Goods and Service Tax- A Detailed Explanation

India has joined the bandwagon of indirect tax reforms. The Empowered Committee of the State has announced in the first discussion paper on 10.11.2009, that there will be a plan to levy a “Dual GST Scheme” in India, read both the Center and the States will have the power to levy the GST taxes.

The scheme though originally was supposed to be realized from 1st April 2016, several hurdles pushed the date further as the ruling party did not have the majority in the Rajya Sabha back then. Most of the states too expressed their grievances against the tax for one reason or the other. 

Constitutional alteration - While the Center has the power to impose the GST tax services till the production stage, the States have the onus to tax sale of goods. While each of powers cannot be swapped with one another as the States cannot levy a tax on supply of services while the Centre cannot impose a tax on the sale of goods. The Constitution does not put the power baton on any one of them (State or Center) exclusively, to levy a GST tax. Furthermore, the Constitution falls short of empowering the States to levy import taxes. Therefore, the Constitutional Amendments empower the Centre to levy taxes on the sale of goods and States and also to impose both service tax and import tax.

What is Goods and Services taxes?  Goods and Service Tax or (GST) is a comprehensive tax levied on the manufacture, sale, and the consumption of goods and services. The Center and the State governments do away with all the indirect taxes.

GST is levied on goods and services under which it is mandatory for each person to pay tax on his output and is imperative to pay the (ITC) or input tax credit on the tax paid on its inputs and outputs. 

Aims and objectives of GST: The Goods & Service Tax (GST) aims to do away with the double taxation or the cascading effect of taxes on both the production and distribution cost of goods and services. Eradicating the cascading effects of the tax on tax which burdens the final consumers will greatly improve the competitiveness of the ultimate goods and services in the market. This competitiveness has a number of positive repercussions and one of them is certainly a positive impact on the GDP growth of the country.

It goes without saying that the Introductionof a GST substituting the existing multiple tax structures of Centre and State taxes is certainly welcomed with open arms by the consumers. GST will most importantly eliminate the cascading effect on the sale of goods and services. This will impact the cost of goods. The cost of goods shall also decrease chiefly because the tax on tax effect will be done away with, forever. 

GST is transparent and embodies current technology. As most of the activities related to the GST is technology-driven. Activities such as registration, application for refund, filing returns, and response to notice are all completed on the GST Portal. This accelerates the entire process. The GST regime is likely to bring a whole new era in the country and the common people will certainly benefit from it in the long run. 

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Why is GST so high in India?

The concept of GST is to simplify multiple levels of taxation. The simplest way to explain is when you go to a restaurant your Bill breakdown will read like Service tax - 6% (not with hotels though which is exempted up to 60%),  VAT - 14.5℅ levied on liquor, and 5.5% VAT will be levied on food. So for a bill of Rs.100, 60 which consists of liquor and 40 is reserved for food, you will be paying a tax of 16.9.

Here is a lowdown on the details of the bill,
Service tax should read as - 6% of 100 = Rs.6. (With exemption)

Without the exemption,  it should be 15℅ of Rs 100 = Rs. 15.

VAT (value added tax) on alcohol - 14.5℅ of 60 = 8.7

VAT levied on food - 5.5℅ of 40 = 2.2

So, the total tax should read as (with exemption) = 16.9

Total tax should read as (without exemption) = 25.9

Things have changed drastically under the GST regime and it will be taxed at a flat rate of 18-19%, that is, Rs.18/ Rs.19.

So, this example would have you thinking that you might think GST isn't making things any simpler for you but for a great number of products, the cascading taxes will be replaced with a single tax, and it will bring down the tax that you need to pay in some cases.

It is a move hailed by most economists, as the tax compliance will be relatively easier, the cascading effect of taxes will also be reduced and the tax collection and remittance will go up significantly. As a consumer, it is certainly a sign of good things to come. 

This is an assumption that Liquor will come under the purview of GST. Even otherwise, the same concept holds good for another sale of Goods and services provided.

All the political leaders have indeed regarded GST as a positive reform for the Indian economy but GST rates in India are considered to be the highest in the world among the 140 countries that have implemented the taxes so far.

As per the new tax system in India will have four tax slabs: 5%, 12%, 18% and 28% which puts India at the top, on the basis of all countries with the highest GST rate toppling Argentina on the way. European countries have one rate of GST as they don’t have to worry about a huge country like India. Also, a majority of Indian population stays in rural areas and their economic condition is not too great.

India followed in the footsteps of Canada and introduced a dual structure where both Centre and the states have the power to levy and also collect the taxes. 

The key issue why India has such high GST rates is because we tend to rely more on indirect taxes rather than direct taxes.

There are chiefly two ways in which the government can tax you:

1.       Direct Tax or tax on your income 

2.       Indirect tax or tax on your purchase

In developed economies, the tax structure is different as the majority of the tax revenues will be direct. Most pay income taxes barring a few exceptions.

