GST Impact on Salaried Individuals
The NDA government credits its Goods and Services Tax (GST), alongside demonetisation, as two of its most pathbreaking reforms. While opinion on these undoubtedly seminal measures is divided, there is little doubt that their implementation by the government has been nothing short of disastrous and they have yet to benefit the public in the manner they were envisaged to.
As this article considers the impact on salaried individuals of this tax regime that encompasses the supply of all goods and services, right from the manufacturer to the end consumer, it is necessary to recall that this “one-nation-one-tax” was introduced on 1 July 2017 to replace the complex multiple indirect tax structure that had prevailed till then. Worryingly, GST largely metamorphosed into another version of a complex multiple indirect tax structure that still confuses and has proved to be vastly inflationary.
It is extraordinary that the tax is still being fine-tuned and repeatedly restructured when it had originally been conceived way back in 1999 and had been debated threadbare by the GST Council, comprising representatives from the Central and State governments, which had met as many as 18 times in the run-up to its introduction.
GST was meant to simplify taxation by unifying the entire country into a single market with one tax rate, but when introduced it was riddled by seven varied tax slabs as also numerous cess rates on luxury items and ‘sin goods’. It moreover has a binary levy through CGST (Central GST) and SGST (State GST). Arun Jaitley, who, as Finance Minister, had also been the chairman of the GST Council, had famously remarked, “We cannot have the same tax rate for both BMW and chappals.” He, however, did not clarify why he had previously pledged that the tax would be a unified one to be levied uniformly nationwide.
The GST regime has since been modified several times to today arch over 1,300 goods and 500 services. And while it has subsumed most indirect taxes such as VAT, service tax, octroi, luxury tax, special additional duty (SAD) and central sales tax levied by both the Centre and states, it has seemingly distilled all these into five tax slabs of 0, 5, 12, 18 and 28 per cent, besides applicable cess. Tax on gold has besides been kept at 3 per cent and on rough precious and semi-precious stones, a special rate of 0.25 per cent. Of all the items transacted in the country, 7 per cent are exempted from GST, while 14 per cent of the items attract a tax of 5 per cent, 17 per cent attract a tax of 12 per cent, 43 per cent attract a tax of 18 per cent and the balance 19 per cent of the items come under the highest slab of 28 per cent. The notable exemptions are petroleum products (including petrol, diesel, ATF and natural gas), alcohol and immoveable property.
In its recent biennial report called India Development Update, the World Bank points out that the multiple rates, high peak rate and numerous exemptions have made India’s GST one of the most complex in the world. It adds that the 28 per cent GST rate is the second highest – after Chile – among the 115 countries surveyed that have a GST (VAT) system. In Asia, India has the highest standard GST rate. The report nevertheless maintains that while teething problems persist on GST’s design and administration, its promulgation should be considered as the start of a process and not the end.
The Bank also suggests that a nuanced communications campaign be launched to convey the diverse aspects of GST amongst businesses, consumers and key intermediaries, such as tax practitioners, as well as amongst the tax administration itself and the political class.
The reach of GST is absolute, as it is levied on the manufacturer, wholesaler, retailer and consumer. It is, however, the consumer who bears the GST, the other three enabled to claim it back. As GST is structured on the destination principle, tax shifts from production to consumption. Imports are liable to both CGST and SGST. Revenue also accrues to the state in which the consumption takes place or is deemed to take place. While GST is applicable on all transactions of goods and services, both goods and services have differently taxable rates.
Salaried people particularly, who are often constrained to budget their everyday expenses, find GST a cross they have to bear. Their plight has perhaps been heeded by PricewaterhouseCoopers (PwC) that reports no clear evidence that the GST has reduced inflation. The business consultancy notes that while the Consumer Price Index (CPI), which was at a low of 2.4 per cent in July 2017 (at the time of GST’s introduction), rose to 5.2 per cent in December 2017, only to dip to 4.3 per cent in March 2018 and then move up again to 4.6 per cent in April 2018.
PwC adds that even where tax rates have been reduced from 28 to 18 per cent on a host of products to boost consumer demand and thereby drive the economy, industry has done little to pass on the tax benefits to end consumers that would have led to inflation being brought under control.
In a study on employer-employee transactions under GST, PwC indicates that GST is payable if the cash value of gifts provided to an employee during a financial year exceeds Rs50,000. Exempted from GST are perquisites that are part of the offer letter such as cash allowance to staff of up to Rs50,000, mobile handsets, long-service awards, employee welfare schemes, relocation benefits and temporary accommodation.
Though the term ‘gift’ has not been clarified under GST law, it is deemed to be a sum “made without consideration, is voluntary and is made occasionally”. GST disadvantages office-workers eligible for subsidised products, services or eatables as they have to pay higher rates for these items that are now brought under the tax net. These items include membership of fitness gyms and health clubs, pick-up and drop-off taxi services and even health insurance.
An employee cannot claim input tax credit on a cab facility as it is a related party transaction. But he or she will have no GST liability on any annual health check-up facility provided by the company since there is no underlying “supply” per se by the company. GST will also not apply if the caterer supplies food directly to employees and raises an invoice (subsidised) to the company, provided there is an agreement to this effect between the company and the caterer. GST will besides not be applicable to free housing for the employee if this benefit is listed among the terms of the contract between the employer and employee and is treated as cost-to-company (C2C).
These trends indicate that companies may be induced to restructure emoluments or human resource benefits of their employees in an effort to counter or circumvent the effects of GST. GST, after all, has a deep impact on reimbursements to employees on home rentals, telephone charges beyond a defined ceiling, medical premiums for extra coverage, health check-ups, and office transportation. The corporate sector has been particularly jolted by the recent ruling of the Authority of Advance Ruling (AAR) in Kerala that mandates the levy of GST on recovery of food expenses from employees for canteen services provided by the employer. Such a ruling may prod companies to stop charging for canteen services in an effort to conserve taxes and this, in turn, may have a fallout on salary packages as the employers may seek to avoid increasing the C2C for their staff.
In a separate ruling on GST law, the AAR in Karnataka opined that the employer-employee relationship exists only in the corporate office and not at other office units, even if these are part of the same legal entity. It ruled that the employee C2C at the corporate office should be considered while arriving at the value of goods or services provided by such offices to other locations.
The Integrated Goods and Services Tax Act, 2017, makes it clear that if goods used for business purposes are availed of by employees for private use, such usage will trigger a GST levy.
The Goods and Services Tax is changing the dynamics of the relationship between the salaried class and their employers and this will undoubtedly have a profound impact on the employment scenario of India.