What is Goods and Services Tax? Rules and Benefits of GST

GST means Good and Services Tax. GST has held center stage for last 6 months and it has been among one of the most burning economic issues in our country nowadays. Industry and corporate leaders have always been in the favor to implement this law as soon as possible but a political deadlock is continued in the parliament for the last 3 sessions.

BJP doesn’t have the necessary two-third majority in Upper house of parliament i. e. Rajya Sabha  to get this legislation passed. On the other hand, the main opposition party Congress has maintained its stand of opposing this bill in the current state.

Now, a question would definitely be buzzing in your mind, That  is, If this bill is so crucial for our economic development then why is congress not supporting GST bill?  How is this bill going to impact your life? How is it going to lead to economic integration? What would be the rules of GST? How will GST benefit to us?

We’ll throw light on all these aspects, but let’s first understand in detail that What is GST and why is government putting lot of efforts to bring this law into existence.

What is GST?

GST is an indirect tax which would be levied on the sale of goods and services. Currently, in our country, there are multiple taxes and GST will replace all the indirect taxes.

Let me explain you through a very simple example. In the present system, suppose you buy a packet of biscuit for Rs 25, it includes taxes like Excise Tax, VAT,  CST and Customs Duty as well on imported raw material at various stages in the supply chain.

Likewise, if you go to any restaurant for dinner then you have to pay VAT as well as service tax on the final bill. It’s charged separately from you usually on the services.

Whereas in the case of products, the manufacturer designs and structure the taxes in such a way that you just have to pay MRP i. e Maximum Retail Price. But do not forget that you pay all the above-mentioned tax.

GST will replace all these taxes. GST will certainly have an overall positive impact on the economy but it’ll help the manufacturer the most as they’ll have to do less calculation for the payment of tax.

What was Wrong with Existing Indirect Taxes?

Currently, taxes are levied by the central government as well as state government and this is the most complex problem. Businessmen have to maintain accounts which will comply with all the applicable laws. Before going in detail let me tell you which state and central taxes would be integrated under GST.

Central Taxes subsumed under GST

• Central Excise Duty (including additional Excise Duty)
• Service Tax
• Additional Customs Duty
• Special Additional Duty of customs
• Central surcharges and Cess

State Government Taxes subsumed under GST

• Value Added Tax (TAX)
• Central Sales Tax
• Octroi & Entry Tax
• Purchase Tax
• Luxury Tax
• Taxes on lottery, betting and gambling
• State Cesses and Surcharges
• Entertainment Tax

You might have assessed to some extent that how tough our taxation policy has been till  now. Worldwide more than 160 countries have adopted the GST and running their economies very efficiently. Though it’s late, we are moving forward to catch up with the global trends.

The Pathway to GST

Due to separate taxation by central and state government, it was an extremely tough job to reach a consensus on GST. Initially, most of the states were not in favor of keeping many commodities under GST. The main reason was that states enjoy autonomy in collecting state taxes and they were afraid of losing their rights.

State governments wanted the Alcohol and Fuel to be kept out of GST system as these two commodities are the biggest contributor to their revenues. State government’s 50% revenues come from petroleum products alone.

States government were also worried about sharing GST revenues with the central government. If India becomes a common market then states will have to share the power of taxation with the Center.

Not just this, States will also lose their rights to increases taxes as and when, as much as they wanted.

The central government had been trying to address the concerns of the states through regular meetings and finally a consensus has been made.  States have given a go ahead to the bill but congress is adamant on some issue.

Will GST Give Me More Trouble or Ease My Life?

There are many taxes. VAT, service Tax, excise duty custom duty and so one. Who bears the cost of these taxes? Retailer, trader, industry or importer? No, it is you the consumer bears the cost of all indirect taxes. Because the taxes finally increase the price of products and services.

With the streamlining of the multiple taxes, the final cost to the customer would be lower. But you must remember that consumers will benefit only if retailers and manufacturers pass on the benefits of GST to the consumers.

We can assume that due to competitive nature of markets, finally prices of goods and services are bound to come down.

GST will benefit to manufacturer and trader more than us. It’s not going to make our lives simple in any way with immediate effect as ultimately we have to pay all the taxes aggregated under GST. We’ll be benefited only if the prices comes down.

