- Date : 04/04/2017
- Read: 6 mins
Don’t know how the GST roll out, scheduled for this July, will affect you? Read on to find out.
In India, the tax system has traditionally been, literally, quite taxing. There are the central government taxes such as the service taxes, central surcharges and central cesses. Then there are those levied by the state government: VAT/sales taxes, entertainment tax, luxury tax, and state cesses.
India’s taxation is fragmented, and can be a bit complex. There are separate taxes for goods and services, and this necessitates division of transaction values into value of goods and values of services for taxation, leading to greater complications, increased administrative work, and higher compliance costs.
Thus, the consumer ends up paying for multiple taxes levied by the centre, as well as the various state governments, on services and materials that go into making a single product, and transporting this product from the factory to the retail outlet.
However, all that is now set to be over. On 20 March 2017, the Union Cabinet approved four legislations that were needed to get the Goods and Services Tax (GST) introduced in Parliament; these bills had earlier been approved by the GST Council.
The GST Council, comprising Finance Minister- Arun Jaitley and his counterparts from the states – will now finalise the tax slabs that are simpler to follower than those that existed so far.
It was the Kelkar Task Force on indirect tax, way back in 2003, which first recommended a GST regime based on VAT principle. Now, 14 years later, Prime Minister Narendra Modi’s government has made it possible, and the GST rollout will happen on July 1.
This should bring relief all around, as a GST rollout spells a “One-Country-One-Tax” regime that subsumes all indirect taxes at the centre and the state level, thereby reducing the cascading effect of taxes on taxes. This also portends to reduce or even eliminate tax evasion and accompanying corrupt practices, greater transparency, increase productivity, and thereby a greater tax-GDP ratio.
In fact, the statement as much, and maintained that the implementation of GST law would lead to an increase in Gross Domestic Product (GDP) of the country by 1-2%.
“This in turn will lead to the creation of more employment and increase in productivity,” the statement added.
New Tax Slabs
The cabinet’s decision on 20 March 2017 means it has approved the GST Council’s proposal for four different tax slabs – of 5%, 12%, 18% and 28% – all within an overall cap of 40%.
Apart from this, there will be a cess on demerit goods – products that are considered unhealthy or otherwise socially undesirable due to the perceived negative effects associated with them; tobacco products such as cigarettes, luxury cars and aerated drinks are examples of demerit goods.
Incidentally, for GST to become a reality in India, the GST Bill needs to be passed by a two-thirds majority in both Houses of Parliament (Lok Sabha and Rajya Sabha), and by the legislatures of half of the 29 States. The four mentioned bills were passed by the Lok Sabha on 30 March 2017, and will soon be discussed in the Rajya Sabha.
Let’s face it: the introduction of GST, at a time when the Indian economy is emerging as a force in the world economic order, had become the need of the hour, and more so as most of the world has switched to GST.
A booming economy like India’s implies is that there is a surge in production and distribution of goods and services across sectors. As mentioned earlier, this has entailed a multiplicity of taxes. GST will change this in several ways:
- The GST system eliminates or reduces the cascading effect of taxes on the final price of the product, and instead integrates all types of taxes
- Makes it possible for tax liability to be divided between manufacturing and services
- Once barriers between states are removed, there will be no tax on tax – which is what happens when goods move across state borders
- GST will be levied only at the final destination of consumption, based on VAT principle, and not at multiple points.
This means that if a product is taxed at 12%, it will include taxes imposed by both the centre and the state government. This will help in the development of a common national market, and will reduce overall taxes that consumers have to pay on products.
Products and tax slabs
Taxes on all products and services haven’t been spelled out yet. However, here are some of the changes that GST is expected to bring.
- While food grains will remain untaxed, mass consumption products such as packaged salts and spices will fall under the 5% tax bracket.
- Products like oil, soaps, toothpaste etc. that were previously taxed at over 20%, will be taxed between 12% and 18% under GST.
- White goods -such as washing machines, air conditioners and refrigerators – that were previously taxed at 30%-31%, will be taxed at around 28% post the GST roll out.
- Some services that will not fall under GST and will remain untaxed, include healthcare, education, distribution and transmission of electricity, pilgrimages, public conveniences, and services rendered by the RBI and Government.
Gains for Businesses
A simplified tax structure getting simplified, can reduce the hassles of filing tax forms by merchants, and transaction costs for manufacturers.
Moreover, with the tax filing process going digital, transparency will be brought into tax administration, leading to less tax evasion. At the macro level, the national economy is set to benefit, as eventually, competitiveness will increase, as will be job opportunities and exports.
With the emergence of a common national market, one area to get a massive leg-up is the e-commerce market, expected to cross the $100 billion by 2020. Managing CST and VAT issues in the GST regime stands to get easier in coming days.
Overall, the GST Bill has more positives than negatives, which are minor. Hopefully, with GST, the confusion over multiple taxations, tax evasions and accumulation of black money will be things of the past.