By Parnika Jhunjhunwala
Services which constitute around 58% of the Indian Gross Domestic Product (GDP) saw a subdued growth in August 2017, rising to 47.5 from a five-year low of 45.9 in July, the Nikkei India Services said. The reason for the slump was the new, incoming work decreased in tandem coupled with weak demand, competitive conditions and the introduction of the new tax system.
Impact of GST on different sectors
The hardest hit service sector due to the roll-out of GST is the e-Commerce sector. The government has not specified any minimum threshold for this sector, unlike others. All businesses carrying out e-commerce activities have to get registered under GST irrespective of their turnover. The new tax regime proposes a tax collection at source (TCS) mechanism, wherein the marketplace operators will deduct taxes as GST liability of the seller and deposit it with the government. Later, the seller will have to file monthly returns to claim the credit of TCS. This process will impact the liquidity and will increase administrative costs, especially for the operators, as it will increase the compliance burden. Although the current rate of TCS has a 1% cap, there will be an increase in the documentation workload for the e-Commerce firms.
Insurance sector
The insurance sector also faces a bouncy ride ahead. The GST rates have increased from 15% to 18%. The hike will result in increased premiums. The increased tax liability will pass onto the consumers. However, it?s not all rosy for the insurers. They will face higher compliance and administrative costs. Bank branches giving services to each other will be taxable under GST (they can claim input tax credit later), but this will increase paperwork and operating costs. With so many digital plans and financial inclusion plans in their nascent stage, the government should be reducing the taxes on the insurance and banking sector to widen financial accessibility.
Hospitality sector and tourism
Tourism and hospitality sector which is already reeling under demonetisation and liquor ban on highways is further hit by the rollout of GST. Under GST, five-star hotels will have a tax rate of 28%, while those with a liquor license will be charged 18%. Though the industry can claim full Input Tax credit on their inputs, the major inputs like alcohol and electricity are out of the purview of the GST net. Thus, the hotel industry would not be able to avail the input credit on the two items which will have a negative impact on this sector. Apart from that, comparing India to its neighbours such as Japan and Singapore reveals that they have very low tax rates for their hospitality sector (8% and 7% respectively). Due to this, India, despite being a global tourism spot, loses out on tourists due to such high taxes.
Entertainment sector
The entertainment sector stands with a mixed response, depending on the state they are in. Initially, the tax levied ranged from 0% to 110%, which has now been fixed to 28%. Depending on the previous tax rate in different states, GST can be better or worse for the sector. The owners can avail ITC on the services component of activities like catering, renting of premises for movie halls, security costs which were not available under the pre-GST regime, thus the owners stand to benefit.
IT sector
The IT sector will attract 18% on software services provided by software companies. There is a race for all fin-tech companies to develop a GST software, thus opening a huge market for software pan-India. IT industry will definitely benefit from GST, thanks to the immense boost in the sale of the software. Availability of ITC will bring down the operating costs and thus, it will increase the overall profitability of the IT sector.
Health sector
A positive effect is expected, particularly in the healthcare and the diagnostic sector, given that it has been exempted from GST. Due to the exemption, ITC is not available for healthcare services provider. The increase in the input tax cost will lead to a rise in the operational costs. The GST rollout is not likely to adversely affect the diagnostics industry. With the implementation of GST, medical tourism is also projected to grow manifold.
What can the government do?
In hindsight, the government policies and programmes which have already been implemented must be better executed. Initiatives like Start-up India, Digital India and Skill-India push the need for better transport, power, connectivity and other infrastructure which is likely to boost the service sector as well. With its campaign of Digital India, the government must take steps to increase access to easy finance, ensuring last mile connectivity. The recent push for promoting digital cashless economy, with schemes like Jan Dhan Yojana, promote better banking services by banks.
The government should consider incorporating E-commerce firms into the composition scheme in some manner. In this age of digitisation, the government should be opening up avenues for the e-Commerce firms to expand and encourage their activities and not the opposite, which GST is doing for this sector.
The other initiative the government should take is improving quality of human capital. Boosting education and skill levels is necessary for the service sector to grow efficiently. The government should also invest?in skill training and vocational training programmes. The present curriculum exposes students to theoretical knowledge only and to improve the quality of the service sector, vocational training is the need of the hour. The government has also liberalised FDI to import better technological, defence and other services.
As far as worries regarding GST on specific sectors are concerned, it has been only two and a half months since the rollout of GST. As in the textile sector, re-negotiations led to re-evaluation of the tax rate, bringing it down from 18% to 5%. We can wait and analyse the impact of GST on the other sectors and try to re-negotiate the rates if need be. Till then, the impact of GST on the services sector is mixed and the government must focus on executing the existing policies with greater efficiency.
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