What is GST (Goods and Services Tax)?
The biggest indirect tax reform since 1947 – the Goods and Services Tax Bill or the more famously known GST Bill, is a single tax on the supply of goods and services, right from the manufacturer to the consumer.
This tax would be charged and collected at every stage of sale or purchase of goods or services, based on the input tax credit method, which makes GST essentially a tax only on value addition at each stage. And the final consumer will only bear the GST charged by the last dealer in the chain, along with all the setoff benefits at all the previous stages.
It also allows GST-registered businesses to claim tax credit to the value of GST they paid as well.
In other words, GST is one [uniform] indirect tax that combines all other indirect Central level and State level taxes into one, making India one unified common market.
It is a comprehensive indirect tax method on manufacture, sale and consumption of goods and services throughout India, to replace the taxes that are levied by the central and state governments. The nature of GST itself is that it taxes only the final customer.
It is officially known as The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, that proposes a national Value added Tax. It was published on 19.12.2014, introduced by Arun Jaitley, passed by Lok Sabha (8th August 2016) and Rajya Sabha (3rd August 2016) and will be implemented in India from the 1st of April 2017.
This bill will come directly under the Central government, will be governed by the GST act and with the help of certain procedures they would also be providing feasible conditions for the taxpayer.
The central government has also assured states of compensation for any revenue losses incurred by them from the date of introduction of GST for a period of five years.
The Structure and Features…
Keeping in mind the federal structure of India, there are going to be two components of GST – Central GST (CGST) and State GST (SGST). And in cases of Interstate transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST), which would roughly be equal to CGST plus SGST. Either ways, no cross utilization of credit would be permitted.
At the Central level: Central Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, and Special Additional Duty of Customs, will be subsumed. While, at the State level: Subsuming of State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, and Taxes on lottery, betting and gambling, shall be subsumed.
The GST Council will consist of the Union Finance Minister (as the Chairman) and MoS in charge of Revenue; Minister in charge of Finance or Taxation, or any other Minister, nominated by each state.
Besides these; the other salient features of the Bill include:
- Both – Parliament and the State Legislatures will have simultaneous power to make laws governing the tax
- Most of the Central and State indirect taxes will be subsumed into the GST
- Dispensing with the concept of ‘declared goods of special importance’ under the Constitution
- GST to be levied on all goods and services, except alcoholic liquor for human consumption. Petroleum and petroleum products shall be subject to the levy of GST on a later date notified on the recommendation of the GST Council
- The GST structure would follow the destination principle, wherein imports would be subject to GST, while exports would be zero-rated. And in the case of inter-State transactions, the State tax would apply in the State of destination as opposed to that of origin.
- Compensation to the States for loss of revenue for a period of five years that could arise on account of implementation of the tax
- Creation of GST Council to examine issues relating to the tax. This council would also be making recommendations to the Union and the States on several parameters including: rates, taxes, cesses and surcharges to be subsumed, exemption list and threshold limits, Model GST laws, etc.
GST Bill Simplified!!
TAKE FOR EXAMPLE ––
A manufacturer of shirts. He buys raw material or inputs worth Rs 100. This amount includes a tax of Rs 10.
He manufactures a shirt using those raw materials, and during the process he adds value, of say, Rs 30 to the materials he started out with, making the gross value of his good to be (Rs 100 + Rs 30) Rs 130.
So at a tax rate of 10%, the tax on output (shirt) will then be Rs 13.
But with the new GST, he can set off this (Rs 13) tax against the tax he has already paid on raw material/inputs (Rs 10), and pay the remaining Rs 3 as the effective GST.
The good (shirt) is then purchased from the manufacturer by the wholesaler at Rs 130, and his personal value or his margin (Rs 20) is then added to the total, making the selling price (Rs 130 + Rs 20) Rs 150.
And at a tax rate of 10%, the tax on this amount will be Rs 15.
But again with the new GST, he can set off this (Rs 15) tax, against the tax that he already paid (of Rs 13) when he purchased the good from the manufacturer, and only pay the remaining Rs 2 (Rs 15-13) as the effective GST.
Finally, a retailer buys the shirt from the wholesaler, and adds a Rs 10 value, or margin, on the purchase price of 150, making it (150 + 10) Rs 160. The tax on this amount would be Rs 16.
But again with the new GST, he can set off this tax, against the (Rs 15) tax that he already paid during his purchase, and only pay the remaining Rs 1 (16-15) as the effective GST.
So the total GST on the entire value chain will be (Rs 10 + 3 +2 + 1) Rs 16.
But if you look at it from the other end –– in a full non-GST system, there is a cascading burden of “tax on tax”, as there are no set-offs for taxes paid in the chain.
Which means – a manufacturer will end up selling the good Rs 143 (130 + 13), the wholesaler will end up quoting Rs 179.30, and the retailer will sell the good at Rs 208.23.
