GST is a single, destination based indirect tax.
It is levied on value added to goods as well as services at each stage of the supply chain. The main objective behind levying such a tax is to consolidate multiple indirect tax levies into a single tax.
Thus, GST subsumes a host of taxes. It overcomes limitations of the previous indirect tax structure. Furthermore, it brings efficiency in the administration of tax.
GST is proposed to have a dual structure. It will have two components: Central GST and State GST. Central GST will replace Central excise duty, services tax and additional customs duties etc. and will be levied by the centre. State GST will replace VAT, Central State Tax, entertainment tax, luxury tax, lottery tax, electricity duty etc. and will be levied by the states.
GST will be charged on the value-added at each stage of sale/ purchase in the supply chain. To illustrate: Let us say that the GST rate is 10 %. A chips manufacturer buys raw materials worth Rs. 10 (potatoes etc.), makes chips and sells it to a retailer at Rs 20. The value-added by the Chips manufacturer is Rs. 10 (20-10). Thus, GST payable by him is Re. 1 (10 % of 10). Similarly, if the retailer sells the chips to final consumers at Rs. 25, the value-added by him is Rs. 5 (25-20). The GST payable by the retailer is Rs. 0.5
State GST will follow the destination principle that is it would be applied in the state where the product is sold.
GST will replace all indirect taxes and will be levied on all goods and services. The exceptions are: petroleum product, Entertainment and amusement tax levied and collected by Panchayat/ Municipality/ district council, alcohol, stamp duty, customs duty, tax on consumption and sale of electricity
GST has been adopted by around 140 countries around the world. It’s benefits are:
Simplified tax regime:
Currently there are multiple indirect taxes (around 15) levied by the Central and the State Government and they differ across states. GST will simplify and rationalize the tax structure of India by bringing in a regime of a single and uniform tax.
A simple tax regime will reduce the cost of compliance and hence increase the number of taxpayers. This will help increase tax revenues. Also, the tax base will be comprehensive as all goods and services will be taxed with a few exemptions.
Reduce the cascading effect of taxation:
As mentioned earlier, GST is a uniform tax levied on value-added. Levy at each stage of sale/ purchase will be set-off against taxes paid by the supplier in the previous stage. Through this set-off mechanism, GST is levied only on value-added. To illustrate: Let’s say GST is 10 %. Continuing with our earlier example, if you make a packet of chips (manufacturer) and sell it for Rs. 20 it should be 30, your GST should come out to be Rs 3 (10 % of Rs. 30). But, this tax is levied only on value-addition and so you’ll be allowed to claim a tax credit to the value of GST already paid by the supplier in the previous stage. Let’s say you bought raw materials (potatoes etc.) worth Rs. 10 for making chips. The supplier of the raw materials has already paid Re. 1 (10 % of Rs. 10) as GST. So, the chips manufacturer can claim a tax credit of Re. 1 and pay only the remaining Rs. 2 as GST. Thus, there is no cascading effect and no burden of ‘tax on tax’.
Improve ease of doing business:
Currently, doing business across state borders is very difficult due to differences in tax procedures. GST will lead to a unified economy and allow businesses to expand its operations with ease. It will also improve manufacturing in India, attract foreign investment and lead to job creation.
Growth of GDP (Gross Domestic Product): Introduction of GST will help reduce tax rates, remove multiple point taxation, and increase revenues. Basically, a uniform tax system will make India a common market, and will boost trade, commerce, and export. Together, these will help accelerate economic growth and boost the GDP of the country. Several experts are anticipating this growth to be somewhere around 1-2% and expecting GST to bring down inflation by roughly 2% as well.A Federal Reserve paper says GST could give a boost of up to 4.2% to the Economy. It will also boost external trade about 32%.
Optimal supply chain decisions: Currently, all supply chain decisions are guided with the view to reduce the burden of indirect taxes. GST will do away with the interest rate differentials and lead to seamless movement of goods and services between states. Read this article to appreciate the importance of optimal supply chain: India’s reverse Brexit: GST will create million of formal jobs
Benefit from the Composition Scheme for Small Businesses:
To encourage reduced taxes and tax compliances, the Composition Scheme was introduced under GST. Small business owners registered under the scheme are required to pay a fixed percentage of tax on their turnover. In addition to this, unlike the regular GST tax payers, small businesses registered under Composition Scheme need to file one quarterly return. Following are the tax rates under Composition Scheme:
Small businesses with a turnover of Rs 1.50 crores would pay a flat GST rate of 1%. They will now file one tax return only.
Small service providers with an annual turnover of Rs 50 Lakhs would now pay a GST of 6% instead of 18%
Simple and easy online procedure
The entire process of GST (from registration to filing returns) is made online, and it is super simple. This has been beneficial for start-ups especially, as they do not have to run from pillar to post to get different registrations such as VAT, excise, and service tax.
Regulated Unorganized Businesses:
One of the motivations to implement GST was to get on board the unorganized sector and eventually increase the tax base. According to Economic Survey 2017 – 2018, post the implementation of GST, there has been a 50% increase in the number of indirect tax payers. Furthermore, there has been an increase in the number of voluntary registrations, especially small enterprises that sell goods to large enterprises. These small enterprises want to come under the ambit of GST and claim input tax credit benefit.
Disadvantages of GST
An increase in operational costs:
Businesses will have to employ tax professionals to be GST-complaint. This will gradually increase costs for small businesses as they will have to bear the additional cost of hiring experts. Businesses have to either update their existing accounting or ERP software to GST-compliant one or buy a GST software so that they can keep their business going. But both the options lead to increased cost of software purchase and training of employees for an efficient utilization of the new billing software.
SMEs will have a higher tax burden:
Smaller businesses, especially in the manufacturing sector will face difficulties under GST. Earlier, only businesses whose turnover exceeded Rs 1.5 crore had to pay excise duty. But now any business whose turnover exceeds Rs 20 lakh will have to pay GST.
However GST Council is set to discuss a proposal to exempt small businesses with annual turnover of less than Rs 2 crore from filing annual returns.
State lose self-administration to change charge cost:
The nation will lose autonomy to trade charge cost and it will likely be done by methods for GST gathering.
Oil and liquor continues being out
Oil and liquor continue being saved out of GST area yet they shape for all intents and purposes forty Percent if India’s general trade, so colossal piece of advancement continues being out of GST space.
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