GST and its Implications

The following is a part of a paper which i submitted for internal assessment at my college.      

                   Goods and Services Tax (and its implications) in India

The law ministry has cleared the goods and services tax (GST) bill that was brought to it for legal consultation and now the finance ministry will take the proposed constitutional amendment to the Cabinet in the coming week for its approval before it is tabled in the winter session of Parliament.

Here is an analysis of the proposed GST.

Some terms used in this passage are:

1. End user is a person that actually uses the product.

2. Retail is the sale of goods and services from businesses or individuals to end users. A retailer purchases products in large quantities from manufacturers and then sells smaller quantities to consumers.

3. Sales tax is a kind of tax imposed by the government at the point of sale on retail goods and services. It is based on the selling price of goods and services.It is set by the state.

4. Value added to a product by a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs.

5. VAT:

Vat is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With VAT, collections, remittances to the governemnt, and credits for taxes already paid occur each time a business in the supply chain purchases products.

VAT was formally introduced as an indirect tax into the Indian tax system on April 1, 2005. Why was it introduced?

Value added tax (VAT) in theory avoids the cascade effect of sales tax by taxing only the value added at each stage of production. For this reason, throughout the world, VAT has been gaining favour over traditional sales taxes. In principle, VAT applies to all provisions of goods and services. VAT is assessed and collected on the value of goods or services that have been provided every time there is a transaction (sale/purchase). The seller charges VAT to the buyer, and the seller pays this VAT to the government. If, however, the purchaser is not an end user, but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it charges to its customers. The government only receives the difference; in other words, it is paid tax on the gross margin of each transaction, by each participant in the sales chain.

In theory, sales tax is normally charged on end users (consumers). The VAT mechanism means that the end-user tax is the same as it would be with a sales tax. The main difference is the extra accounting required by those in the middle of the supply chain; this disadvantage of VAT is balanced by application of the same tax to each member of the production chain regardless of its position in it and the position of its customers, reducing the effort required to check and certify their status..

A general economic idea is that if sales taxes exceed 10%, people start engaging in widespread tax evading activity (like buying over the Internet, pretending to be a business, buying at wholesale, buying products through an employer etc.) On the other hand, total VAT rates can rise above 10% without widespread evasion because of the novel collection mechanism.

And it is not as evil as thought although when VAT was implemented .

Prices did rise but that was because then more goods which were illegally escaping tax were brought into its net and thus Black money was also controlled.

So, why GST is being considered?

At present, a consumer in India is taxed more than once. First, he/she has to pay the CST or Central Sale Tax and next comes the state's sales tax, thus leading to a double burden. Besides the CST, 36 states and union territories of India levy a sales tax on sale and purchase of goods. But the sales tax levied is not uniform in nature and varies from state to state. Most states also levy tax on entry of goods. The list of taxable goods, classifications and rates are neither uniform, nor standardised.

Compliance to all these complicated taxes is burdensome, time-wasting and leads to corruption. Most businesses face commercial and legal hassles in this regard. The end result is that goods cost more and customers naturally seek cheaper alternatives. India already faces competition from other growing economies, such as China. And we are effectively pricing ourselves out.

Difference between VAT and GST

GST is a further improvement over VAT.

Vat is applied only on tangible goods while GST is applied on both goods and services.Through a tax credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in the supply chain.

GST in India

In India, the proposed GST regime will have dual tax structure where one will be the central component levied by the Centre, called the central GST, and the other to be levied by the states, called the state GST. In the dual tax structure the Centre and states would have concurrent jurisdiction and both the rates of state GST and the Central GST is likely to be in the range of 10% to 12% each,keeping the overall rate about 22% .While the basic features of the law would remain uniform, the dual model would be implemented through multiple statutes.

All goods and services, barring a few exceptions, will be brought into the GST base. There will be no distinction between goods and services.

Despite the expected differences between state, they have come to the following conclusions:

• Two-part levy: Central GST and State GST.
• Common threshold for the levy of GST: All businesses with annual turnover of more than Rs 10 lakh (US $16,480) for general states and Rs 5 lakh (US$8,240) for special-category and north-eastern states.
• Harmonize GST exemption lists nationwide: 96 items exempted by States and 243 items by the Center.

Implications of implementing GST

Benefits Under GST, exports are suppose to be zero rated and taxes on imports are same as on domestic goods and services. Experts believe that implementation of GST will contribute as much as 1.5 per cent to the GDP and Current Account Deficit(CAD) can also be narrowed. GST rates are typically between 16 per cent and 20 per cent world over and in India it is also likely to be the same.

The GST is expected to increase the tax base by increasing the number of taxable goods and services. The biggest benefit is that multiple taxes that currently exist will no longer remain in the picture. This means that taxes like octroi, CENVAT, central sales tax, state sales tax, entry tax, license fees, turnover tax etc will no longer be present and all that will be brought under the GST. Businesses thus will not have to deal with multiple taxes but will be able to undertake the tax compliance in an easy manner. This will also help in reducing transaction cost.

So do we as consumers get goods at a cheaper price? Probably not, and it is here that the GST has been attacked by the opposition. Since taxes are distributed across the chain, the consumer prices are likely to rise to maintain the current tax revenue levels. The government has justified this by saying it would provide tax cuts across various brackets. This isn't entirely satisfactory. First, the tax paying population isn't too significant a number to begin with and second, the tax payer is likely to get a meager tax cut for the GST he would pay for all the goods or services he purchases.

GST is clearly a long term strategy, it would lead to a higher output, more employment opportunities, and economic inclusion. Initially however, it is likely cause high inflation rates, administrative costs, and face stiff oppositions from states due to loss of autonomy.

States are opposing GST. Why? More industrialized states, such as Gujarat, Maharashtra and Tamil Nadu, which derive 70 to 80 percent of their revenue from state taxes, are most concerned about the potential change in tax base with the GST. By shifting taxation from production to consumption, industrialized states which currently export most of their products to other states around the nation will face significant losses in tax revenue, since the levies will instead go to states where the products are sold.

This issue is addressed by Finance Minister Arun Jaitley , who said that the Center would compensate their loss in CST revenue of about Rs. 34,000 crore (about US$5.6 billion) over a three-year period, appeasing some of the concerns.

IT Infrastructure: The Government needs to develop/set up proper infrastructure to

implement GST, especially IT infrastructure.

Design and Structure: No less significant is the issue of an appropriate design and

structure of GST. For instance, how the issue of inter-state movement of goods and

services may be addressed. The phasing out of CST may go a long way in

addressing the issue of inter-state trade and commerce in goods but the crucial issue

regarding services originating in one state and being consumed in other state still

remains.

Sharing of resources: Another contentious issue that is bound to crop up in this

regard is the manner of sharing of resources between the Centre and the states and

among the states as also the basis of their devolution. Taking away the powers of

taxation of goods by the States will not be favoured by them.

Efficient administration : Apart from all these, there has to be robust and integrated

machinery dedicated to the task of tracking flow of goods and services across the

country and rendering accurate accounting of levies associated with such flow of

goods and services. No meaningful risk management system can work without

efficient tax administration software.

Taxation issues: The contentious issue of taxing financial services and e-commerce is

to be appropriately addressed and integrated.

Confidence:

Some states that are in favour of GST, fear the state saying

“ We are in favor of this Act...The problem is when the central government receives any type of tax from people, for years, they don't want to transfer it (state''s share) to state governments. It is obvious the share of state government should be immediately passed to it