“GST is a great step by Team India, great step towards transformation. This can’t be seen as a victory of a party or government, it is a win for the democratic ethos of India. We say a lot about corruption but to eradicate it is important to strengthen our system as well”- was how Indian Prime Minister Narendra Modi kickstarted the much awaited Goods and Services Tax (GST) at the wee hours of July 1, 2017.
The discussion on GST was first mooted in India in 2000 and now after 16 years has become a reality. Claimed by the government as the biggest tax reform since independence, the GST is expected to boost growth and scrap local taxes that add to overhead costs and stymie businesses.
The introduction of the GST is a great step and has been hailed the world over. The question remains as to how effectively and efficiently it will be implemented. The opposition political parties which have supported the implementation of the GST now claim that more time was needed for an efficient transition of the GST regime. A strong and comprehensive IT system would be the foundation for the smooth functioning of the GST regime and the country is still in the early stage of such an IT system, the opposition political parties argue.
Admittedly, a proper functioning of the GST system will take some time but the fact is that the nation has to begin the process and Modi has taken the initiative. India has now joined the group of countries which have already implemented the GST. France was the first country to implement the GST in 1954. Since then, more than 150 countries have implemented the GST law in some form or other. In many of these countries, VAT is the substitute for GST, but unlike the Indian VAT system, these countries have a single VAT tax which fulfills the same purpose as the GST.
What is the GST?
The GST is one indirect tax for the whole nation, which will make India a unified market. The GST would amalgamate several central and state taxes into a single tax and eradicate double taxation. It’s a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. This would ultimately have a sobering impact on prices.
The basis of GST is the seamless flow of Input Tax Credit (ITC) along the entire value addition chain. At every step of the manufacturing process, businesses will have the option to claim the tax already paid in the previous transaction.
The GST is levied on all transactions such as sale, transfer, purchase, barter, lease, or import of goods and/or services. Keeping in mind the federal structure of India, a dual GST model has been adopted. There are two components of
GST – central GST (CGST) and state GST (SGST). Both the centre and the states will simultaneously levy GST across the value chains. Transactions made within a single state will be levied with central GST by the centre and state GST by the concerned state government. For the inter-state transactions and imported goods and services, an Integrated GST (IGST) will be levied by the centre. GST is a consumption-based tax and therefore, taxes will be paid to the state where the goods and services are consumed and not the state where they are produced. IGST complicates tax collection for state governments by disabling them to collect the tax owed to them directly from the central government. Under the previous system, a state would have to only deal with a single government in order to collect tax revenue
Indian tax structure is divided into two: direct and indirect taxes. Direct taxes are levies where the liability cannot be passed on to someone else. An example of this is income tax where the person or the entity earns the income and is alone liable to pay taxes.
But for indirect taxes, the liability of the tax can be passed on to others. For example, when the shopkeeper has to pay VAT on his sale, he can pass on the liability to the customer. So, in effect, the customer pays the price of the item as
well as the VAT on it so the shopkeeper can deposit the
VAT to the government. This means that the customer must pay not just the price of the product, but he also pays the tax liability, and therefore, he has to make a higher payment when he buys an item.
This happens because the shopkeeper has paid a tax when he bought the item from the wholesaler. To recover that amount, as well as to make up for the VAT he must pay to the government, he passes the liability to the customer who has to pay the additional amount. There is currently no other way for the shopkeeper to recover whatever he pays from his own pocket during transactions and therefore, he has no choice but to pass on the liability to the customer.
GST will address this issue. It has a system of Input Tax Credit which will allow sellers to claim the tax already paid, so that the final liability on the end consumer will come down.
Foodgrains, cereals and vegetables have been zero-rates under GST, other rate slabs are 5%, 12%, 18% and 28%. A cess will also be added to certain sin and luxury products.
How will it impact the consumers?
It’s too early to gauge the actual impact of GST on prices at retail points. The experience so far has been mixed. But theoretically the prices of most goods are expected to come down in the GST regime. Due to multiple taxes levied by both the Centre and the states and with incomplete or no input tax credits available at progressive stages of value addition the tax components in goods are very high and are generally passed on to the consumers. Under GST there would be only one tax from the manufacturer to the consumer. In addition, with prevention of leakages, the prices of goods are expected to come down.
However, in the case of services like telecom, banking, other financial services, online shopping, insurance, eating out, airline and housing society charges are likely to up.
Impact on government revenue
Experts believe that methodical implementation of the GST will bring many business enterprises under the tax net raising the government’s revenue collections. On the other hand, the government claims the transactions happening in the parallel economy will be captured in the official statistics. This will raise GDP figures and will bring in more taxes. Any business whose annual turnover is over `20 lakh will have to digitalise its business for transparency in paying taxes and input credit benefits.
An increase in service tax at the other end will more than compensate for whatever losses in tax revenue the government will incur in the tax restructuring process. Services constituted about 54% of the Gross Value Added (GVA) last year. The increase in service tax by 3% in GST regime will see a huge increase in tax collections. A 10% growth in services GVA (it grew by about 10% in 2015-16) will increase the service tax collections anywhere between RS75,000 and RS1,00,000 crore.
These are estimates, the actual impact of the GST on the economy or on consumers will be known, say, after a year. But the fact remains that the GST is going to change the way businesses were operating and handling their taxes so far.