Slow tax growth reflects companies’ GST troubles

The exchequer got 19.1 per cent more from direct taxes in the first four months of the current financial year (FY18), but the amount paid by companies reflected their struggle with the goods and services tax (GST).

The total direct taxes after refunds grew 19.1 per cent at Rs 1.9 lakh crore between April and June this year. Last year, during this period, it had risen 24 per cent.

This is a minor deceleration, but when compared in terms of percentage of Budget Estimates (BE), the figures this time are rosier.

 

The collections constituted 19.5 per cent of the BE of direct taxes for FY18. In FY17, they had accounted for 18.8 per cent of the BE.

What is startling, however, is the slow tax collection from corporate entities. This year, this grew by 7.2 per cent in the April-July period, sharply lower than the 11.7 per cent in the same period last year.

Experts said the slowdown could be attributed to adjustments leading to destocking and the offering of discounts by companies as the government ushered in the new indirect taxation system on July 1.

Aditi Nayar, principal economist with Icra, said gross corporation tax collections recorded slower growth, reflecting factors such as subdued volume growth in various sectors as well as the discounts offered to reduce inventories ahead of the transition to the GST.

Available indicators — such as the sequential decline in growth in non-oil exports, core sector output and automobile production — suggest that industrial growth was subdued in June.

chart “Given the unfavourable base effect and inventory trimming prior to the onset of the GST, we expect a 1 per cent contraction in the Index of Industrial Production in June. Subsequently, the Purchasing Managers’ Index (PMI) for manufacturing as well as services indicates a contraction in July,” she added.

While the services sector PMI plunged to a four-year low in July to 45.9 points from 53.1 in June, manufacturing PMI contracted to an eight-year low of 47.9 from 50.9 points.

Madan Sabnavis, chief economist with Care Ratings, attributed the slowing growth in corporation tax collections to de-stocking and discounts offered by companies.

He, however, said this would be more than compensated for by rebuilding of inventories after initial hiccups due to the GST, from the third and fourth quarters. Nayar said higher prices of some commodities in April-July, compared to the same period in 2016, might be squeezing the margins of companies in some sectors. For instance, many businesses would be experiencing higher fuel costs, following the 8 per cent rise in the average crude oil prices. Also, the margins of some exporters might be getting squeezed following the rupee appreciation relative to the dollar, she added. Personal income tax collections, including the securities transaction tax (STT), were up 17.5 per cent. Growth was 31.47 per cent in the same period in FY17.

After adjusting for refunds, net growth in corporate tax collections stood at 23.2 per cent in the period under consideration. Similarly, personal income tax collections rose 15.7 per cent. Growth was 46.55 per cent in April-July of FY17. The phenomenal growth of personal income tax collections was because of a change in the rules of advance payments in FY17. Refunds to the tune of Rs 61,290 crore were issued in April-July against Rs 64,181 crore in the corresponding period of the previous financial year.

Slow tax growth reflects companies’ GST troubles

GST pulls down July services PMI to 45.9, lowest level since Sept 2013

The introduction of the Goods and Service Tax (GST) has pushed down activity in the services sector to a nearly four-year low in July even as manufacturing activity reels at an eight-and-a half-year low.

The widely-tracked Nikkei Purchasing Managers’ Index (PMI) on Thursday showed that PMI for the dominating sector of the Indian economy plunged to 45.9, its lowest level since September 2013. At an eight-month high, PMI had been 53.1 in the previous month of June.

ALSO READ: India’s June services PMI grows to 8-month high on new orders

The 50-point mark separates expansion from contraction.

 

Output and new work declined for the first time since January, with rates of reduction the quickest since September 2013. This had an adverse effect on the labour market, with employment contracting over the month. Likewise, factory orders decreased in July, and at the quickest pace since February 2009.

According to survey participants, confusion over GST was mentioned by services firms as having caused a contraction in new work, leading to lower activity. This is in stark contrast to improving demand conditions and marketing efforts leading to a higher share of new work over the past four months.

