Impact Analysis of GST on Bhutanese Economy

Transcription

1 In Association With Association of Bhutanese Industries (ABI) Impact Analysis of GST on Bhutanese Economy In Consulting With Institute for Management Studies Limited (IMSL) Chubachu Roundabout: Thimphu

2 Contents 1 What is GST - Introduction? 1 2 Present tax Structure in Bhutan 1 3 Proposed Indirect Tax Structure 2 4 Advantages to Indian Manufactures/Traders which are likely to Impact Bhutan: 2 5 Taxation of Imports to India/Export from Bhutan 3 6 Taxation on Exports from India/Import to Bhutan 4 7 Tax treatment of export of goods and services to Nepal and Bhutan 4 8 Endorsement of GST Tax Invoice Under Exports 5 9 Overall Impact on the Bhutanese Economy Expected fall in prices in various commodities being imported from India 7 11 GST Rate Comparison Analysis Impact on cement Industry Recommendations 13-14

3 1. What is GST - Introduction? Goods and Services Tax (GST), also known in some countries as value-added tax (VAT), is a tax on consumption that is collected incrementally i.e. based on the value added at each stage of production or distribution. The standard way to implement a GST is to pay GST on the price of the product minus all taxes previously paid on goods and services. Nearly 160 of the world s approximately 193 countries levy some form of VAT/GST. A perfect value-added tax system aims at eliminating cascading effect of taxes in a supply chain of producer/manufacturer and end consumer. A continuous chain of set-off of earlier taxes from the original producer s point and service provider s point up to the retailer s level is established so that burden of tax is passed on to end consumer, i.e. destination. This is achieved through the mechanism of Input Tax Credit. India has been following a truncated version of VAT for more than 30 years in Central Taxes (Excise and Service Tax) and since 2005 in State Taxes (VAT and Entry Tax). 2. Present tax Structure in India Present Tax Structure [5 Important Constituents] Excise Duty Service Tax Sales Tax /VAT/ CST Customs Duty Entry Tax/ Entertainment Tax Entry No. 84, List I, Schedule VII Residuary Entry No. 97, List I, Schedule VII Entry No. 54 of List II (VAT) and 92A of List I (CST) Entry No. 83, List I, Schedule VII Entry No. 52 &62 List II, Schedule VII Taxable Event is Manufacture Taxable Event is Provision of Service Taxable Event is Sale Taxable Event is Import & Export Taxable Event is Entertainment & Entry of Goods

4 3. Proposed Indirect Tax Structure Excise and Service Tax will be known as CGST CST will be replaced by Integrated GST (IGST) Local VAT & Other taxes will be known as SGST Approx. Sum Total of CGST and SGST Custom Duty In Place of CVD and SAD, IGST will be charged 4. Advantages to Indian Manufactures/Traders which are likely to Impact Bhutan: a. Input of Interstate Purchase: In the earlier VAT regime, CST was levied on Interstate purchase, The amount so levied (Generally 2%) was not allowed as set-off and use to form part of the cost. b. Warehousing Cost: In the previous regime, Companies use to have warehouses and offices in every state so as to avoid levying of CST during purchase and sale. This use to increase the operational cost of the manufactures. With IGST being levied, Warehouses and offices now shall be located at strategic locations only. c. Transportation: In the previous Indirect Tax regime, Cost of Transportation of goods used to be an important constituent of Cost. With the Check post melting along the state borders and with the introduction of e-way bill it is estimated that minimum 2,800 crore worth of economic benefit shall be passed on to the traders/manufactures