In India, the majority of the tax revenues is not direct mostly it is indirect. Farmers and many others don’t pay income taxes in India and it is less than 3% who pay income tax.

So the government have to earn their revenue from taxing your purchases and that is a little difficult to cheat on. Since the government has to pay a large number of employees, provide subsidy and freebies to everyone and provide infrastructure and other things, high indirect taxes are a reality in India compared to most countries. This has always been the case and the scenario has not changed much. But things are changing and the price of most things are reducing.

How will the GST impact your start up business?

The GST bill is supposed to bring about a great change in the Indian economy. GST helps streamline the whole process of indirect taxation and this helps make it more effective. 

The tax payers shall get a little relief as it will pay one consolidated tax instead of a number of taxes that includes service tax, state value-added tax (VAT), entry tax, central excise, octroi or entry tax and a few other indirect taxes as well. 

Most of the developed countries have already been using this form of taxation. This helps in simplifying the entire tax structure and also avoid the double taxation.

The GST will be levied on the price which is actually paid or payable it is also known as the “transaction value.” which includes packing cost, commission, and plenty of other expenses incurred for sales. 

This tax will be payable at the final point of the consumption. The GST will have two components – the Central GST and the State GST. This is easier to legislate and administer the respective taxes.

 Is the Implementation of GST a good news for Start-ups?

GST is thought to be a perfect for businesses in India, but is it good for small businesses too? Read start-ups?

1.    It helps ease a new business: When a new business starts you need a VAT registration from sales tax department. A business has to face many teething problems with issues regarding procedures and fees in the state. The two things that GST does is it brings about a uniformity in the process and propels an easier start to business and also a centralised registration.

2.Ease of tax burden: The current tax structure dictates that if any business which has a turnover of more than Rs five lakh, will have to get VAT registration and pay VAT. GST has a higher limit and has risen up to Rs 10 lakh. So, businesses have a turnover of Rs 10 and 50 lakh will be taxed at lower rates. This will help ease off tax burdens and a great reprieve for new businesses.

3.    Taxation process is simplified: Sticking to various regulations at different States make the process slightly more complex. GST will simplify the taxes, making the process of paying taxes simpler.

4.    Reprieve for businesses in both sales and services: Businesses such as restaurants, which are under the purview of both sales and service taxation are supposed to calculate the VAT and service tax on both items separately making the calculations process extremely complex. GST does not distinguish between sales and services, and the tax calculation is done on the total.

5.   Minimization of logistics costs across States: There are a number of transport vehicles that get delayed during the free movement across States as there are two issues to be dealt with, small border tax and also check post issues.  With the GST the Interstate movement lessens and also saves big on time, as these taxes are eliminated.

Thus the GST has a positive impact on small business and start-ups as there is a simpler taxation system.

How will the GST impact Indian capital markets?

Not many radical economic changes have impacted the Indian Economy as much as the Good and Services tax(GST) since 1947. and it plays an important role in the economy of India. GST is levied on the manufacture, sale and also the expenditure of goods and services

 The chief purpose of GST is to unify indirect taxes and create a common market. The Finance Minister of the country, Arun Jaitley says that the GST bill will revolutionize the economy of India and helps in the economic integration of India. Thus the GST also is a way to make the cumbersome tax process uniform, which is levied on goods and services across the country.

Certain Facts of GST which you should know about

Currently, the tax scenario is like this, there are multiple indirect taxes which are levied on goods and services which are a deterrent to the growth of India’s economy. 

There is not one but numerous taxes in the forms of CST, Entry tax, VAT, Excise duty, Entertainment tax, Customs duty and Stamp duty and any other have divided the Indian market. This scenario means that introduction of GST will result in economic growth. 

GST is sure to impact positively on the Indian economy. Some of the sectors of the Indian economy are more impacted upon in comparison to another sector under GST.

After the GST implementation, it has removed all the indirect taxes and formed a single common market which results in an efficiency of supply chain and an economy of scale in production It can also give leeway to improved trade and commerce.

GST will also do away with the rapid effect of taxes rooted in the cost of production of products or services and will provide the required credit throughout the value sequence. 

This will particularly minimize the expense of natural products and will raise the importance of the ‘Make in India’. The long value sequence can be found in basic products to final consumption stage with functions distributed in different states which include the FMCG, consumer resilient, pharmaceutical, vehicles and also technological innovation products which are the ones which will bear the major brunt of the GST application. 

GST will help the business to flourish in India. The expense of tax conformity and deal price will be substantially resolved with the transformation of current several taxations into single GST. So you get a tax program which is stable, clear and definitely foreseeable, it will draw both local and foreign investors in droves to India and this also means lucrative job opportunities.

Goods and services tax (GST) has started being implemented from July 1.

There are certain expectations from this tax reform that it will boost the Indian economy and a major shift will be seen from unorganized to organized sector.

However, you would expect to experience near term hiccups for the next one or two-quarters.

According to a few market experts, job creations may prove to be a problem.

Whatever the consequence the GST is said to create a major economic transformation, the effect of which will spread far and wide.