You may have read about it in the newspapers and watched about it on T.V. The Economist says that India’s GST Bill ‘promises to subsume India’s miasma of local and national levies into a single payment’. Forbes magazine explains the GST to be ‘a simplified and efficient indirect tax that would subsume myriad taxes levied by the central and state governments’. Also, many consultants have said that GST will have a ‘cascading impact’ on taxes.
Bowled over by the jargon? You are not alone!
An end-consumer in India pays direct and indirect taxes. Direct taxes typically mean taxes on income or profits an individual makes and these are directly paid to the government by the individual. Indirect taxes are a bouquet of taxes levied by the central and the state governments for the goods and the services consumed by the penultimate customer — you. These taxes are collected by the retailer or service provider. The Constitution of India confers powers to the Centre and the States to respectively levy taxes on goods and services. The major sub-categories of indirect taxes that are levied by the Centre are Excise Duties, Custom Duties, Service Tax and Central Sales Tax. Whereas, the major sub-categories of indirect taxes levied by the States are VAT, Sales Tax, Entry Tax and Luxury Tax. This summarizes the existing taxation structure in India.
In the existing federal structure, the Centre is empowered to tax services and goods till the production stage, and the States are empowered to tax the sale of goods. Note that the States do not have the power to levy a tax on the supply of services, whereas the Centre does not have the power to levy a tax on the sale of goods. Thus, the Constitution of India does not vest eminent power either in the Central Government or in the State Government to levy a tax on the ‘supply of goods and services’. This necessitated the much celebrated 122nd Constitutional Amendment, which was passed by the Rajya Sabha on 4th August 2016.
Mehul Turakhia, Director — Finance of the Directi Group states: ‘ The Government aims to unify all these indirect taxes as one levy — the Goods and Services Tax (‘GST’). GST is a single tax on goods as well as services which taxes the value addition at each stage and permits tax credits of previous stages. The final consumer would thus bear a tax only on GST charged by last dealer in supply chain with setoff benefits at all previous stages. Under the GST regime taxes would be levied only on value addition at each stage. Also, unlike today, wherein setoff of central taxes against state taxes is not allowed, the GST system allows the tax to be off-set at each stage of the value chain. Therefore, the overall efficiency in the tax collection system would improve. This would result in the reduction of cost for the manufacturer or service provider, benefits of which shall be passed to the end consumer in the long run by way of drop in prices of goods and services.’
Let’s understand GST with the help of an example:
Therefore, if the overall tax saving is passed on to end consumers, they would end up paying 60 Rupees less for the same dress!
Now the other roving question is — what rate would GST be levied at? Well, this is yet to have a concrete answer from the government, though it is said that it may vary from 18% to 22%.
So how would India look post-GST?
While the GST rate may range anything from 18% to 22%, it would eventually be beneficial for the manufacturing sector which today pays taxes at a minimum of 25% (12.5% Excise + 12.5% Average VAT Rate). On the other hand, pure service players who merely pay 15% Service Tax today, without major credits of Excise Duty and VAT, may see a rise in their tax bill. This may create a temporary rise in prices of various services. Further, due to increased transparency and uniformity of taxes, the unorganized players will also start falling in-line and may not have many avenues to avoid taxes. This may initially increase the prices of many goods, and thereby ignite inflation during the initial years of GST implementation. However, the end consumer and entire economy would be benefited by GST in the long run.
For an end-consumer: There would definitely be more transparency with a single uniform taxation policy throughout the nation. The major concern, however, is whether you would have to pay more or less tax. Well, that would largely depend on your consumption pattern. Purchasing from the organised sector may become a tad cheaper, but the erstwhile cheaper deals provided by unorganised players may start vanishing soon.
For a business: Businesses will stand to benefit a lot owing to the uniformity of taxes and the avoidance of multiple taxes being paid on the same goods. Now the tax would only be on the value addition at every stage of the supply chain. Also, once all unorganised players start falling in line and paying taxes, all businesses will be on a uniform platform.
That’s it then, the GST — as simple as it can get! Do stay tuned to the Zeta blog for more simple interpretations of the Fintech space.