5 Technical: 5. Taxation of Imports to India/Export from Bhutan As per provisions of the IGST Act import of goods into India shall be deemed to be a supply in the course of inter-state trade or commerce. It has also been provided that Integrated Tax on goods imported into India shall be levied and collected in accordance with the provisions of Section 3 of the Customs Tariff Act, 1975 at the point when duties of Customs are levied on the said goods under the Customs Act, 1962, on a value as determined under the Customs Tariff Act, The Taxation Laws (Amendment) Act, 2017 provides that IGST on imports will be levied at value of imported article as determined under the Customs Act plus duty of customs and any other sum chargeable in addition to customs duty (excluding GST and GST Cess). This in effect makes levy of IGST at par with present levy of CVD which is on basic value plus customs duty, It is to be noted that there is no levy of CVD on trade As per the definition of supply under CGST Act, import of services for a consideration whether or not in the course or furtherance of business is deemed to be supply and as per the IGST Act, supply of services in the course of import into the territory of India, shall be deemed as supply of services in the course of inter-state trade or commerce. Accordingly, Integrated Tax would be levied on import of services. The Integrated Tax on import of services would be payable by the recipient under reverse charge. Further, there would be no change in applicability of countervailing duty levied under section 9BB of the Customs Tariff Act, 1975 (and different from the additional duty of Customs levied under section 3, ibid., also known as CVD), anti-dumping or safeguard duties, where ever imposed by the Government. Summary: What it means for Bhutan? All Exports to India will be subjected to IGST paid at Jaigaon customs by the Indian Importer. As compared to the current regime there were no taxes or duty to be paid when the Goods were exported back to India. This would be mean that a cement Importer sitting in India needs to pay 28% of IGST on the value of the cement imported. Although the same IGST paid shall be allowed as credit to him on his further resale.

6 Technical: 6. Taxation on Exports from India/Import to Bhutan Export of Goods: Section 2(5) of IGST Act export of goods with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India; This translates into all goods taken to Bhutan shall be considered Exports Export of Service Section 2(5) of IGST Act Means the supply of any service when, (i) the supplier of service is located in India; (ii) the recipient of service is located outside India; (iii) the place of supply of service is outside India; (iv) the payment for such service has been received by the supplier of service in convertible foreign exchange; This translates into all goods taken to Bhutan shall be not be considered Exports unless the same is received in convertible foreign exchange Summary: All Goods Imported to Bhutan from India shall not attract any GST. That is to say that the goods so exported from India shall be free from any taxes. However the services rendered in Bhutan like Consultancy services shall attract IGST which was earlier exempt under Service Tax. 7. Tax treatment of export of goods and services to Nepal and Bhutan As per the provisions of IGST Act, export of goods and/or services are to be treated as zero rated supplies and a registered taxable person exporting goods or services shall be eligible to claim refund under one of the following two options: i. Export under bond or letter of undertaking without payment of Integrated Tax and claim refund of unutilized input tax credit. ii. Export on payment of Integrated Tax and claim refund of the tax so paid on goods and services exported. The aforesaid refunds will be subject to rules, safeguards and procedures as may be prescribed.

7 8. Endorsement of GST Tax Invoice Under Exports As discussed above, export of goods from India attracts nil GST. However, if GST is paid at any point of time against exports from India can be either refunded or can be exported under bond without paying GST. If IGST is involved on any exports from India, the Export Invoice has to be reflected an endorsement as Supply meant for Export on Payment of IGST or Supply meant for Export under bond without payment of IGST. Any movement of goods for export where IGST is leviable can be effected in two methods. Either the exporter from India can pay IGST in advance and gets refund later after exports by submitting required documentary proof for exports or the exporter can execute a bond against IGST leviable against such goods. If a bond is executed by an exporter against IGST payable against such export goods, the exporter can cancel such bond by producing required proof of documents of exports. The contents in Export Invoice remain same except inclusion of following information: 1. An endorsement in Export Invoice as SUPPLY MEANT FOR EXPORT ON PAYMENT OF IGST or SUPPLY MEANT FOR EXPORT UNDER BOND WITHOUT PAYMENT OF IGST, as the case may be, and shall, in lieu of the details. 2. Name and address of the recipient 3. Address of Delivery 4. Name of the country of Destination 5. Number and date of application of removal of goods for Export (ARE-1) The above procedures are same as central excise procedures for movement of goods for export, previous to introduction of GST except slight changes in procedures As per recent developments in international trade, instead of Export Invoice and Export packing list, a single document called Export invoice cum Packing list is accepted in customs and other authorities worldwide.