“The downturn in services follows similar weakness in manufacturing, to make a double-whammy of disappointing news at the start of the second quarter of the 2017/2018 financial year. Private sector activity dipped for the first time since the demonetisation shock and to the greatest extent since early 2009, mirroring the sales trend,” Pollyanna De Lima, principal economist at IHS Markit — which compiles the data — and author of the report, said.

On the price front, input cost inflation eased from June, while charges were raised to the greatest extent since early-2013. This was a result of higher tax rates and salaries awarded to staff. Nonetheless, the rate of inflation softened since June and was well below its long-run average, the survey showed.

Those companies that reported higher selling prices again quoted the GST. However, producers offered discounts amid efforts to stimulate demand. The drop in factory charges was the first in 17 months.

Released two days back, similar data for the manufacturing sector had shown manufacturing PMI contracting to 47.9 points in July, down from 50.9 in June. Factory activities had last fallen in December 2016 after demonetisation. Implementation of the GST led to outputs, new orders, and purchasing activity seeing their steepest fall since early-2009, De Lima said.

ALSO READ: GST pulls down manufacturing PMI to over 8-year low

Consequently, companies purchased fewer quantities of inputs for use in the production process, leading to an overall decline in holdings of raw materials and semi-finished items, data showed.

As a result of all this, the Nikkei India Composite PMI Output Index, which maps both the manufacturing and services sectors, fell sharply from the eight-month high of 52.7 in June to 46.0 in July.

GST pulls down July services PMI to 45.9, lowest level since Sept 2013

Relief! No GST on sale of old gold jewellery, cars by individuals

The Revenue Department on Thursday clarified that sale of old jewellery as well as old vehicles by individuals will not attract any GST as the sale is not for furthering any business.

Clarifying on Revenue Secretary Hasmukh Adhia’s comments yesterday, the department issued a press statement saying it was informed at GST Master Class yesterday that “purchase of old gold jewellery by a jeweller from a consumer will be subject to GST at the rate of 3 per cent under reverse charge mechanism in terms of the provisions contained in Section 9(4) of the Central GST Act, 2017.”

 

It then went on to state that the said section has to be read in conjunction with another section and “even though the sale of old gold by an individual is for a consideration, it cannot be said to be in the course or furtherance of his business (as selling old gold jewellery is not the business of the said individual), and hence does not qualify to be a supply per se.”

“Accordingly, the sale of old jewellery by an individual to a jeweller will not attract the provisions of Section 9(4) and jeweller will not be liable to pay tax under reverse charge mechanism (RCM) on such purchases,” it said.

Revenue department officials said the same principal will apply on sale of old cars or two-wheelers and no GST will be payable even though the supply would be for a consideration.

The statement said that Section 9(4) of the said Act mandates that tax on supply of taxable goods (gold in this case) by an unregistered supplier (an individual in this case) to a registered person (the jeweller in this case) will be paid by the registered person (the jeweller in this case) under reverse charge mechanism.

But since the sale is not in consideration for the furtherance of business no tax will apply.

It however said the tax would apply if an unregistered business sells gold ornaments to registered supplier.

“However, if an unregistered supplier of gold ornaments sells it to registered supplier, the tax under RCM will apply,” it added.

A supplier is defined as the one who buys or sells in furtherance of his business.

Relief! No GST on sale of old gold jewellery, cars by individuals

Gifts up to Rs 50,000 by employer, free club membership exempt under GST

The government on Monday clarified that gifts worth up to Rs 50,000 by an employer to its employees as also free membership of clubs, health and fitness centres will not attract the Goods and Services Tax (GST).

Also, the services by an employee to the employer in the course of or in relation to his employment is outside the scope of the new indirect tax regime, it said.

Any club, health and fitness centre membership provided by an employer to its all employees free of charge will not be subject to the GST.

 

The same would hold true for free housing as part of cost-to-company (C2C) package.

Commenting on reports of gifts and perquisites supplied by companies to their employees being taxed under GST, the finance ministry in a statement said gifts up to a value of Rs 50,000 in a year by an employer to his employee are outside the ambit of GST.

“However, gifts of value more than Rs 50,000 made without consideration are subject to the GST, when made in the course or furtherance of business,” the statement said.

