All You Need To Know About GST. Goods & Services Tax Law Explained for Beginners
GST is the third most complex thing in the world. First one is Women’s nature, second is Duckworth Lewis Rule and now the third one GST. Don’t you think that?
- 1 What is GST? How does it work?
- 2 How GST Works?
- 3 Why is Goods and Services Tax so Important?
- 4 How will GST help India and Common Man?
What is GST? How does it work?
GST is one indirect tax for the whole nation, which will make India one unified common market.
Goods & Services Tax is 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.
How GST Works?
G.S.T works on the principle of ONLY taxing the vendor’s contribution to the “overall product’s value”. Also, the tax paid is not included in the price of the product sold to the vendor next in the chain. This uniformly distributes the burden of taxation to all vendors (in the chain) in proportion to their contribution (value added) to the end product – leveling the playing field especially for vendors at the end of the product chain. Also, the tax rate for a product category is same across the country – preventing arbitrage.
Why is Goods and Services Tax so Important?
Current Scenario: Cascading Effect of Taxation
The current multi-staged tax structure has charges from the State and Union governments separately, leading to cascading effect of taxes. There are taxes at different rates and at multiple points. The Centre has taxes like Income tax, service tax, central sales tax, excise duty, and security transaction tax while at the State level it includes VAT or sales tax, octroi, state excise, property tax, entry tax and agriculture tax. These taxes lead to increased tax burden on the Indian products affecting the prices and sales in the domestic as well as international markets.
How will GST be a Remedy?
The remedy to the above scenario of multiple taxes and its cascading effect which is a burden on common man is Goods & Services Tax. The framework of the proposal has dual Goods & Services Tax which means it will have a federal structure. GST will basically have three kinds of taxes namely Central, State and one called Integrated Goods & Services Tax that will help to tackle inter-state transactions. Under the current GST tax reform, all forms of supply of goods and services like transfer, sale, barter, exchange, and rental will have a CGST and SGST.
What are the challenges in the implementation?
India is adopting a dual GST, namely the Central GST (CGST) and state GST (SGST). The main hurdle in the implementation will be the coordination among different states. The Centre and States will have to come to a consensus on the uniform GST rates, the inter-state transaction of goods and services, infrastructural requirements to implement the new tax reform, all of which needs to be worked upon for the smooth transition into GST pattern.
Other Factors to be Considered:
Since GST is a destination-based tax, there should be clarity on where the goods are going. The Proper methodology should be chalked out as it would require proper management in terms of services provided.
There has to be uniformity in the implementation of GST in all states at the same time and the same rates or else it would be difficult to comply with the legal provisions.
Features of GST:
- GST will have two components namely Central GST levied by the Centre and State GST levied by the states.
- Petroleum products, alcohol for human consumption and tobacco have been kept out of the purview of the GST.
- The final consumer will have to bear only the GST charged by the last dealer in the supply chain.
- The tax collected would be divided between the Center and the States in a manner that would be defined by the Parliament, as per the recommendations of the GST Council.
- The bill proposes an additional tax not exceeding 1% on an interstate trade in goods, to be levied and collected by the Center to compensate the states for two years, or as recommended by the GST Council, for losses resulting from implementing the GST.
Advantages of Implementing GST:
An introduction of GST is considered to be a significant step in the reform of indirect taxation in India. Amalgamating several Central and State taxes into a single tax would help mitigate the double taxation, leading to a common national market. From the consumer’s point of view, the advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%. (Source: Wikipedia)
The Other Advantages Include:
- Reduction in prices: Manufacturers or traders would not have to include taxes as a part of their cost of production, which would lead to the reduction in prices.
- Lower compliance and procedural cost: There would be the reduction in the load to maintain compliance. Also keeping a record of CGST, SGST and IGST separately would not be required.
- Move towards a Unified GST: Although India is adopting dual GST, it is still a good move towards a Unified GST which is regarded as the best method of Indirect Taxes.
