“Oh no, not yet another tax!” Is this your reaction to the Budget promising to implement Goods and Services Tax (GST) soon? Don’t fret, for GST isn’t a new tax. Originally proposed in 2010, GST is expected to bring down the cost of goods and services across India by streamlining all indirect taxes and unifying them into one. Fears of having to be at the Centre’s mercy for all their revenue needs, saw the states drag their feet on the GST. But with most issues sorted out, GST may soon be a reality.
What is it? GST will replace all existing indirect taxes on both goods and services produced with one single tax and simplify India’s mind-boggling maze of taxes. Life today is not easy if you are a manufacturer or a service provider in India. For there’s the central Government levying excise duty, service tax, cess and surcharge and then State governments imposing sales tax, VAT, entertainment tax and entry tax and more!
Once the GST kicks in, almost all goods and services will attract the Dual GST — Central and State GST — with the tax collections going to the respective governmentsBesides, with States refusing to give up their existing taxation powers over petroleum products and alcoholic beverages, two major money spinners, don’t expect taxes on them to fall.
The GST is designed as a value-added tax, which means starting from the manufacturer to the wholesaler and then the retailer, each person will pay tax only on the value addition done by him. So, suppose a manufacturer purchases inputs worth ₹40 and then produces a good worth ₹100, then with a 10 per cent tax rate, his tax liability will turn out to be only ₹6 (10 per cent of ₹60). This is because he gets to set-off the tax paid on the inputs against the tax he pays on the final goods produced.
But this is not all there is to GST. It promises much more.
Why is it important The one big thing that the GST promises to offer is a lower tax burden for businesses by removing the cascading effect of tax on tax. Today, a manufactured good first attracts excise duty and thereafter sales tax is imposed on it. The latter tax is therefore imposed on the price of a good that is inclusive of excise duty, making it a tax on tax. The GST will put an end to this for it will be one single tax that will be imposed only once on the price of a good. Besides, a manufacturer or seller will be able to fully set-off the tax paid on all inputs purchased.
Currently, there is no provision for setting off Central Sales Tax, a tax paid on goods (inputs) purchased from another state.
Besides, the GST rate is expected to be lower than the total of excise duty plus VAT (add up to about 22-24 per cent) currently paid by manufacturers. However, service providers (subject only to a service tax rate of up to 12 per cent) are likely to face higher liability. Moreover, India cannot afford to keep away from implementing the GST if it wants to integrate with the global tax system.
Why should I care? Firms will face lower taxes once GST is put into place and, so, as a consumer you can hope to benefit from lower prices. Also, as reduced costs and a hassle-free tax regime boost businesses, you can expect higher economic growth.
The bottomline You can’t get away from death and taxes, but you do wish that paying taxes wasn’t so complicated. That’s what GST hopes to do.