While the GST law does not define gifts, the ministry said for tax purposes gift is something that is made without consideration, is voluntary in nature and is made occasionally.

“It cannot be demanded as a matter of right by the employee and the employee cannot move a court of law for obtaining a gift,” it said.

On the issue of taxation of perquisites, the ministry said the services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods or supply of services).

“It follows therefrom that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST,” it said.

Further, the Input Tax Credit (ITC) Scheme under GST does not allow ITC of membership of a club, health and fitness centre.

“It follows, therefore, that if such services are provided free of charge to all the employees by the employer then the same will not be subjected to GST, provided appropriate GST was paid when procured by the employer.

“The same would hold true for free housing to the employees, when the same is provided in terms of the contract between the employer and employee and is part and parcel of the cost-to-company (C2C),” the statement added.

Gifts up to Rs 50,000 by employer, free club membership exempt under GST

Now, pay GST if you earn over Rs 20 lakh per year as rent

Rental income from residential property has been exempt from GST but any earning over Rs 20 lakh annually from renting or leasing for commercial purposes would attract the levy.

Revenue Secretary Hasmukh Adhia said that if the house property is rent out for shop or office purpose, no Goods and Service Tax (GST) will be levied up to Rs 20 lakh.

 

“Rental income received from residential house is exempt. But if you have given your unit to commercial enterprise, then it is taxable if you are getting more than Rs 20 lakh as rent,” Adhia said at the GST Master Class.

The taxpayer earning more than the exempted threshold will have to register with the GST Network and pay taxes.

GSTN Chief Executive Prakash Kumar said that as many as 69.32 lakh registered excise, service tax and VAT payers have migrated to the GSTN portal. There are over 80 lakh such assessees in the earlier indirect taxation regime.

Out of the 69.32 lakh, as many as 38.51 lakh have completed the entire registration process and registration certicate is being issued to them.

The remaining 30.8 lakh taxpayers are being sent SMS and emails by GSTN so that they complete the registration process by giving the details of the business like main place of business, additional place of business, promoters details.

Besides, over 4.5 lakh new assessees have registered on the GSTN portal since June 25.

Adhia further said that the facility to amend the details of businesses provided to the GSTN portal at the time of registration will open on July 17. Also, registration for GST practioners will open on the same day.

Besides, cancellation of registration can be done online.

Now, pay GST if you earn over Rs 20 lakh per year as rent

File taxes online: GST launch spawns tech cottage industry for compliance

Goods and Services Tax (GST), India’s biggest tax reform since independence, will unify a $2 trillion economy into a single market – and demand massive changes for small businesses that will have to go online to file their taxes.

Major software and service players, IT companies and tax advisers are teaming up to market GST compliance products to firms large and small.

But the new requirements have also led to the emergence of boutique players offering to help firms connect to the new GST Network, the vast IT back-end system that will crunch up to 5 billion invoices a month.

 

Rahul Garg, a former Google executive, is positioning his e-commerce firm Moglix for the GST’s launch on July 1 when, at a stroke, at least 6 million companies will have to start filing taxes returns online.

Moglix, founded in August 2015 with $5.9 million in venture capital, is a marketplace for industrial equipment that links 200 large manufacturers and 40,000 small- and medium-sized enterprises, or SMEs. Garg will offer a GST compliance product to this ecosystem for free but also sees a wider opportunity.

“We’ll put it out as a commercial model that will be a no-brainer for all SMEs,” said Garg.

While a public-private partnership will run the GST Network, the design of the tax is creating a new class of businesses that enables firms to connect to this network through their secure data pipes.

Already, 34 of these so-called GST Service Providers, or GSPs, have been accredited. Another 160 have applied for accreditation – including Moglix.

The other key element of the GST’s architecture is the Application Service Provider, or ASP, a software interface that ensures invoices are properly formatted and reconciled with those of counterparties. In a bid to reach smaller businesses, some companies are marketing “bundled” software that includes both ASP and GSP solutions.

