Goods and Services Tax (GST) is a proposed comprehensive tax levy, expected to be implemented in India by April 2016. A uniform tax system across the country, it will be charged at State level (SGST) as well as at the Centre (CGST).
An effort to simplify the complex taxation structure in India, GST will serve as a replacement for all the indirect taxes charged on goods and services. CGST will include taxes such as CENVAT (central excise duty), Service tax and other custom duties levied by the centre, while SGST will integrate Octroi, central sales tax (CST) and other taxes levied at the state level.
The implementation of GST will hope to bring a reform in the Indian Tax Regime, helping the economy grow, as well as removing tax barriers between the centre and states. To put it into perspective, India is expected to gain approximately $15 billion a year, by implementing GST, as it would promote exports, increase employment, and boost growth. The entire country will be under a single uniform tax rate that will be lower than that under the current tax system. It will be a simple, centralized, and computerized tax system throughout India, striving to reduce tax evasion and increase the tax net and total tax collected.
It has already been successfully implemented in around 140 countries. The key point about GST is that will be charged only at the destination, i.e. retailer to final customer.
With the implementation of GST, taxes on services can be set off against taxes on goods. Thus, the retailers would be positively impacted.
Let us see how it happens.
Products we buy go through numerous stages before reaching retailers. At each stage, tax is levied, in turn increasing price of goods sold. Let’s look at the following table to understand this:
|Stage of supply chain||Purchase value of Input||Value addition||Value at next stage||Rate of GST||GST on output||Input Tax Credit||Net GST|
|Manufacturer||100||30||130||10%||13||10||13-10 = 3|
|Whole seller||130||20||150||10%||15||13||15-13 = 2|
|Retailer||150||10||160||10%||16||15||16-15 = 1|
Retailers will henceforth be able to pass on benefits of the reduced tax incidence to customers in the form of reduced prices.
The Positive Impact GST is expected to bring to India:
- Relief from the burden of major taxes and their cascading effects
- Trade barriers within the country will be removed
- Long term rise in growth rate
- Improved compliance will lead to increase in tax collection
- India’s global ranking in ‘Ease of doing business’ will improve considerably
- Elimination of multiple taxes will help reduce cost prices or in margin reduction
- Lower tax rate will improve the tax net, bringing the government more revenue from taxes
This post was written by Umesh M, a bright, young chap pursuing his MBA at a leading B-school, and currently interning at the A-Team.