 15%. The uniform GST is likely to be in range of 18%-22%. Goods will thus find a lower rate by up to 4%, and services will see a rise by 3& to 7%. Pure service players in the processed foods industry will have to keep this in mind.
Because of the simpler tax tariff, pricing under GST will be easier. However, initially, there may be some issues, in case of products that are sold based on a particular price point, like an Rs 10 pack. Food processing units presently exempted from indirect taxes will have to hope or lobby to ensure that their bene-fits are incorporated into the GST enactment as consider-able litigation is expected post GST era.
Initially, GST was supposed to be levied at a single uniform revenue neutral rate. That would have been adverse for the multiple economic priorities that India has. Fortunately, there has been a recent favourable announcement, that we may have to begin with multiple GST rates and this is required to protect the poor and the middle class.
Processed foods are expected to be an increasing portion of the food basket. Therefore, the rate of GST on processed foods should be kept low; else food inflation will spiral up. There should be no disparity between processed/branded foods and others. Processed foods are fast becoming a necessity for time poor nuclear families especially in urban areas. A high GST rate will be counterproductive for the ‘Make in India’ programme. The processed foods industry is emerging as a major stream of manufacturing in India. It needs to be nurtured with a concessional rate. The government seeks to double farmers’ income by 2022, through various initiatives, including specific programmes for food. e.g. 100 new cold chains are expected to come up in India with investment of around Rs 3,000 crore. There are other steps being taken to build the required infrastructure in the food processing sector. These efforts will suffer if the demand for processed foods is affected, therefore GST on processed foods should be kept low.
The GST should ensure that processed food does not be-come costlier as it could have an adverse impact on the nutrition levels of the population. The government seems to be seriously intending to roll-out GST by April 1, 2017. The industry too needs to move swiftly. The government is gearing up with a state-of-the-art IT design goods & service tax network (GSTN) for GST implementation. Trial runs are expected by January 2017. Parallelly, the industry needs to be ready with their IT plat-forms to deal with the GST regime.
The government has also begun to train its own task force. On the same lines, each organisation, depending on the scale of complexities, should start getting its employees ready for the D Day. GST will affect the cash flow requirements of business. Working capital needs will go up, as it would be blocked into higher taxation on inputs, on stock transfers, into input tax credit yet to be recovered from GST authorities. The industry needs to have a financial plan for this.