GST CHALLENGE

India’s GST is the world’s most complex, with four separate tax rates for different classes of goods and services: 5, 12, 18 and 28 percent. Firms must file three tax returns a month. For those operating across state lines, the compliance burden can quickly multiply.

Major IT companies like SAP (SAPG.DE), Oracle (ORCL.N) or Microsoft (MSFT.O) are providing consulting and software “patches” that enable their bigger clients to manage the transition to the GST.

Microsoft has teamed up with tax firm EY to offer DigiGST, a cloud-based solution, while HP Inc (HPQ.N) has linked with KPMG to sell a GST laptop with two years’ support for a flat fee of 33,990 rupees ($530).

GST Network head Prakash Kumar, for his part, wants many service providers to step up so that compliance costs stay low and to avoid market monopolies.

“The market has to take care,” he told a recent GST seminar. “Let’s get out of this ‘Licence Raj’ situation.”

SAP, which reckons that its systems will handle 40 percent of all invoices uploaded to the GST Network, is working with larger clients to get their sales, procurement, manufacturing and supply chain GST-ready and compliant.

SAP also offers products for smaller firms but says it is also “GSP agnostic”, meaning it is willing to connect with new market entrants, like Moglix.

Neeraj Athalye, head of SAP’s GST adoption drive, sees many smaller firms that adopt basic GST packages graduating, eventually, to SAP’s premium range.

“Although they have a competing solution, the reason we have decided to go together is because, jointly, we have a more compelling reason to work together,” said Athalye.

File taxes online: GST launch spawns tech cottage industry for compliance

GST coming July 1 despite calls for delay: Revenue Secretary Hasmukh Adhia

India will launch goods and services tax (GST) as planned on July 1 to boost economic growth and state revenues, a finance ministry official said on Wednesday, despite calls from some businesses for a delay.

The central and state governments were ready to roll out GST, said Revenue Secretary Hasmukh Adhia, adding that firms should not count on a postponement of a tax more than a decade in the making.

India’s most ambitious tax reform since independence would transform its $2 trillion economy and market of 1.3 billion people into a single economic zone with common indirect taxes — something that neither the European Union nor the United States can boast.
And, although the GST is designed to be revenue neutral, Adhia expects it to improve compliance by businesses as well as draw their owners into the income tax net, thus boosting overall tax revenues.

“The entire parallel economy will vanish,” Adhia told Reuters in an interview.

“The benefit of avoiding tax which was accruing to the entrepreneur or to the trader – that will now come to the government. That is why we expect revenue buoyancy to go up.”

CHECKPOSTS TO GO

Tax checkpoints at state borders would be dismantled, Adhia said, adding that a GST panel was in talks with other departments to remove other posts that could hinder the movement of goods. This would “take some time”.

Work is also complete on setting up the GST Network, an IT (information technology) system that will match invoices, making it possible for companies to claim input credits that will soften the impact of initially high GST rates.

There will be four tax ‘slabs’ — 5, 12, 18 and 28 per cent — with rates on individual items broadly in line with levies that now apply. Parliament passed laws to implement GST in the session now ending.

“Our fundamental aim is to keep the rate closer to the existing one,” said Adhia, one of Prime Minister Narendra Modi’s most trusted bureaucrats.

Other countries that have launched GSTs have faced a dip in growth and revenues due to initial teething troubles, but Adhia was confident that indirect revenues would exceed a target of 9-10 per cent in the financial year (FY) to March 2018.

With company owners using their personal tax numbers to comply with GST, Adhia expects income tax dodgers to have to come clean. Only around 3 per cent of people in India pay income tax.

“It will become harder for people to stay informal,” he said. “They will have to come into the tax net, and that, in turn, will give us some benefit in direct taxes also.”

Looking further out, expected revenue buoyancy would leave room to lower GST rates and simplify the tax structure.

“The 18 per cent or 28 per cent rates certainly need a relook, but right now we can’t afford it,” said Adhia. “Once our revenues are more steady, there is a reason for consumers also to benefit from GST. And that they will.”

GST coming July 1 despite calls for delay: Revenue Secretary Hasmukh Adhia