Levying a compulsory financial bill on individuals or legal institutes by a state or equivalent to meet public expenditure is called “Tax”. You are acquainted with various taxes like – income tax, property tax, sales tax and service tax. Across the globe every country has their own architecture and set of rules and guidelines to pay taxes, which are adhered and any non-compliance is punishable act under their law.
Indian constitution defines tax almost similarly and has more than twenty five direct and in-direct taxes. There are different taxes imposed by state governments and the central government, separately. So many taxes, surely had chances of non-compliance and formulating a single tax across the country was the need of the hour. This imperative necessity gave birth to GST- Goods and Service Tax!
Tax Reforms history
The V.P.Singh Government, in 1986, started tax reforms with the introduction of MODVAT (Modified Value Added Tax). At the same time the proposal of a single common tax named – “Goods and Service Tax” was proposed, which was later approved by the Atal Bihari Vajpayee Government, in 1999. After 17 years of debates, changes, formation of committees and ups and downs the political will power of the Narendra Modi Government launched GST on 30th June 2017.
Goods and Services Tax (GST)
Replacing multiple taxes levied by state and central governments a single tax with rates of 0%, 5%, 12%, 18% and 28% is applicable under GST. GST is governed by a GST council chaired by the finance Minister of India. The rates vary as per goods and services, and it is quite obvious that tax on certain things and services have increased and vice-versa. As the implementation of the new regime is just three days old, there are confusion, general non-awareness and disturbance amongst individuals and institutes.
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The technical definition: GST is detailed, multi-stage, destination- based tax imposed on every value addition stage.
After the GST implementation the following will be the format and different terms you must be aware of:
- SGST (State GST): The revenue will be collected by the state governments. Sales within the State will be imposed with this.
- CGST (Central GST): The revenue will be collected by the Central government.
- IGST (Integrated GST): The revenue will be collected by the Central government. Sales from one state to another will be imposed with this.
Advantages of Goods and Service Tax
- Increased transparency and abolishing complex, cascading taxes (tax on tax), by single, simple tax.
- Simplified calculation, procedure, implementation and compliance will lead to increased submission.
- Registered retailer will reap the benefit of doing business at lower cost, as GST is not considered as cost to them.
- Cost of thousands of household products will come down, initiating a cycle of increased demand and increased sales for companies producing them.
- Taxation burden on both manufacturing and services will be divided equally. Currently service tax paid on input services cannot be left, against output VAT. To simplify with example- if a retailer is paying service tax on certain service, current system do not have any option by which he can ask for a credit and hence he passes it to the end customer. Under GST he can avail, the input tax credit and need not to burden the end user; thus eliminating the cascading effect.
- Paper work or number of compliances to be followed will be replaced by Single paper. Currently excise VAT and service tax need separate returns and separate filling. With GST, a single compliance has to be followed.
- As GST is levied on the final destination, not at various stages, of consumption the economic distortion in current system will end resulting in development of a bigger national market.
- The clarity in taxes will empower people and eradicate the all sorts of corruption in tax administration. Further, all transactions will be via electronic medium, enabling minimum physical interactions with tax officials, and any unwanted intervention is impossible.
- Single resolution platform (comprehension IT System), the GSTN, will support for better understanding and execution of the every aspect of GST. This system will allocate GSTIN (GST identification number) to traders, stockists, retailers and manufacturers and on a long run help the government to analyze and plug leakages.
- Will put the country at par with other developed countries that have superior structured tax system.
- Integrating the country with a single tax regime will improve the collection of taxes and as a result development plans will get the required economical thrust.
- A gradual and steady growth of GDP is overviewed.
- Goods which are manufactured indigenously, with current taxing @ central excise- 12.5%+State VAT-5% to 15%, will be cheaper. The same will happen as GST for them will be @5% or standard rates of 12% and 18% only.
- GST allows taxpayers, refund within 60 days and even release 90% refund, provisionally, in case of exporters within 7 days.
- The refund claims, in GST, is directly credited in your bank account. In case of delay in releasing the refund amount, interest will be paid.
- GST compliance rating mechanism categorises taxpayers as per their compliance followed. There are slabs rates on which the percentage of refund claims will be disbursed instantly. Say for example if taxpayer comes under the rating of 8, his 80% of the refund will be instant.
Disadvantages of GST
- The real estate will be affected, as the cost of new houses will increase by 8%, subsequently the demand will go down by 12%.
- Experts feel that there are changes only in the terminology, like- the CGST and SGST are changed nomenclature of Central Excise/Service tax, VAT and CST. Broadly speaking GST is similar to existing taxes.
- Problem arises for products and services on which the taxes are below 4% and with GST their tax increases, for example- garments and clothes.
- The current tax rate on flights range from 6 to 9%, with GST coming, the aviation industry faces the challenge as the new tax rate will be over 15%.
- Though the GST has been launched, lack of awareness, procedures, terminologies, and the lack of correct authentic information is creating confusion, irritation and bad mouthing of the system.
- Vouched for simplicity, the new system with five tax slabs, ignorance of terminologies and correctness of claims spread in the ecosystem are making things worse.
- The electronic medium chosen for this system currently is a hindrance as lot of the population is computer-illiterate.
- The awareness programs on GST are negligible and only small portion of the population may be acquainted with correct information, which may lead to red-tapism or even corruption.
- Fear and agony about the new policies of GST may lead to accumulate non-compliance.
- Tax burden on Small Manufacturing Establishments (SMEs) will increase. As per the current taxation system excise duties are levied only if the turnover is over Rs.1.5Crores. With GST the same is revised to Rs.20lakhs.
- All those companies, units or enterprises that now have to pay taxes under the GST regime will need professional support, which are always chargeable. Thereby increasing their over costs of operations.
- In the current business and tax set-up the use of software, which has the required elements of ERPs, tax returns, excise and VAT incorporated, needs to transform as per GST. This will need change in software, increased cost of buying the same and training the staff again.
- State of utter confusion for the fiscal year 2017-18 is worrisome for tax payers and businesses. The implementation of GST mid-year will need tax to be paid under old system for six months and the balance six month under the new taxation.
- Petroleum products, currently, are out of the scope of GST, therefore industries dependent on them, like- plastic cannot avail the input tax credit. Similarly manufacturing units operating on petrol and diesel cannot avail input tax credits; hence produce may come with increased prices. The government has not taken any stance on this subject and situation of uncertainty prevails on this crucial matter.
The Beginning of a new TAX ERA!
Any change gets a resistance, this is the law of nature, and this is what can be implied. Small teething problems implementing the new tax regime under GST may soon vanish. Professionals and experts ready with their explanations and support will lubricate the system and GST will start moving smoothly. India will be amongst those few countries which successfully implemented a unified tax system and are reaping the benefits thereon.
Once successfully implemented and compliant India will become a single big market for the globe to invest and enjoy the freedom of doing business with fewer compliance’s and better mobility. It is your duty to acquire correct knowledge and information on the subject and at the same time take initiative to share the learning. Your contribution in building an economically strong nation rests on positively taking GST Forward.