Ever since the rollout of GST in India, it was received with a mixed reaction by business owners, customers as well as market experts. What is GST and how has it impacted the Indian businesses? Let’s find out.
One Country One Tax – that was the motto of Goods and Service Tax (GST) when it was first proposed in 2000 and finally rolled out on July 1st, 2017. It came with a lot of promises for the businesses and economy of the country.
The very first few points that draw the attention of the common man include the claims that it will simplify the system of taxpaying for Indian businesses, reduce prices, curb inflation, and mitigate corruption.
When GST started?
Currently prevalent in over 160 countries that include European Union and Asian countries, GST was first introduced in France in 1950. The only purpose behind it was to prevent tax evasion. In some countries, it is also called the Value Added Tax (VAT).
What is GST?
GST is one consolidated indirect tax that replaced the multiple state and central taxes applicable to goods and services. It is a tax that applies to the value addition (the difference between the sales and the cost of production) at every stage of the value chain.
When it comes to how many types of GST, three types of GST are adopted by different countries as per the suitability of their country’s economic structure. The main differentiating factor in these three types is how the investment is being treated at the tax base.
- GDP-type GST: No deduction on capital investment and depreciation of capital. This is as good as sales tax levied on consumer goods and capital goods. Countries that have adopted this type include China, Senegal, Morocco, and Finland.
- Consumption-type GST: Capital investment is deducted from the value addition on the year of purchase. This is similar to the sale tax on consumer goods. Most of the countries have adopted this type.
- Income-type GST: Tax is levied on Domestic Product, exempting the capital depreciation. Argentina, Turkey, and Peru have adopted this type of GST.
Single and Dual GST
Further, GST can be either a single unified GST system which means a single tax is applicable countrywide and Dual GST system where tax is levied separately by the central and the state government. The countries that have adopted the Dual GST system include Canada, India, and Brazil.
GST in India
After a lot of research, reformations, and consideration, Dual GST was rolled out in July 2017 where the center and the state are authorized to charge tax in unison. Hence, now, taxpayers would primarily pay only two taxes – GST charged by the center (CGST) and GST charged by the state (SGST). IGST would be charged for interstate transactions.
GST was first proposed in India in the year 2000 to leverage the following reformatory steps:
- Eradication of corruption and tax evasion,
- Transparency in businesses,
- Mitigating the cascading impact of taxes, bring down prices and thereby increase consumption,
- Beat inflation,
- Increase Foreign Direct Investment (FDI), and
- Systematise the entire unorganised segment that employs approximately 85% of India’s total workforce.
Before and After GST in India
Indirect tax is the tax that is paid by the customers for the goods and services they purchase. Before the implementation of GST, there are multiple taxes levied at different stages by the state and central government such as –
- Custom Duty levied by the Central Govt. on Import/ Export.
- Central Excise Duty levied by the Central Govt. on manufacture and production.
- Central Sales Tax levied by the State Govt. on Inter-state sale.
- Service Tax levied by the Central Govt. on Taxable Service.
- VAT levied by the State Govt. on sales within the state, and several others.
The biggest discrepancy of this system was that the taxpayers had to pay tax on tax that created a cascading impact, eventually increasing the final cost of the product that the end customer had to pay.
The first thing that GST does is to consolidate all these taxes into one. However, the two-tier GST that has been adopted by India still includes separate taxes levied by the central and state government in the form of CGST and SGST. Even then, it is much more simplified a process than before.
Next, GST does away with the tax-on-tax process, wherein, the amount of tax levied at the earlier stages in the value chain is deducted in the following stages. It makes the tax burden a lot lighter by the time it reaches the customer.
Let us understand what is GST with an example
Before the implementation of GST, the entire value chain would look like this –
If a manufacturer from State A sold goods to a wholesaler in State B, he would have to pay Central Excise, VAT/CST applicable on sale of goods, Entry Tax charged by State B. All these taxes were charged at different points adding up to the cost of the goods purchased.
- The state (SGST) and the central government (CGST) are to share the tax in unison.
- In the case of the inter-state supply of goods, the only central government would charge tax.
- IGST will be distributed within the centre, state, and Union Territory.
Hence, post-GST rollout, business transactions would look somewhat like this:
A manufacturer buys raw material worth Rs.100 that includes GST charged at the rate of 10%. He also makes a value addition of Rs.10 to the goods. Now he has to pay 10% of the costs (Rs.110) that come to Rs.11.
Had it been the earlier tax reforms, he had to pay Rs.11. But as per the GST rules, he deducts the tax amount of Rs. 10 that he had already paid when he bought the raw material. Hence, now he pays a tax of Re.1 only.
The same goods reach the hands of the wholesaler who pays Rs.110 (a cost which is inclusive of the tax). The wholesaler adds a margin of Rs.10 that takes the cost of the product to Rs120. When the wholesaler pays the GST at the rate of 10 percent that comes to Rs.12, he deducts the previously paid tax of Rs.11 and pays the GST of Re.1.
Now the goods worth Rs.120 (inclusive of the taxes) are purchased by the retailer. He adds a margin of Rs.10 to it taking the cost to Rs.130. Again the tax levied at this stage would be 10% of Rs.130 that is Rs.13. However, under GST, the retailer would have to pay Rs.13 (total tax) – Rs.12 (previously paid tax), which is Re.1.
Finally, the customer who purchases the goods worth Rs.130 will have to pay a tax of Rs.13.
Rates and Exemptions
A four-tier tax structure of 5%, 12%, 18%, and 28% was implemented depending on the consumption pattern. Certain commodities that are exempted from GST include food grains, fruits, vegetables, animal products, alcohol, petroleum products, and electricity among others.
The Downside of GST in India
Even though GST came with a lot of promises for a better and more organised tax reform that will benefit the governments and taxpayers across the cross-section of the society, it was received with a mixed reaction from people across India.
Even the critics and market watchers emphasised a couple of points that make the newly implemented tax reform quite complex. The first among them is the dual structure that betrays the one-nation-one-tax motto, to begin with. This could lead to economic and political complications in the future. Secondly, the comparatively higher tax rate at 28 percent is also being viewed as one of its drawbacks.
Apart from the critics, the business community is also facing a lot of problems regarding electronic payment of the bill, the cumbersome procedure with a lot of loopholes in it, among several other factors. In a recent report in Economic Times, the business communities were found to have filed a writ petition in Delhi High Court for not being able to claim the transitional tax credit. It is just one of the many reactions that the newly implemented tax reform is facing at the moment.
Besides, several small business owners in the unorganised sector are fretting over online transactions. Potent questions such as – ‘can I pay GST online’ or ‘is GST registration mandatory’ are asked repeatedly.
Bottom Line
Such an overhaul in the tax reforms would create disruptions among business communities and customers. It will take time to subside. Hopefully, all the objectives of GST would be realised very soon. For the time being, it can be said that the gestational period for GST in India is not over yet, as the Interim Budget 2019-20 revealed that the benefits of GST are not likely to be evident until 2020-21.
Sources:
1. https://www.nbc.com.my/gst/brief-history-gst/
2. https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=205