8 9. Overall Impact on the Bhutanese Economy a. Decrease in the prices of consumables: It is believed that most the consumables and FMCG items shall undergo price cut in near future on account of GST Impact even in India. Prices of raw material as well goods are assumed to come down especially those of necessity and comfort Items. In the Bhutan Context, as most of the goods were subjected to Excise duty which was always a part of the cost which is now exempt in the case of export to Bhutan, the prices of commodities are expected to decrease across the board. However the underlining question is whether the traders are going to pass on the benefits of fall in prices to the ultimate consumers. b. Balance of Payment: As discussed above Indian Item beings imported to Bhutan is going to see a price drop. This would lead to increase in purchasing power of the Trader/Consumer as well. With a significant drop in prices Import is all set to increase thereby making trade deficit an even major cause for concern in Bhutan The other reason shall be Indian manufactures being more competitive on account of various factors discussed below, which might limit Exports to India. c. Intermediary / Finished Goods Industry Intermediary Industry had an added advantage in Taxation front as there was no excise on manufacturing in Bhutan however there Indian counterparts needed to pay the same. Industries now have to more focus on the costing of their product to compete in the Indian Market as there upper edge on the taxation front shall no more be available. To look beyond the loss of Excise advantage Bhutanese manufactures had, an indirect advantage was levying of CST on Interstate Trade in India. Such CST paid was not allowed as credit, hence was always taken as part of cost to the trader/manufacturer. To mitigate this cost the Indian trader use to prefer buying from Bhutanese market thereby giving an edge of 2-4%. Now with the implementation of GST all the input taxes are allowed to be set off hence vindicating the advantage.

9 d. National revenue More than 80% of the total export is being made to India and similarly around 75 percent of the total import originates from India. Above all almost all the consumables goods and services are being imported from India, the trade deficit with India stands at 70 percent of the total and the current account balance with India stands around 87 percent. With imports becoming cheaper and Export more competitive, the gap is all set to increase. Based on the past five-year trend, it indicates that by not having to pay excise duty in India, the import value could come down to about 10 percent. With a fall in prices the revenue collection from BST and green tax shall also come down to a considerable extent. For the government this would mean Loss to the tune of approx. Nu. 14 billion. (28% of the excise collected on Petroleum products shall still be received by the government) 10. Expected fall in prices in various commodities being imported from India Sl. ITEMS Decrease in level of prices 1 Necessity Items (Food grains, medicines, Yarn, etc.) 7% 2 Intermediate goods (semi-finished goods) & fabrics 13% 3 Comfort Items ( Packed goods, paints, TMT rods, toilet preparations 12% 5 Plastic carry bags, Betel nuts, Pan Masala 16% 6 Aerated water NIL 7 Vehicle not exceeding 1500cc 14% 8 Vehicle above 1500cc 25%

10 11. GST Rate Comparison Analysis The below rate analysis is done so as to identify the change in tax rates in the new tax regime. Also the current rates show the quantum by which the products shall be available cheaper in Bhutan than in India. Prices of goods will also fall to the tune of the excise duty which was earlier a part of cost. a. On services (IGST is applicable on services rendered in Bhutan) Name of ITEM GST Rate(%) Existing Rate(%) Telecom Works contracts Non AC/alcohol-serving restaurants AC, alcohol-serving restaurants Five-star restaurants b. On Construction Sector (GST is not Applicable) Name of ITEM GST Rate(%) Existing Rate(%) Cement Wall paper Paints and varnishes Putty, wall fillings Plaster Ceramic tiles Tempered glass bricks Sand lime bricks, fly ash 5 6

11 c. Metals and Minerals (GST is not Applicable as exports will be Zero Rated) Name of ITEM GST Rate(%) Existing Rate(%) Cement Wall paper Paints and varnishes Putty, wall fillings Plaster Ceramic tiles Tempered glass Sand lime bricks, fly ash bricks 5 6 Copper screws, nuts, bolts Nickel bars, rods, wires Nickel screw, nuts, bolts Nickel tubes, pipes, netting Aluminium ingots, rods, wires

12 d. Direct Cost implication on Bhutan (Consumables) Daily consumable items Items % Change Milk 0 Vegetables and Fruits 0 Bread 0 Basmati Rice 0 Atta 0 Pulses 0 Packaged tea and coffee 1/kg Packaged Chicken 0 Edible oil 6 Masala 0 Packed curd 0 Packed Paneer 0 Butter 0 Cheese 0 Biscuit 6 Mithal 0* Bhujia 0* Chewing gum 12.5 Chocolate 12.5 Corn flakes 12.5 Ice cream 6 Cold drinks 12.5 Juices 6 Soap 12.5 Toothpaste 12.5 Hair oil 12.5 Shampoo 12.5 Face cream 12.5 Medicine 6

