BackHow favourable will GST be for Karnataka?
Though Karnataka tax authorities say they are better prepared for GST rollout than peers, the state could lose out its edge when it comes to attracting investments
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Bengaluru: The goods and services tax (GST) has headed into the final leg of discussions and deliberations of the proposed economic reform, with just over a month left for the actual roll out.
But the economic reform, touted to be one of the biggest since Independence, may not augur too well for Karnataka which, apart from its thriving information technology sector, has a large presence of small and medium enterprises that are likely to feel the burden, tax practitioners and small business owners said.
Though state government tax authorities said that they are better prepared for the roll out than many peers, the state could lose out its edge when it comes to attracting investments.
“Past promises to large industries—exemption or deferment of taxes—are being done away by GST which was started by tapering when VAT (value added tax) was introduced in 2005. This allows no leeway for Karnataka to attract investments except domestic skill (technical skills like ITI) about which precious little has been done by the governments in the past," a Bengaluru-based tax practitioner said, requesting not to be named.
The person cited above said that Karnataka may not have anything specific to offer to potential investors like exemptions or other incentives.
Karnataka, with a growth rate of 7% per annum, has attracted over $12 billion of cumulative foreign direct investment (FDI) since 2009, according to state government data.
The state will also forgo around 60% of the existing taxes, including entry tax, central service tax, VAT, entertainment tax, betting tax and luxury tax—totaling about Rs35,000 crore annually—as they will be subsumed by the GST.
Professional tax which earns about Rs1,100 crore for Karnataka, along with state excise, motor vehicles, stamps and registration, among others, will continue to remain out of the GST.
However, tax authorities in Karnataka, one of the more industrialised states, claim they are not worried by GST in terms of preparedness as it already has an existing online filing infrastructure and largely compliant business community, considerable number of trained tax practitioners and almost 73% migration from VAT to GST before the roll out, making the transition from multiple taxes to one nationwide tax smoother when compared to other states.
The Karnataka government has tried to mitigate estimated losses by removing VAT from liquor and replacing it with additional excise duty. The state declared 17 slabs of additional excise duty in its 2017-18 budget and hopes this step would help insulate its target of achieving Rs18,050 crore in 2017-18.
The state government’s decision to not opt for a GST Network (GSTN) and depend on its own information technology infrastructure may not work in the state’s favour, tax practitioners say as the volume of data will be more than what Karnataka has handled so far.
Even small businesses said their concerns have gone unrepresented.
Shivananda Shenoy, chief executive of Naman Technology, a Bengaluru-based company that manufactures and supplies a range of industrial polyurethane machines and equipment, said there will be added pressure of filing returns three times a month as mandated by the new reform, when compared to once earlier, spiking accountancy costs as they will have to hire professional agencies to carry out the tedious task.
The tax practitioner cited above added that the GST will be a disincentive for small and medium business-to-business company as their threshold is below ₹ 50 lakh, making them vulnerable to either “scale up or wrap up" their enterprise.
“GST discourages micro and small enterprises because the Composition Tax system is not available to anyone who makes an inter-state supply. Karnataka has a large base on machine shops with ITI trained youth. A large section of this industry will have to move-up or move-out," the tax practitioner cited above said.
Rutvik Pandey, commissioner, commercial tax, Karnataka, said the state will gain from its higher compliance levels.
He said very few sections like pharmacists (around 4,000) resisted online filing of returns in the earlier set-up but now will have no other choice.
Karnataka provided optional online filing of returns in 2009, but made it compulsory when the numbers of online filing of returns touched 90%.
However, some industries like e-commerce will benefit as all existing tax issues it faced in Karnataka like commercial tax will be virtually wiped out with the GST, Pandey said. But the state will not reap the benefits like it used to earlier by keeping and growing the e-commerce eco-system. “Its like this; we have invested into building infrastructure and eco systems and now another state will enjoy the benefits," the person cited above said.
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