The Goods and Services Tax (GST) is all set to be rolled out from July 1, 2017. The aim of the GST is to collate multiple taxes into one common tax. This move is expected to reduce the cost of compliance and transactions, transforming India into a more efficient economy. However, a few doubts remain with respect to the new tax rates and the complexity of the structure.
By Baishakhi Dutta & Shruti Mishra
The much anticipated event has finally happened and hats off to the government’s stewardship in ably carrying this off. On May 18, 2017, at the GST Council meeting held at Srinagar, J&K, decisions were taken on the broad taxation slabs that goods would come under — nil rate, 5 per cent, 12 per cent, 18 per cent or 28 per cent. Electronic components, which the industry was expecting to come under the merit GST rate of 12 per cent, have been placed in the18 per cent (and in some cases the 28 per cent) tax slab.
The GST is a groundbreaking reform and will probably prove to be one of the most impactful ones. The aspect that appears most exciting is that India will finally have a single common market, which will radically transform the US$ 2 trillion economy and help boost GDP by up to 2 percentage points. Theoretically, one common market is great for ease of doing business but, practically, the fate of the GST is still unclear. The policy-makers and researchers are still finding it difficult to predict how GST is going to unfold in the coming months.
To analyse the impact of the GST on the various segments of the Indian electronics industry, the Electronics Bazaar team reached out to various experts in the industry to assess their reactions and expectations with respect to this tax. This report summarises their sentiments with respect to the effectiveness of the new tax structure.
- Existing taxes: 23 per cent (approx.)
- Upcoming GST: 28 per cent
The consumer electronics segment will probably experience the greatest upheaval because the effective tax rate is much higher now than what was prevailing before. This year, the prices of televisions, refrigerators and air conditioners are set to go up by 4 to 5 per cent with the GST council proposing the highest tax slab of 28 per cent on consumer electronics and durables, as compared to the current tax rate which is around 23 per cent. While interacting with electronics industry veterans, we came across many distinguished views on how the new GST is going to affect this industry.
“Consumer electronics products, i.e., air conditioners, refrigerators, vacuum cleaners, etc, will see a rise in taxes from the current 26 per cent rate to the 28 per cent tax slab. Office equipment like printers, photocopiers, fax machines, monitors and projectors are going to be costlier as well. However, due to GST, India will become a common marketplace and the cost of warehousing and logistics will be reduced. This will lead to a more decentralised supply chain model, which will be different from the current centralised warehouse systems operated by many players. We are likely to see an improvement in logistics systems and a reduction in lead times under this tax structure,” says Pavel Naiya, senior analyst, Counterpoint Research.
LED TV manufacturer, Avneet Singh Marwah, CEO, Super Plastronics Pvt Ltd, opines, “Since consumer electronics has been classified under the 28 per cent tax slab, the cost of all consumer electronics products like TVs, ACs, washing machines and refrigerators will be impacted and will get costlier by approximately 5 per cent, depending on the state these are sold in. At present, there is lack of information on the excise exemption currently available and the refund mechanism that is being planned. Legalities on paper tend to be different from their practical implementation. There are a lot of questions related to how the indirect taxes currently in place are going to be enfolded into GST.”
Manish Sharma, president and CEO, Panasonic India and South Asia, as well as VP, Appliances Company, Panasonic Corporation, states, “Under the new GST tax slabs, a price rise of 4 per cent and upwards can be expected for consumer durables. There will be a negative impact on sales in July-August this year, but we expect the effect will get neutralised by the festive season and demand will be back. The trade partners, though, might experience a slight impact due to the input tax.”
DTH to enjoy lower taxes!
- Existing taxes: 15 per cent
- Upcoming GST: 18 per cent
The Goods and Services Tax has opened the door to cheaper entertainment as the tax on cable TV and Direct-To-Home (DTH) services has been rounded off to 18 per cent. Currently, these services charge a service tax of 15 per cent along with an entertainment tax (levied by the state governments, which ranges from 10 to 30 per cent).
- Existing taxes: 0 per cent
- Upcoming GST: Flat 5 per cent on all solar equipment
The solar power segment is likely to experience a jolt with the new GST slabs. While solar power generating systems fall within the 5 per cent bracket, other basic equipment and modules will attract an 18 per cent GST. The biggest hit is that cables, transformers and other power supply components are now categorised under the 28 per cent slab. But some experts feel that this is unlikely to have any lasting impact on the rapid growth of India’s solar energy sector.
The solar industry, which paid zero excise duty, will now pay 18 per cent GST. The sector could also face some issues around debt financing, refinancing and financial closure due to changes in the tax structure, ELCINA has warned.
Talking about the negative effects of GST on the solar industry, Puneet Khanna, CFO, Su-Kam says, “Solar parts, including modules, have not been classified in the zero per cent tax bracket, nor any exemption given for solar power generating systems. The latter have been categorised in the 5 per cent tax slab, which will increase operating costs. E-way bills for the movement of all taxable goods need to be generated, which could be a major logistics hassle. Also, IGST (Integrated GST) is now applicable for imports at 5 per cent versus the CVD exempted earlier. The tax on supplies to agents will only block a company’s working capital when such goods are given as samples on non-returnable gate passes. Also, demarcation of supplies up to the date on which GST comes into effect would be a challenge for companies.”
