WHAT IS GST? HOW IT IMPACT ON YOUR BUDGET?

Government brings a system of Goods and Services Tax (GST) in India. It is the next most important economic reform item on the Narendra Modi government’s agenda after the Demonetisation. 

This is one reform which affects all of us. As usually about taxes it is also a complicated reform. In my this blog I try to present an overview on GST and explain why it is expected to make a difference to all of us. 

WHAT IS GST?

GST (GOODS & SERVICES TAX) – It is also known as VAT or the value added tax in many countries is a multi-stage consumption tax on goods and services. GST will replace various other taxes such as Excise, VAT and Service Tax with a single tax structure. 

First to know - How is India’s tax system structured today? 

Direct Taxes 

The Indian constitution divides taxation powers between centre and states. Both levels of government have some exclusive and described areas where they can levy tax. Income tax is the exclusive domain of central government, which includes tax on company profits. These taxes are referred to as direct taxes. 

Indirect Taxes 

These are taxes levied on manufacture of goods, consumption and provision of services. Generally indirect taxes levied on manufacture of goods or provisions of services are the exclusive domain of central government. Taxes on consumption are the exclusive domain of state governments. 

What is the problem by the tax system structured today? 

Multiplicity of taxes: 

Taxes by Union Government, State Governments and the local governments have resulted in difficulties and harassment to the tax payer. Complexity and corruption: A provoking feature of the Indian tax system is its complexity. Both direct and indirect tax laws are complex. This provides enough scope for avoiding and evading taxes. 

Bias in incidence of taxes: 

As per the indirect taxation enquiry committee, “The burden of the urban households was distinctly higher than the rural households in the corresponding expenditure class”. Urban population is taxed far higher than the rural rich. 

Lack of built-in elasticity: 

Income from taxation does not increase automatically in India in proportion to increase in National income. Hence, the government is compelled to increase taxes every year to maintain a constant tax income ratio.

Generally speaking there are two important problems with the current arrangement. 

First, keep in mind that some good such as a Jeans has to first be manufactured before it is consumed. The central government, therefore, levies its indirect tax called central excise at the factory gate. Subsequently, a jeans reaches a retail outlet and is bought by a consumer. The state government at this stage levies a tax on consumption dubbed value added tax (VAT). So, we have a tax at the factory gate which adds to the cost of the jeans and another tax on the final price. 

State also have their exclusive domain on consumption tax within their borders, they treat goods coming from other states as ‘Imports’. 

For example, if a jeans maker in Delhi buys dye in Haryana, he would have paid central excise and Haryana’s state taxes on the product. On this cost, Delhi government would levy its tax if the jeans are sold in the state. If the jeans are sent across Delhi’s border and sold in Uttar Pradesh, an ‘export’ tax called central sales tax is collected by Delhi.

By the above example it is clear that India is politically one country, but economically it is fragmented. There are multiple taxes when there is commerce across state borders. Therefore it increases costs for everyone and makes economic activity within India for Indians complicated. 

How will GST help? 

GST is a better and fairer tax system compared to SST. GST is levied on the supply of goods and services at each stages of the supply chain from the supplier up to the retail stage of the distribution. Even though GST is imposed at each level of the supply chain, the tax element does not become part of the cost of the product because GST paid on the business inputs is claimable.

The basic fundamental of GST is its self-policing features which allow the businesses to claim their input tax credit by way of automatic deduction in their accounting system. This eases the administrative procedures on the part of businesses and the Government. Thus, the Government’s delivery system will be further enhanced.

How will GST help consumers?

GST (GOODS & SERVICES TAX)

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. From the above example we know that 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 over 20% tax for the most merchandise we buy. 

In GST Consumers should benefit in two ways. 

First of all, all taxes will be collected at the point of consumption. It means that if a jeans 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 one is that, 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.

All above are for the improvement of our Country’s (INDIA) GDP.

Now see the impact of GST : 

Positive Impact of GST : 

• A unified tax system removing a bundle of indirect taxes. 

• Less tax compliance. 

• Removes cascading effect of taxes. 

• Manufacturing costs will be reduced,hence prices of consumer goods likely to come down. 

• Due to reduced costs some products like cars,FMCG etc.will become cheaper. 

• A unified tax regime will lead to less corruption which will indirectly affect the common man. 

Hence,this is possible only if the benefit is actually passed on to the consumers. 

Negative Impact of GST : 

• Services will become expensive.e.g.Telecom,banking,airline etc. 

• Being a new tax,it will take some time for the people to understand its implications. 

• It is easier said than done.There are always some complications attached. It is a consumption based tax,so in case of services the place where service is provided needs to be determined. 

• If actual benefit is not passed to consumer and seller increases his profit margin,the prices of goods can also see a rising trend.

However,GST is a long term strategy and the positive impact shall be seen in the long run only.

Let us hope GST proves to be a game changer in a positive way and proves to be beneficial to the common man.