So the total tax on the entire value chain will be (Rs 10 + 13 + 16.30 + 18.93) Rs 58.23. This of course, does not include the other taxes!
Effects & Benefits of GST bill
GST is a worldwide accepted system that is now being seen to be as a more efficient tax system which is neutral in its application and distributionally attractive.
Some of the benefits of the bill include: -
The assumed rate of GST (16%-17%) is much lesser when compared with the current rate of taxation of around 35%-40%
The benefits of GST are:
- The prices of products will lower after the introduction of the GST, which would in turn increase the product demand.
- The concept of warehouse will change when GST is introduced.
- Currently, a warehouse is required for each state. If the dealer and the warehouse are in different states, then the dealer needs to pay a Central Sales Tax of about 2%.This increases the price of the commodity, and forces companies to setup warehouses in each state.
- With the implementation of GST, the CST gets eliminated, and the number of warehouses can also be reduced.
- GST is an uncomplicated tax pattern, unlike the current tax pattern which involves the calculation as well as the tabulation of various indirect taxes.
- There won’t be any GST charged on the Goods with the exempt category, 1% on bullion and a reduced rate for the essential item.
- Elimination of mostly all other Central and State taxes including: octroi, CENVAT, central sales tax, state sales tax, entry tax, license fees, turnover tax, etc… and their cascading effects.
- Wider tax base, necessary for lowering the tax rates and eliminating classification disputes.
- Explanation of tax structure and Simplification of compliance procedures, and Reduction in duplication and compliance costs
- Automation of compliance procedures to reduce errors and increase efficiency
- Dis-incentivisation of Tax Evasion: If you don’t pay tax on what you sell, you don’t get credit for taxes on your purchases. And since you will be buying only from those who have already paid taxes, the result would be the unearthing of a lot of underground transactions.
- Lower tax rates: Right now, we have more tax on fewer items; with GST, there will be less tax on more items. This will follow from GST covering all goods and services.
Other than these, although GST is deemed to benefit all businesses in India, but small businesses can rejoice for the following reasons:
- Ease of starting business
- Higher exemptions to new businesses
- Simple taxation
- Breathing space for businesses in both sales and services
- Reduction in logistics cost and time
- Reduction in the cost of doing business
This goods and services tax will undoubtedly give India a much needed facelift on the taxation front.
Of course, the suspense over the rate at which GST will be levied remains, but that shouldn’t be much of a trouble, as analysts and economists are predicting it to be somewhere around 17%-18%.
Goes without saying – since the bill has just been passed in the current session, it will take a good few years, to completely roll out GST and see its effects.
Therefore, it will be premature to conclude how this reform will impact the Indian economy overall, in the near term.
Having said that – the rollout of the bill will certainly have several immediate effects! There definitely will be some immediate winners and losers
Let’s take a look: -
- Automobiles:A clear winner from implementation of GST, which is expected to lead to lower prices for the end user and thus boost demand, and companies including Maruti Suzuki India Limited, Mahindra and Mahindra Limited, etc will make the most of it.
- Multiplexes:Multiplexes pay around 25% of their average revenues per user as taxes (average ticket price + F&B per head), in three broad areas of — Entertainment tax on net ticket sales, Value-added tax (VAT) on F&B, and Service tax on input costs for which there is no set-off available.
- FMCG: If the GST rate is less than or equal to 18%, then it should be positive for most FMCG companies. Additionally, there will be gains from warehouse rationalization and a better competitive position. Although, the results will be seen over the period of time.
- Logistics:The logistics industry is expected to be benefited in several ways. Not only will it get a boost and reduced transit time, but further, interstate trade barriers would also reduce resulting in better interstate commerce as well. Additionally, Consolidation of warehousing facilities will add onn to the benefits too.
- Cement: The cement companies currently pay far more than the anticipated 18% GST rate. These benefits are being expected to be eventually passed on to the consumers as demand continues to remain weak.
- Retail:Last, but not the least, the retail industry will benefit from the opportunity to set off input tax credit on rent is expected to aid margin expansion.
Other than these – the price of consumer durables like air conditioners, refrigerators will see a fall which will begin with the logistic and supply chain inventory side, then move on to the overall pricing.
As mentioned earlier, services-related sectors are expected to be the losers. They might have to shell out higher taxes than what they are currently paying.
- Telecom: Even a moderate rise in tax outgo could hit the demand and revenues, but the impact would be marginal. Users will have to pay more for their mobile bills. This will further add on to their existing bigger problems of slowing Data volumes and the launch of Reliance Jio Infocomm Limited.
- Consumer staples and discretionary: Many consumer staples currently have low indirect tax, and with the launch of GST will create a negative impact for companies in food processing, bakery, edible oil, dairy segments and personal care items. Quick service restaurants may face the heat too.