The new tax regime will inflate the indirect taxes from 0 per cent to 5 per cent on solar modules, and around 3 per cent on engineering and construction services. According to Bridge to India, the revised rate structure will not have any material negative impact on the industry because of the buffer afforded by the sharp fall in equipment costs. It will allow project developers to proceed with construction. Some developers may still file compensation claims, but many of them might simply absorb the additional burden to avoid scrutiny of sensitive commercial information.
- Existing taxes: Between 9 per cent to 16.5 per cent
- Upcoming GST: 28 per cent
Security products such as CCTV cameras, DVRs/NVRs, etc, come under the 28 per cent GST slab, whereas earlier, the total tax on these products was between 9 per cent and 16.5 per cent, varying from state to state.
- Existing taxes: Between 5 per cent to 15 per cent (depending on the state)
- Upcoming GST: 12 per cent
We came across some contrasting views on the impact of GST on the Indian smartphone industry.
M.N. Vidyashankar, president, India Electronics and Semiconductor Association (IESA), says, “Smartphones currently attract 2 per cent central excise duty, while VAT rates vary from state to state and are in the 5-15 per cent range. The weighted average VAT rate on smartphones works out to about 12 per cent. Thus, the present total tax incidence on smartphones works out to more than 13.5 per cent. As against this, the proposed GST rate for smartphones is 12 per cent. The consequent reduction in prices will boost demand for electronics in India. With almost 40 mobile phone companies opening manufacturing facilities in India in the last two years, this will motivate them to expand their operations in the country.”
There is, however, a contrasting view too. According to Tarun Pathak, associate director, Counterpoint Research,’ “The aim of GST is to make tax simpler across the country. With the implementation of GST, mobile phones will be in the 12 per cent tax bracket. This essentially means that the imported phones will become cheaper, as before. Currently, net taxes and other costs associated with importing handsets are close to 17 per cent. However, domestically manufactured goods, which earlier had a duty of 5 per cent to 6 per cent, will become costlier as the countervailing duty ceases to exist and GST rates of 12 per cent become applicable. What this effectively means is players with local assembling processes will not have any significant advantages while manufacturing in India, unless the government decides to give them incentives using other means like increasing the basic customs duty on imports or giving preferential treatment to those manufacturing in India. In a nutshell, we expect distributors to clear off existing inventory before transitioning to GST, while the sale of handsets will take a hit. We estimate a 4 per cent to 5 per cent short-term decrease in sales of handsets YoY in the coming months.”
Manish Sharma, president of CEAMA (Consumer Electronics and Appliances Manufacturers Association), says, “MeitY’s initiative to impose an additional 12 per cent customs duty on imported handsets is a welcome step for the domestic smartphone industry. It provides the necessary impetus and, at the same time, motivates the local manufacturers to align themselves to the government’s ‘Make in India’ vision. Also, it will boost the sentiments of the local players, and provide a level playing field for all the manufacturers within the segment. The industry awaits such positive stimulants to continue under the GST regime as well.”
According to IT and telecom secretary, Aruna Sundararajan, MeitY will push for imposing a basic customs duty (BCD) on top of the GST rate on imported devices, to ensure that phones manufactured locally continue to be cheaper as compared to imports.
- Existing taxes: 15 per cent
- Upcoming GST: 18 per cent
The GST Council headed by Finance Minister Arun Jaitley has announced that an 18 per cent GST
will be levied on the telecom industry, which is 3 per cent higher than the current 15 per cent service tax it pays. The industry has expressed its apprehension over the higher tax rate, saying that it will further stress the already stressed sector.
The Indian telecom sector is already under pressure due to the entry of Mukesh Ambani’s Reliance Jio as well as a debt of about ₹ 4600 billion, and is disappointed with the new tax slab. According to sources, any tax rate above the existing 15 per cent makes telecom services more expensive for the consumer.
Uday Pimprikar, tax partner, EY India, says, “Imposing 18 per cent tax on telecom is likely to increase the overall tax burden and therefore may have a negative impact on the consumers’ expenses. It needs to be appreciated that telecom is a necessity and an extremely important infrastructure service and resource, and thus deserves more sensitive treatment.”
LEDs and lighting
1. Existing taxes: 14.5 per cent
2. Upcoming GST: 12 per cent (finished goods), 18 per cent (raw materials)
The new policy has turned the whole supply chain scenario of LED lighting upside down by placing raw materials at a higher slab of 18 per cent and finished products at a lower slab of 12 per cent. It is still unclear how the government is planning to compensate for the gap of 6 per cent.
