GST 101: What India’s biggest tax reform means for you

TomorrowMakers ™

GST 101: What India’s biggest tax reform means for you

05 August 2016
The goods and services tax (GST Bill) and its impact on consumers explained in terms you will actually understand
 
 

Things are about to change within India’s $2 trillion economy.

The GST – or Goods and Services Tax – Bill is a key constitutional amendment that was passed on Wednesday, 3rd August, 2016 in the Rajya Sabha, and on Monday, 8th August, 2016 in the Lok Sabha after months of discussions between India’s ruling party and the opposition. The Bill was passed with 203 votes in favour and none against in the Rajya Sabha and with 443 votes in favour and none against in the Lok Sabha.

The GST Bill is a game changer for India’s 1.3 billion consumers and historically is the most important reform in indirect taxation. Here’s a look at how the Indian Taxation system worked before and after the GST:

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Why is the GST important?

Before the passage of this Bill, we were burdened with a plethora of state-level taxes and levies of about 25%-30%, and in some sectors even higher. The GST will replace all indirect taxes, currently applied to goods and services and is expected to be around 18%.

GST will mark the beginning of a uniform tax regime and will allow a smooth flow of goods and services between states, making the country one marketplace. That means less tax burden and improved ease of doing business.

An example to explain GST’s positive effect on consumers

Under the old taxation system, a product priced at Rs. 100 would undergo several levels of taxation: Excise Duty would be around 10%, bringing the price to 110. The VAT would be around 14%, bringing the price to Rs. 125.40. Service Tax of 6% would add to that, bringing the price to, say Rs. 132. In reality, the Indirect Taxes applied come up to around 25-30% in total.  

Under the new GST taxation system: Let’s say a product is priced at Rs. 100 and we apply the Central GST of 10% (equal to Rs. 10) and the state GST of approximately 18% (equal to Rs. 18), the final price becomes Rs. 100 + Rs. 10 + Rs. 18 which equals Rs. 128. Thus, in this case, the product becomes cheaper because there is no tax on tax in GST.

An example to explain GST’s negative effect on consumers

In certain sectors, however, such as Textiles, Edible Oil, low value footwear, however, where there is currently VAT of only 5% and there is no Excise Duty, the overall tax chargeable comes to around 8-9%. In this case, if the standard GST of around 18% (proposed) is applied, it would make these products more expensive.

How will GST affect you?

There are both long-term benefits and short- to medium-term benefits of GST. In the medium term consumers will enjoy lower prices, businesses will be able to operate more efficiently and tax collection will be simpler.

 

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How GST affects different sectors of the Indian Economy

GST is the most transformative tax reform in years and is going to affect your budget in different ways. It will also affect different sectors of the economy in different ways.

Sector

Positives

Negatives

FMCG

  • No need for multiple sales depot
  • Decrease in tax from 25-27% to 18-20%
  • Prices of luxury cars, tobacco products and aerated drinks might go up if recommended 40% “sin/demerit” rate passes
  • Food industry might see a hike in effective tax

Telecom

  • Might become easier for handset makers to conduct business
  • Companies will save cost on logistics
  • Mobile phone prices likely to even out across the states
  • Call and data charges might go up

Tech

  • Will eliminate multiple levies
  • Digital services will have deeper reach
  • Documentation might increase for companies
  • Duty on manufactured goods will go up from 14-15% to 18%
  • Likely rise in prices of electronics

E-commerce

  • Free movement of products through a single unified market
  • Increase in documentation load for companies
  • Increases in prices

Automobiles

  • Likely drop of 8% in on-road prices
  • May lead to increase in volumes
  • Demand for commercial vehicles may be hit in the medium term
  • Logistic hurdles may be eased

Media

  • Likely drop in multiplex ticket prices
  • Tax 2-4%
  • Yet to be discovered

Insurance

  • Yet to be discovered
  • Up to 300 basis points hike in taxes
  • Life, health and motor insurance will to go up

Airlines

  • Yet to be discovered
  • Flights to become more expensive as service of 6-9% to be replaced by GST of 15-18%

 

Challenges of GST: what you need to know

  1. Since all 443 Lok Sabha members voted unanimously in favour of the Bill, it’s time for it to be ratified by a minimum of 15 states in their respective assemblies. The individual states will have to call for special sessions in the next 30 days to clear GST. Expect GST to be rolled out by April 1st, 2017 if things go as planned.
  2. Since India is adopting a dual GST: central GST and state GST, one of the challenges in its implementation remains coordination among states.
  3. The Centre prefers a moderate rate whereas the states are seeking a minimum rate of 20%. Therefore, there still needs to be consensus on uniform GST rates, inter-state transaction of goods and services and the administrative infrastructure for implementation.

While the transition to the GST tax model is definitely going to be challenging for the Central Government and the states it is going to simplify our country’s complex tax structure in the long run.

Want to know what people are saying about the GST? Click here to see the best reactions on the internet. 

 

 

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