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GST: One Nation One Tax

Understanding GST

Goods & Services Tax is a value added tax which streamlines all the different types of indirect taxes and implement a “single taxation” system. The main expectation from this system is to abolish all indirect taxes and only GST would be levied. As the name suggests, the GST will be levied both on Goods and Services. Indian Government is opting for Dual System GST. This system will have two components which will be known as Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST). It is expected that the base and other essential design features would be common between CGST and SGST, across SGSTs for the individual States. It is based on the “Destination principle” that means GST is applied on goods and services at the place where final/actual consumption happens. Thus, exports would be zero-rated, and imports would attract the tax in the same manner as domestic goods and services. Inter-State supplies within India would attract an Integrated GST (aggregate of CGST and the SGST of the destination state).

In addition to the IGST, in respect of supply of goods, an additional tax of up to 1% has been proposed to be levied by the Centre. The revenue from this tax is to be assigned to the origin states. This tax is proposed to be levied for initial two years or such longer period as recommended by the GST Council.

GSTEleven years after it was first mooted in Parliament, the Rajya Sabha has finally adopted a goods and services tax on 3 August 2016, paving the way for what is popularly referred to as the concept of “one nation, one tax”. The Government of India seems committed to replace all the indirect taxes levied on goods and services by the Centre and States and implement GST by April 2017.

Salient features of GST

  • The power to make laws in respect of supplies in the course of inter-State trade or commerce will be vested only in the Union government. States will have the right to levy GST on intra-State transactions including on services.
  • Administration of GST will be the responsibility of the GST Council, which will be the apex policy making body for GST. Members of GST Council comprised of the Central and State ministers in charge of the finance portfolio.
  • Centre will levy IGST on inter-State supply of goods and services. Import of goods will be subject to basic customs duty and IGST.
  • Central taxes like, Central Excise duty, Additional Excise duty, Service tax, Additional Custom duty and Special Additional duty and State level taxes like, VAT or sales tax, Central Sales tax, Entertainment tax, Entry tax, Purchase tax, Luxury tax and Octroi will subsume in GST.

Advantages of GST

GST will be a game changing reform for Indian economy by developing a common Indian market and reducing the cascading effect of tax on the cost of goods and services. It will impact the Tax Structure, Tax Incidence, Tax Computation, Tax Payment, Compliance, Credit Utilization and Reporting leading to a complete overhaul of the current indirect tax system.

It has been envisaged as a more efficient tax system, neutral in its application and distributionally attractive. The advantages of GST are:

  1. Economists project an increase of 0.4-0.8 percentage points in India’s economic growth within three to five years of GST rollout.
  2. The tax structure will be made lean and simple.
  3. The entire Indian market will be a unified market which may translate into lower business costs. It can facilitate seamless movement of goods across states and reduce the transaction costs of businesses.
  4. It is good for export oriented businesses. Because it is not applied for goods/services which are exported out of India.
  5. In the long run, the lower tax burden could translate into lower prices on goods for consumers.
  6. The Suppliers, manufacturers, wholesalers and retailers are able to recover GST incurred on input costs as tax credits. This reduces the cost of doing business, thus enabling fairer prices for consumers.
  7. It can bring more transparency and better compliance.
  8. Number of departments (tax departments) will reduce which in turn may lead to less corruption.
  9. More business entities will come under the tax system thus widening the tax base. This may lead to better and more tax revenue collections.
  10. Companies which are under unorganized sector will come under tax regime.

 GST impact on various sectors

GST will have a far reaching impact on almost all the aspects of the business operations in the country, for instance, pricing of products and services; supply chain optimization; IT; accounting and tax compliance systems :- 

  • The real estate sector is expected to benefit from lowered construction and procurement costs and funding, which may help developers secure higher margins.
  • GST may bring down transaction cost for retail businesses thus helping reduce prices. Analysts expect a strengthening of supply-chain management to bring about lower inflation.
  • For telecom, service tax rates will go up to 18 per cent from 15 per cent.  Carriers including Bharti Airtel, Vodafone India and Idea Cellular may have to take a hit on margins in the short-term as they will not be able to fully pass on the tax increase to pre-paid customers, who dominate their subscriber base.
  • GST may be levied on the sale of newspapers and advertisements and this would give the government’s access to substantial incremental revenues.

Key business impacts of GST

Sourcing

  • Inter-State procurement could prove viable
  • This may open opportunities to consolidate suppliers/vendors

Distribution

  • Changes in tax system could warrant changes in both procurement and distribution arrangements.
  • Current arrangements for distribution of finished goods may no longer be optimal with the removal of the concept of excise duty on manufacturing.
  • Current network structure and product flows may need review and possible alteration.

Pricing and profitability

  • Tax savings resulting from the GST structure would require repricing of products.
  • Margins or price mark-ups would also need to be re-examine.

Cash flow

  • Removal of the concept of excise duty on manufacturing can result in improvement in cash flow and inventory costs as GST would now be paid at the time of sale/supply rather than at the time or removal of goods from the factory. 

System changes and transaction management

  • Potential changes to accounting and IT systems in areas of master data, supply chain transactions, system design.
  • Existing open transactions and balances as on the cut-off date need to be migrated out to ensure smooth transition to GST.
  • Changes to supply chain reports (e.g., purchase register, sales register, services register), other tax reports and forms (e.g., invoices, purchase orders) need review.
  • Appropriate measures such as training of employees, compliance under GST, customer education, and tracking of inventory credit are needed to ensure smooth transition to the GST regime.

To implement the bill there has to be lot changes at administration level, Information Technology integration has to happen, sound IT infrastructure is needed, the state governments has to be compensated for the loss of revenues and many more. The key to the implementation will be the decision on rates, exemptions and thresholds. GST, being a consumption-based tax, states with higher consumption of goods and services will have better revenues. So, the co-operation from state governments would be one of the key factors for the successful implementation of GST.

 References

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5 replies »

  1. Very nice and detailed article….Thank you Economics Club for sharing this….hope for more such resourceful articles in the future 🙂

    • Hi Khusbhu, below is an example of how GST is an improvement over the Present taxation system

      *Present tax system*

      Product sold from Pune to Mumbai:
      Selling price 1000
      VAT @10% =100

      Product sold from Mumbai to Delhi
      Cost price 1100
      Profit 1000
      Selling price 2100
      VAT @10%=210
      Total cost=2310

      GST

      Product sold from Pune to Mumbai:
      Selling price 1000
      CGST @5% =50
      SGST @5% =50

      Product sold from Mumbai to Delhi
      Cost price 1100
      Profit 1000
      Selling price 2100
      IGST @10%=210-CGST-SGST
      Total cost=2210

      • Thank-you…!
        It’s a great article overall…
        Topic has been nicely explained!