Senior industry member, Vijay Kumar Gupta, CEO, Kwality Photonics expresses his concern by mentioning, “A quick look at GST rates for the electronics sector shows that old rates have been mapped routinely onto the nearest GST slabs. The opportunity to address anomalies was not grabbed by the concerned authorities. One significant anomaly in the case of LED lighting is that the components and parts are charged at 18 per cent GST, whereas the LED lights are in the 12 per cent category. There is an urgent need to bring the inputs into the 12 per cent GST slab, in harmony with the finished product to avoid inverted tax overflow and locking of precious working capital.”
On the other hand, Vimal Soni, Corvi LED, feels that, “A unified market allows the industry to deliver across the nation. Light is a central and basic requirement. India is working towards a surplus energy paradigm from the current deficit that we face. LED lights will play a crucial role via energy saving, helping light up interior areas across the country and GST will certainly help in reaching those areas. From a distribution perspective, the paperwork will get lighter and borderless transit will bring down costs and delivery times, creating further value.”
- Existing taxes: 13 per cent
- Upcoming GST: 12 per cent
“Medical devices will witness a lower tax burden with the GST rate pegged at 12 per cent instead of the current incidence of over 13 per cent, which includes 6 per cent central excise duty and 5 per cent VAT.” says Vidyashankar.
UPS systems and power supplies
- Existing taxes: 5 per cent
- Upcoming GST: 28 per cent
UPS systems and power supplies will receive a major setback because the higher tax slab of 28 per cent will disturb the manufacturing base of this segment.
Manoj Jain, VP, Microtek International Pvt Ltd, says, “The UPS system and power supply industry is going to come under the 28 per cent tax slab. Hence, the prices are going to increase by 12 per cent to 15 per cent for the customer because most of the leading players of this industry currently have manufacturing facilities in the exemption zones, like Himachal Pradesh and Uttarakhand. Since these products are now necessities for a household, they should be in the lower tax slab so that the price of the product does not increase for the customer.”
The industry’s take on GST
The GST has the potential to transform the current unorganised economic structure of the country, the underemployed workforce and low productivity levels into a well-organised formal economy with improved wages and productivity, leading to a boost in consumption. GST is expected to benefit both the states and the Centre, since it takes care of state governments’ interests in the medium-to-long term as well. The transition phase will demand some short-term adjustments, but it will deliver a prosperous economy, buoyant capital markets and a structured corporate scenario in the long run.
Says Vidyashankar, “After the implementation of GST, all transactions will move online with no manual interference. This will help in transparency of processes and the elimination of multiple levies. GST will be beneficial for the electronics manufacturing industry as the cost of warehouses and logistics will get reduced. This will enable the EMS industry to pass on this cost reduction to the consumers. Under the present indirect taxation system, the consumer has to pay around 25 per cent more than the actual cost of production due to the levy of excise duty and value added tax on manufactured goods. With the current GST of 18 per cent, the various industrial sectors, including electronics, will benefit.”
For promoting domestic manufacturing, ELCINA has the following recommendation for the Central government. Across the value chain in the electronics industry, the CGST portion of the GST charged on the manufacturer should be reimbursed or refunded. This will reduce costs for the consumer and help to increase local buying. It will also encourage foreign investors to come to India and manufacture locally.
Impact on domestic manufacturing of smartphones
In the past couple of months, leading Chinese smartphone makers including Xiaomi, Coolpad and OnePlus have set up their manufacturing units in India. As per Counterpoint Research, around 80 per cent of the 59 million phones sold in India in the first quarter (January to March 2017) were made in India. As of now, the duty charges for mobile phones imported and sold in India are capped at 27 per cent, whereas the phones manufactured locally attract only 6-7 per cent of taxes (1 per cent excise + 5 per cent VAT in most states). That advantage for local manufacturing may erode a bit once the GST is introduced. While the basic import duty will remain, additional customs duties will stop and GST at 12 per cent will be charged on imports. This means the prices of imported mobile phones could be less than before, and the government may need to consider giving some additional sops for local manufacturing.
(Source: Counterpoint Research report)
Case study: The impact of implementing GST in Malaysia
Malaysia has already implemented GST. The 6 per cent GST regime was launched by the Malaysian PM, Najib Razak on April 1, 2015, replacing Malaysia’s sales tax (10 per cent) and service tax (6 per cent). Businesses got 17 months of preparation time between the declaration and official implementation. However, the new taxation system has not quite achieved all that it was expected to.
While aimed at creating a consolidated, effective and simplified platform for taxation in order to boost revenues, the plan has drastically backfired for the Malaysian government.
What India can learn from Malaysia is that businesses need to start early with the implementation process to be GST-ready. The Malaysian government faced strong resentment from the masses even after having a single tax slab structure and providing
17 months for GST preparedness. Unlike Malaysia, the GST model in India is more complex and, therefore, businesses need time to adapt to this new tax structure. Tax experts believe that the 10-month period given is not enough for the big sectors like electronics to adapt to the new GST regime.
Could the Malaysian experience be a warning for the Indian government to be prepared for potential economic upheavals? Or will everything fall into place and the Indian GST achieve its desired goals? We will have to wait and watch, and hope for the best.