13 e. Direct Cost implication on Bhutan (Long term Purchase Items) Long-term purchase items Items % Change Television 12.5 AC 12.5 Fridge 12.5 Washing Machine 12.5 Furniture 12.5 Watches 12.5 f. Benefit on Exported Items Product Rate Aerated water 21% M.S Billets 12.50% Ferro silicon 12.50% Coal fines 6% Tar 6% Semicoke Fines 6% Cement 12.50% Silicon carbide 12.50% Coke 6% Fanta 21% Sprite 21% Plastic Granules 12.50%

14 g. Benefit on Imported Items Product Excise Rate(%) Sugar 12.5% Malts 12.5% Crown Seal 12.5% Bottles 12.5% Cartons 12.5% Aluminium Cans 12.5% Sponge iron 12.5% Pig iron 12.5% Silicon managanese 12.5% Ferro silicon 12.5% Code Flexible Coupling (CPC) 12.5% Met coke 6% Iron scraps 12.5% Carbon electrode paste 12.5% Carbon temping paste 12.5% Carbon raiser 12.5% Lancing pipe 12.5% Low ash mett. Coke 6% Millscale 12.5% Nangal coal 6% HRCA sheet 12.5% Packing material 12.5% Vitamins 12.5% Coal 6% LAMC 12.5% Granulated slag 12.5% Slack coal 12.5% MS scrap 12.5% Slag 12.5% Clinker 12.5% Fly ash 12.5% Preforms 12.5% Closures 12.5% Helene HP % MGR CON Blue HD % Master Batch(Black) 12.5%

15 12. Impact on cement Industry It is speculated that the worst impact of Indian GST shall be felt by Cement industry exporting in India. The Operational/raw material cost of Indian manufactures shall be reduced while Bhutanese manufacturers shall losses there advantage in terms of taxation. a. Under the VAT regime: The tax rates for cement are extremely complex. For example, there are various rates and specific duties of excise applicable on different types of cement depending on whether they are supplied in bulk form or in packaged form or whether for industrial or trade purposes. The effective rates including excise & VAT totals up to around 24-25%. b. Impact of GST on Cement (India) Cement will attract 28% GST, i.e., a higher rate of tax which means increased costs for the infrastructure sector. Refractory cement, mortars, concretes (mainly used for building industry furnaces, huge ovens etc.) will attract 18% tax. Cement Bonded Particle Board will attract 12%. The main raw materials for cement are limestone, coal and electricity. The tax rates on these are as follows: Limestone is taxed at 5% Coal is capped at 5%,which is a reduction from the earlier rate of 11.69% Electricity is outside the purview of GST Nothing is mentioned regarding the royalty that the cement companies pay to the state governments for quarrying limestone. Clean energy cess is levied on coal, which is not available as an input credit because it is not subsumed by GST. So, these two factors will continue to be outside the purview of GST and will be included in the cost of the cement production even after GST is implemented, as was done previously. c. Impact of GST on Cement (Bhutan) Taking into account the above specified impact along with a decrease in operational cost on account of warehousing, Transportation etc Indian Cement company are set be more competitive. The Operational cost for Indian manufacturers shall be reduce however the Bhutanese Industry has to face the brunt of loss of an upper edge they use to receive on tax front, particularly excise and Interstate CST.

16 13. Recommendations SUBMISSION OF THE BHUTANESE PRIVATE SECTOR WITH REGARD TO ROLLING OUT OF THE GOODS AND SERVICE TAX (GST) REGIME IN INDIA FROM 01 JULY Exemption of Integrated GST (IGST) on export of Bhutanese products to India: In the previous indirect tax regime, Bhutanese products exported to India were exempted from all taxes and duties including counter-vaeling duty (CVD), Special Additional Duty (SAD), Customs Duty, etc. Now, as per the IGST Act, IGST has to be paid at the point of Customs (entry) even in the case of export of goods from Bhutan to India. Under the new GST regime, export of goods from Bhutan to India will be treated at par with export of goods from one state to another in India. This major change in the tax regime will make Bhutanese manufacturers uncompetitive vis-àvis Indian manufacturers and will also create hassles for Indian buyers procuring goods from Bhutan, thus, restraining Bhutanese export trade and commerce. Therefore, it is a request of the Bhutanese private sector to kindly lobby for exemption of IGST on products exported from Bhutan to India. 2. Deferring the levy of IGST from the point of entry to the point of resale: Should the recommendation as stated in Point 1 above be not acceptable during the process of negotiation with the Indian counterpart, the Bhutanese business fraternity suggests for deferment of the levy of IGST from the point of entry to the point of sale / resale. This is in line with the current trend being followed under VAT regime where no taxes / duties are being imposed at the point of entry ensuring smooth flow of goods between the two countries. Through this proposed arrangement, there will not be no loss of revenue from IGST to the Indian Government as the same shall be collected at the point of resale. By deferring the collection of levies to the point of sale / resale, an advantage can be provided to the Indian importers under which, the importers need not block their funds, hence, providing an incentive of improved financial liquidity. This arrangement would keep Bhutanese exporters at par with their Indian counterparts.

