Lot has been mentioned about Goods and Services Tax (GST) over last few days. I am trying to write something which will make you understand GST than just to provide you information about it.
What is GST?
GST 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.
Origin of GST
GST is being introduced in the country after a 13 year long journey since it was first discussed in the report of the Kelkar Task Force on indirect taxes. In 2003, the Kelkar Task Force on indirect tax had suggested a comprehensive Goods and Services Tax (GST) based on VAT principle. A proposal to introduce a National level Goods and Services Tax (GST) by April 1, 2010 was first mooted in the Budget Speech for the financial year 2006-07. From 06-07 the bill has been finally passed in 2016 Monsoon session.
How is it going to work?
Keeping in mind the federal structure of India, there will be two components of GST – Central GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State. The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilization of credit would be permitted. Integrated Goods and Service Tax (IGST) shall be levied on Inter State transactions of goods and services which are based on destination principle.
So in this example you can see that once the goods are moved from one state to the other state and a tax is imposed, the tax which was already added in the initial stage(CGST & SCST) are deducted from final invoice for the consumer.
Why is it needed?
- It is estimated that GST can boost India’s GDP by 1-2 per cent.
- GST will convert the country into unified market, replacing most indirect taxes with one tax.
- GST is expected to provide the benefits of simplification of tax regime, broadening of tax base, elimination of tax cascades, enhancing export competitiveness, ensuring greater regional equity and improvement in transparency.
- GST is a Value added tax, i.e., the final consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
- GST has become a preferred global standard. All OECD countries, except the US, follow this taxation structure.
- GST will not distinguish between sales and services, and thus the tax calculation will be done on total.
How is it going to help business?
Starting a business will be a lot easier. Currently any new business needs to have a VAT registration from sales tax department. There are lots of issues faced by a business which is based in one state and planning to do business in other states also. GST will solve this problem as it will bring uniformity in process and will make inter-state business easier and simple. The introduction of GST will help save time and energy of a business in calculating taxes at various stages. In addition to this, the cost for the logistics and supply chain inventory will be curtailed by almost 30-40 per cent. After the implementation of GST, paints and other construction chemicals companies will benefit from lower tax rate.
Is everyone going to be benefited?
NO, initial there are losses which need to be incurred by the state government since currently they have full control on the percentage of tax on various product and service. The States will be presenting their policies in the upcoming monsoon session, thus it remains to be seen how uniform these policies will turn out to be. For few years Central has told the state government that they are going to provide a compensation for the loss incurred.
GST is clearly a long term strategy; it would lead to a higher output, more employment opportunities, and economic inclusion. Initially however, it is likely cause high inflation rates, administrative costs, and face stiff oppositions from states due to loss of autonomy.