Benefits of GST to Businesses

• If you are a trader in a supply chain or manufacturer then GST is like a boon for you. It would definitely reduce the complexity of taxes.
• It can facilitate seamless movement of goods across states. It will reduce the transaction costs of businesses.
• In the GST system, both Central and State taxes will be collected at the point of sale.

• Both components (the Central and State GST) will be charged on the  manufacturing cost. This will benefit the consumer as prices are likely  to come down. Lower prices will lead to more consumption, thereby  helping companies.
• Thus, the prices of commodities are expected to come down in the  long run as dealers will be allowed to avail the CENVAT credit of Excise  duty paid by Manufacturers and moreover he will be allowed to avail  the CENVAT credit of tax paid on services also.
• GST will improve ease of starting and doing business. This is a phase of startups. Once the GST is implemented, you won’t need VAT registration from state’s Sales Tax Department.
• Under GST regime, you would no longer have to obtain multiple VAT registration. A single GST registration would be applicable across India.
• The procedure of GST registration would also be made simple, thereby improving the ease of starting a business in India.
• It is good for the export-oriented businesses. Because it is not applied for goods/services which are exported out of India.
• You will know exactly how much tax you are paying on the product you bought or services you consumed.

GST Benefits To Economy

• The tax structure would become lean and simple.
• Industry leaders believe that after GST, we’ll see up to 2% jump in GDP growth.
• The GST will plug the leakage of tax. This, in turn, gives more money in the government exchequer. Subsequently, the government would be able to spend more on infrastructure. It would have a ripple effect in the economy.
• Companies which are under unorganized sector will come under the tax regime.
• There would be a single department for tax collection. It would increase the efficiency of tax collection. The government can manage with less employee.
• More business entities will come under the tax system thus widening the tax base. This may lead to better and more tax revenue collections.
• It can bring more transparency and better compliance.
• The number of tax departments will reduce which in turn may lead to less corruption.

Benefits of GST to Consumer

• In the long run, the lower tax burden can decrease the prices of goods and services.
• 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 us.
• If government spend more money on the infrastructure, It would ultimately benefit the citizens.
• GST is believed to have the potential to add to the revenues of the exchequer.If government receives more revenues then ultimately the money will be spent on infrastructure and development which will, in turn, improve the lives of citizens. Amenities and facilities might rise after the substantial rise in tax sources, thus making the standard of life better.
• This passing of the  benefits of reduced tax incidence to consumers by slashing the prices of  goods will definitely reduce the prices.

Rules of GST

• The Centre and states will together implement the uniform GST. It will be a “dual” GST – comprising of Central GST (CGST) and State GST(SGST). The central GST will be legislated, levied and administered by central government. Similarly, the state GST would be governed by the state government.
• The current taxes like Excise duties, service tax, additional 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.
•  The same taxable base will be subject to both GSTs.
• 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.
• GST is collected on value-added goods and services at each stage of sale or purchase in the supply chain.
• GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services.The manufacturer or wholesaler or retailer will pay the applicable GST rate but will claim back through tax credit mechanism.
• The current tax structure does not allow a business person to take tax credits. There are chances double taxation at every step of the supply chain. This will change with the GST.

Political Deadlock

The central government has set the target for GST implementation from April this year, but the bill is currently stuck in RajyaSabha on some issues. Congress has 3 demands from the government.

Don’t compensate the manufacturing states for potential tax losses. The government has proposed extra one percent levy for manufacturing states such as Maharashtra, Gujarat and Tamil Nadu.

Congress wants to put the rate of GST in the constitutional amendment. But government want to keep it out to have some flexibility in the future.

Congress wants an independent dispute resolution mechanism to settle disputes between center and states.

However, the GST panel headed by Chief Economic Advisor Arvind Subramanian has recommended a standard rate of 17-18 per cent. Further, there could be a lower rate (of 12-14 per cent) for concessional goods and a higher rate (up to 40 per cent) for luxury goods.

Way Ahead

Conclusion

There in no confusion about the fact that GST is next big reform. Investors community from abroad is keeping a close eye on it. The Government is optimistic to pass this bill in the budget session.

GST may not have a direct impact on your financials but It certainly has the potential to change the dynamics of Indian Economy. For you, prices are going to fall further due to the rationalization of taxes. It would be a big boost to ‘ Ease of Doing Business’ which has been one of the biggest worries among foreign investors.

GST will have a very positive impact on GDP and revenues. And you all are wise enough to sense that when GDP grows then a citizen also grows eventually.