17 3. Exemption from IGST on import of services from India: Under the current service regime, export of services from India to Bhutan is exempted (Vide MEA UO No. E-IV/219/1/2013 dated 23 rd August 2013 as attached herewith). However, as per the definition under IGST Act for export of services to Bhutan, it does not fall under zero-rated supplies thereby imposing IGST on such services. Consequently, this will make the procurement of services from India more expensive as compared to the earlier tax regime (by a factor of around 18% 20%). This will have a financial impact on RGoB besides the private sector as a lot of consultancy service is procured by the RGoB from India. It is recommended that the Government of India may kindly be approached for similar notification exempting IGST levy on such services. 4. Transport Service and levy of taxes on it: Several commodities are imported from India to Bhutan via railways. However, as we do not have the railway infrastructure within Bhutan to facilitate direct transport of goods from India to Bhutan, there is a break-journey at the nearest Indian railway locations. In this case, the place of supply of services is considered within India inviting levy of taxes. The Bhutanese private sector is of the opinion that even though there is a break-journey due to lack of a direct connecting railway lines, the actual destination of supply for such transport services is Bhutan. It is therefore requested to kindly negotiate with the Indian counterpart for considering the place of supply under such transportation services as Bhutan and thus providing an exemption from levy of taxes. 5. Refund of taxes in case of export of goods and services: In the recent past, the trade deficit with India has increased tremendously as a result of increased imports, whereas, there has not been noticeable increase in exports to India. With the change in indirect tax regime in India, exports from India have been provided with even further boost by giving a complete exemption / refund on all taxes including input taxes paid earlier (taxes paid in case of purchase of raw materials, other goods and services). Ninety percent of all such refunds shall be provided within seven days under the GST regime.

18 Under the current taxation system in Bhutan, only primary raw materials procured from India are exempted from such taxes. When compared to their Indian competitors, the Bhutanese manufacturers become uncompetitive on account of them having to pay several other additional taxes like the BST on secondary raw materials, Customs Duty, etc. The Bhutanese private sector is of the view that to be export-competitive, boost exports and narrow down the burgeoning trade deficit with India, a similar benefit needs to be provided to them. The private sector therefore requests for consideration of the complete refund of taxes paid, like taxes on secondary raw materials, etc., if the goods are exported back to India. 6. Rationalization of taxes: With the change of the tax regime in India, the Royal Government of Bhutan will lose a big chunk of revenue that it received as excise duty refunds from India. The private sector understands that this revenue loss (approximately 10 percent of the RGOB s annual revenue) will create a budget deficit in the coming financial years. The BCCI is of the view that rationalization of taxes and broadening of tax net is required to cover these loses. Some services like consultancy job works, transportation, etc. are today outside the purview of the tax net. There is a need of indirect tax reforms to be undertaken even in Bhutan to help the government to mitigate the losses. The other cause of concern is the imports getting cheaper resulting in an increase in the trade deficit with India. This will also have a detrimental impact on the viability of the domestic industries. In order to protect the domestic and also to recover the loss of excise duty refund, levy of BST on consumables and FMCG products needs to be put in place. It is therefore recommended that the Royal Government undertake a study to assess the viability and impact of revising the BST structure as well as introduction of other reforms in the current tax regime. Direct Tax should be also looked into, as when compared to SME industries in India the tax is 25% as against 30% in Bhutan. Tax holiday on convertible currency earnings are required to boost exports to third country.

19 7. Non Profiteering Clause: As consultants we fear that the benefits of fall in prices commodities might not be passed on to the ultimate consumers. It is always advisable to take some interim measure like introducing Anti-profiteering Clause or likewise which ensures that the benefit is passed on to the ultimate consumers and the case of unjust enrichment does not takes place.