The Rajya Sabha has cleared a constitutional amendment to bring about a system of Goods and Services Tax (GST) in India. It may perhaps be one of the most important economic reform items on the Narendra Modi government’s agenda.
What is GST?
As per the recent events that have been taking place the central government, has taken many major and tough decisions to fulfill its promise to curb the black money in India like demonetization, the introduction of GAARs. One of the major decisions is the implementation of the GST. But only businessmen and taxpayers and survive in the GST regime as there are various checks at the basic levels of a transaction. This would ultimately change the style of doing business in our country. IMF, the monetary wing of the United Nations, estimates that GST will add 2% to the Indian GDP.
What is the problem with this arrangement?
There are two important problems with the current arrangement.
First, we must keep in mind that some goods such as a shirt have 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 shirt 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 shirt and another tax on the final price.
Since states have their exclusive domain on consumption tax within their borders, they treat goods coming from other states as “imports.” For example, if a shirt maker in Uttar Pradesh buys dye in Bihar, he would have paid central excise and Bihar’s state taxes on the product. On this cost, Uttar Pradesh government would levy its tax if the shirt is sold in the state. If the shirt is sent across Uttar Pradesh’s border and sold in Delhi, an “export” tax called central sales tax is collected by UP.
As the example suggests, India is politically one country, but economically it is fragmented. There are multiple taxes when there is commerce across state borders. Consequently, it increases costs for everyone and makes economic activity within India for Indians complicated.
How are taxes imposed on the Indian Economy?
- Excise Duty, which is attracted on production
- Service tax, which is generally put on goods moving from the factory to shops
- VAT, which is payable when the goods are finally sold to the consumers. This type of current tax regimes creates a cascading effect.
In GST, consumers should benefit in two ways.
First, all taxes will be collected at the point of consumption. It means that if a shirt 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 a public backlash.
Second, 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.
Will I be liable to pay taxes?
There are currently different monetary limits to be registered under the different laws such as:
- 10,00,000 for VAT
- 9,00,000 for service taxes
Note (the taxing limits may vary as per different states), as well as a person needs to keep a check on the different laws while doing business so that he/she is not liable to pay fines for noncompliance.
With the GST there is a single limit of INR. 20, 00,000/- for everyone to get registered. So what if someone has two shops? The answer to the following question is simple; a limit of 20 lakhs will be seen for the PAN issued under the Income Tax Laws. This means that the total turnover of all the entities having same PAN will be clubbed together to calculate the limit of the 20 lakh rupees.
What will be its immediate impact on my business costs?
Costs of doing business will also be impacted by the implementation of the GST, but this impact will be of mixed nature. With the reduction in costs on account of more input tax credits (now ITC will be available on “almost” all expenses), more efficient and transparent working and rating of all the GST dealers by the Government, there will be sharp rise in compliances costs.