- GST rollout can help boost India’s GDP growth by 100-200 bps or (1 to 2%) as this will help faster and cheaper movement of goods across the country with a uniform taxation structure.
- GST’s successful implementation would give a strong signal to the foreign investors about India’s ability to support business.
- GST will be beneficial with more transparency, efficient compliance, ramp up in GDP growth to the Centre, states, industrialists, manufacturers, the common man and the country at large.
How will GST help India and Common Man?
From India Today, We get the following details:
EATING OUT TO GET EXPENSIVE
For eating out, if you spend Rs 1000. Currently, you pay on an average 18.5 per cent as service tax and VAT.
So apart from the service charge, you usually have to bear the burden of Rs 1185.
Under the GST regime, it’s expected that the rates can be fixed at 18 percent or above.
Accordingly, at 20 per cent approximate tax rate, your bill is set to go up, to at least 1200 rupees.
“Services will get more expensive if GST is implemented as states will now have the services under their net and hence it will mean they can fix higher rates,” said DK PANT, chief economist, India ratings-Fitch ratings.
PHONE BILLS TO GET EXPENSIVE
As the states are expected also to decide service tax rates, your phone bill could see an escalation of taxes.
So on a bill of Rs 1000 on which you pay service tax of 15 percent and finally pay Rs 1150.
Post the GST, if the tax rate is fixed at 18 per cent then you will have to shell at least Rs 1180.
Rajan Mathews, Cellular Operators Association of India told India Today, “Under the Goods & Services Tax, the tax rate is bound to go up and the telecom operators will have to pass it on to the consumers, we can look at internet packs and call rates getting higher.”
READYMADE GARMENTS TO GET CHEAPER
Buying clothes and fashion brands will be cheaper, as the effective excise duty (7.5per cent) and VAT of average 5per cent will be subsumed in Goods & Services Tax slab.
So if you pick up a Rs 1000 T-shirt today, you pay 1125 including various taxes. But if GST is kept at 12 percent, then your final bill will be Rs 1120.
BUYING CAR IS CHEAPER
Buying a car will not only be easier in different states with price similarity between manufacturing and non-manufacturing states but tax experts believe it will be cheaper as well.
For example, a Rs 5 lakh car attracts excise duty of 12.5 per cent, and along with VAT roughly comes to Rs 6.25 lakh. Now under the Goods & Services Tax it is expected to go down as much as Rs 35,000 if the rate is fixed at 18per cent, so for you, the price will be Rs 5.9 lakh rupees
“We will see more tax competitive rates and will reduce prices for consumers. We are looking forward to the Goods & Services Tax”, Roland Folger, CEO, Mercedes-Benz India told India Today.
BUYING PHONES TO GET EXPENSIVE
If you planning to buy an imported phone from the market the countervailing duty and VAT comes to 12.8 per cent.
So if the GST council decides to peg the rate at 18 percent, then for a Rs 10,000 phone for which you pay Rs 11,280 currently, you will have to shell out Rs 11,800.
LED TVs TO GET CHEAPER
But watching TV could get cheaper, as part of the Make in India initiative, the GST is expected to be lower.
So at present for Rs 20,000 LED TV you pay around 24.5 per cent tax shelling out Rs 24,900 eventually.
As the GST rate is expected to be at 18 percent, for you the cost will come down to Rs 23,600
JEWELLERY TO GET EXPENSIVE
Tax experts have pointed how currently only 2 percent of effective taxes are passed on to the consumers but as per the Goods & Services Tax model, at least 6 percent rates could be imposed, impacting the jewelry purchase.
Buying bags, shoes, electronics online will be getting more expensive as the e-commerce industry comes into a tax net and will have to pay tax deducted at source for every purchase from its sellers.
So e-commerce companies which will see shrinking of profit margins & increase tax compliance net could slash discounts & freebies that they offer.
“E-commerce will see the revision of its tax compliance and its time we understand the industry in India. But consumers can benefit from lower logistical cost and faster delivery. Overall tax collection will be a challenge, Harishankar Subramaniam, National Leader, Indirect Tax, EY.
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