GST… The Much Awaited Reform in India

GST: GOODS AND SERVICES TAX

The tax structure in India is complex at present. As we know,  there are various types of taxes like sales tax, service tax and duties such as import duties, excise duties etc.

For that matter; we even land up paying entertainment tax for watching a movie.

Currently, some of the taxes are levied by Central Government and some by State Government. These are based on different activities undertaken.

Taking a cue from international best tax practices, a thought process was started for a unified system of taxation across the country.

The Constitutional Amendment Bill was passed in the Rajya Sabha in August’2016 to introduce a country-wide goods and services tax (GST), shifting the focus on the tax rates.

The financial express indicates that Goods and Services Tax (in short 'GST') is by far one of the most awaited tax reforms in the country. 

Though GST is a tax reform, it is going to impact every sphere of business activity, be it procurement, supply chain; IT, logistics, pricing, margins, working capital, etc. as a number of business decisions taken based on the current tax structure may no longer be relevant in the new GST regime.

What is GST?

It has been long pending issue to streamline all the different types of indirect taxes and implement a “single taxation” system. This system is called as GST (GST is the abbreviated form of Goods & Services Tax). The main expectation from this system is to abolish all indirect taxes and only GST would be levied. As the name suggests, the GST will be levied both on Goods and Services.

The current central government is very determined to implement GST Constitutional Amendment Bill.

GST is a tax that we need to pay on supply of goods & services. Any person, who is providing or supplying goods and services, is liable to charge GST.

How will it help consumers?

Today consumers have no idea about the extent of taxes they pay on goods. If you get a bill after buying merchandise which gives the extent of VAT you have paid, it is an understatement of the actual tax you have paid. Remember, well before merchandise reached the retail outlet, the central government has collected excise duty. The extent of excise duty is not mentioned in the bill. Therefore, today it is reasonable to assume we pay well over 20% tax for most merchandise we buy.

In GST, consumers should benefit in two ways.

First, all taxes will be collected at the point of consumption. It means that if a dress is taxed at 18%, it will include both central government’s taxes and state government’s taxes. Transparency in taxation should deter governments from indiscriminately increasing taxes as there is bound to be public backlash.

Second, once barriers between states are removed, we as consumers will not end up paying “tax on tax” which is what happens when goods move across state borders.

How is GST applied?

GST is a consumption based tax/levy. It is based on the “Destination principle.” GST is applied on goods and services at the place where final/actual consumption happens.

The GST is an indirect tax which means that the tax is passed on till the last stage wherein it is the customer of the goods and services who bears the tax. Streamlining of the multiple taxes the final cost to the customer will come out to be lower on the elimination of double charging in the system.

The current tax structure does not allow a business person to take tax credits. There are lot of chances that double taxation takes place at every step of supply chain. This may set to change with the implementation of GST.

Indian Government is opting for Dual System GST. This system will have two components which will be known as

• Central Goods and Service Tax (CGST) and
• State Goods and Service Tax (SGST).

The current taxes like Excise duties, service tax, custom duty etc. will be merged under CGST. The taxes like sales tax, entertainment tax, VAT and other state taxes will be included in SGST.

So, how is GST Levied? GST will be levied on the place of consumption of Goods and services. It can be levied on:

• Intra-state supply and consumption of goods & services
• Inter-state movement of goods
• Import of Goods & Services

What is the applicable GST rate?

The rate (percentage) of GST is not yet decided.  As mentioned in the above table, there might be CGST, SGST and Integrated GST rates. It is also widely believed that there will be 2 or 3 rates based on the importance of goods. Like, the rates can be lower for essential goods and could be high for precious/luxury items.

Benefits of GST Bill implementation

• The tax structure will be made lean and simple.
• The entire Indian market will be a unified market which may translate into lower business costs.
• In the long run, the lower tax burden could translate into lower prices on goods for consumers.
• The Suppliers, manufacturers, wholesalers and retailers are able to recover GST incurred on input costs as tax credits. This reduces the cost of doing business, thus enabling fairer prices for consumers.
• It can bring more transparency and better compliance.
• Number of departments (tax departments) will reduce which in turn may lead to less corruption.
• More business entities will come under the tax system thus widening the tax base. This may lead to better and more tax revenue collections.
• Companies which are under unorganized sector will come under tax regime.

One of the most important benefits of implementing the GST is that it would integrate the economy and provide for a common national market

 

 

Experts Speak:

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1.   -- GST will bring in much-needed transparency and higher investments in the coming years: CII director general Chandrajit Banerjee

2.     -- It will enhance production possibilities in manufacturing sector and expand the growth trajectory of services sector: PHD Chamber of Commerce president Mahesh Gupta

 

 

Although we now have a fair idea of how it’s going to be; nonetheless we shall be able to experience the actual impact of the taxes only once implemented as various sources have tried their best to interpret this tax based on the available information.

- MRCC Corporate Communication Team