GST Council to meet Today, Tax rate in Limelight

The much awaited GST has entered the Central phase today. The three-day meeting of the GST Council will take a decision on the tax bands and level out issues like compensation formula for the new indirect tax regime. The government is keen to utilize the meet to make a pact with states so it can push the bill in the winter session of parliament that is to start at November 16. The Council is chaired by Finance Minister Arun Jaitley, with state finance ministers or other representatives as members.

The Tax Rate Talk:

The tax rate is a vital point that will have a relevance to the common man. The rate bands for essential and luxury goods are likely to be worked out. The Centre will probably propose a four-tier tax structure under the GST, with a peak slab of 26 percent. Approximately 20-25 percent of all taxable goods, along with those consumed by the middle class, could come under the peak rate. The thought is to arrive at a common ground with the states that are anxious over revenue loss.

The discussion paper that will be presented at today’s meeting is believed to have proposed a standard rate of 18 percent.

Currently, there is a four tax slab with the highest at 26 percent, lower than the 40% rate that is proposed for very limited demerit items. A lower rate of 26 percent can be implemented on more items.

The states are asking for a standard rate of 22 percent, whereas the Centre has pressed for one of 18 per cent. The lowering of the top slab by including more items may act as a middle-ground for the Centre and the states.

 

The GST panel, headed by Subramanian, had proposed a “sin tax” of 40 percent on limited demerit items like aerated drinks, luxury cars, pan masala, tobacco and tobacco products. This brought out the protest from the aerated drinks sector with Coca-Cola arguing that the 40 percent tax would leave the company with no alternative but to shut down certain factories.

At present, aerated drinks with added sugar pulls a central excise duty of 18 percent and a state value added tax of 12.5 percent, making the total indirect tax 30.5 percent. The Subramanian panel advocated a low rate of 12 percent for certain items, a standard rate of 17-18 percent for a majority of items and for the precious metal, it recommended a range of 2-6 percent.The 26-per cent rate might be imposed on big cars, besides other premium or luxury items and there is a possibility of another slab over 26 per cent for them.

Other Agendas:

• Compensation Formula: Like Tax rate, this one is again going to be a tough nut to crack. At the first GST Council meet, 3-4 alternatives were discussed but a verdict could not be reached. According to the proposals, a state can be compensated if the revenue under GST falls short of the standard tax earnings in the best three years out of the past five years. Secondly, of the five years, two outliers are omitted and an average is taken. If the revenue under GST is lesser than this, then states get compensated. Third, a base year can be fixed which would be 2015-16 and a particular growth rate will be decided for all states. If the income falls short of that, then the state gets compensated. Another proposition was on a fixed rate of revenue growth and give compensation. The Bill attempts to provide full compensation to states for first five years of rollout of the GST regime. Previously, the 100 percent compensation to states was limited to only first three years. On the other hand, the Select Committee of the Rajya Sabha had in its report suggested 100 percent compensation for possible loss of revenue for five years.
• Service Tax Assessment: The Council will also discuss on the problematical issue of the Centre retaining power to assess 11 lakh service tax filers under the new dispensation. While a decision to this was taken at the first meeting of the GST Council, at least two states were indecisive on approving the minutes of the meeting, stating they are not in favor of losing power of assessment of these assesses.

Benefits for Logistics:

With GST, the ride for logistics just got better. This indirect tax Bill, which is likely to result in a uniform tax across goods and services, except petroleum, alcohol, tobacco and selected products, will alter the way industries, logistics and supply chains operate. The Bill is set to be rolled out on April 1, 2017 and will optimize production, inventory and distribution nationally. Besides this, the GST Bill will also help speed up cargo movement.

A 2015 combined report by the Transport Corporation of India and the Indian Institute of Management – Calcutta (TCI-IIM-C) shows that the stoppage expense, i.e., average expense incurred due to the stops along the way such as check-posts and customs per ton-km has increased from Rs. 0.16 per ton-km to Rs. 0.28, a 75 percent increase between 2011-12 and 2014-15.

Over the past one year, the movement in stock prices of logistics players has been mixed. TCI share price and Allcargo Logistics have gone up by 9 and 13 per cent, respectively, while the GATI share price and VRL Logistics were beaten down by 19 and 16 per cent, respectively.

Similarly, the price to earnings ratio (trailing 12-month earnings) of major stocks such as Allcargo Logistics (16 times), GATI (31 times), VRL Logistics (28 times) and Transport Corporation of India (16 times) are lower than their three-year average.

This indicates that the positive impact of GST may not have been completely priced in yet. With a fixed GST rate that is expected to vary anywhere between 18 and 22 percent, together with virtual melting of State boundaries, the abundant smaller warehouses in many locations are projected to be consolidated into bigger ones.

The Transport Corporation of India is by now in the process of building GST-ready warehouses across four locations in India and so are others. With the Tax structure in place, the containerization in full throttle and reduction in transit time, GST is set to benefit Logistics in more than one way.