Goods and Services Tax act (GST) Explained (PDF)
- 1 Goods and Services Tax act (GST) Explained (PDF)
- 1.1 What is GST?
- 1.2 Types of GST?
- 1.3 What are the advantages and disadvantages of GST?
- 1.4 How will GST impact India’s GDP?
- 1.5 What about the common man? How will GST impact Indian citizens?
- 1.6 Why isn’t the GST Bill a Money or Finance or Tax Bills?
- 1.7 How will tax evasion be prevented by GST?
- 1.8 Is there a difference between GST and VAT?
- 1.9 Any difference between 18% general rate and RNR?
- 1.10 Will there be separate registration numbers?
- 1.11 What will be the service tax rate after GST is implemented?
- 1.12 Why cannot there be a single GST? What is the purpose of CGST and SGST?
- 1.13 Which taxes will no longer exist after the GST is implemented?
- 1.14 How does tax distribution happens under GST?
- 1.15 How will GST impact financial relationship between Central and State governments?
- 1.16 Will the tax revenues increase once GST is implemented?
- 1.17 What effects will GST bring down on states?
If we talk of economic reforms in India in recent times, GST is probably the most radical and of course, the biggest reform that India is experiencing. The GST or the Goods and Services Tax, also sometimes referred to as Constitution Amendment Bill had one and only one purpose – untangle the existing indirect tax system that plagues the Indian economy and burdens the end users with multi-layered taxation for goods and services. The end result is that Indian’s pay more for goods and services while they should be paying less.
With introduction of GST, the tax burden on end users will be reduced significantly as it will wipe out the cascading affect that taxes have on all goods and services in Indian economy. GST, which is all set to be introduced in 2017 is going to impact the entire tax structure, which spans over:
- tax incidence
- tax computation
- tax payment
- credit utilization
This means that the whole system of tax is not just getting a facelift but is also getting a complete overhaul. It will become so comprehensive that it will impact all goods and all services in Indian economy.
In this article we will take a very detailed look into GST from all aspects. But, before we start our long journey, you should know GST bill has received approval from Indian President after it cleared Rajya Sabha on August 3, 2016 and then cleared Lok Sabha on August 8, 2016. It has also been ratified by more than half of state legislatures. It was an incredible achievement wherein all political parties (barring one) of India stood together and unanimously agreed on the proposed changes. GST will be implemented by April of 2017 and all indirect taxes that are being levied as of now will be eventually replaced by a uniform taxation system.
Okay, now let us start understanding GST…
What is GST?
GST or Goods and Services Tax represents a unified system of applying indirect taxes in India. This unified system is intended to replace the indirect and highly complex system that already exists. In the current system, tax is applied on every good and service at various stages by both State and Central governments. There are two terrible things that happen in the existing system:
- Tax is applied on the total value of the service or the good at each product stage.
- The taxes applicable are different for States and Center.
In the current system, since taxes are applied on entire value of goods and services at various stages of production, the tax burden increases significantly for the end users or consumers.
The GST will however give a whole different breed of engineering, reducing the tax burden on consumers. What really will happen is that instead of applying varying rates of taxes on entire value of goods and services at various production stages, a uniform tax rate will be applied at various production stages but only on the value added to a particular product or service at different production stages. The end result will be that when the product reaches the final consumer, the consumer will be required to pay the GST that only and only the final dealer is charging.
The mechanism that helps to reduce the tax burned for the end user is the set-off which is allowed at each stage of production. This means that each stage the dealer can set-off the tax that has already been paid earlier in the supply chain.
A numerical example will help you understand better. For this, we will consider both Non-GST structure and also the GST structure.
The Non-GST Structure
Let us assume that X is a manufacturer of T-Shirts. He needs raw materials like cloth, thread, machinery for tailoring etc. Let us assume that he (X) buys all raw materials for INR 100. This cost includes 10% tax.
Now, X manufactures a T-Shirt using the raw materials. When he finishes manufacturing the T-Shirt, he adds some value to it. The value he adds is say, INR 30. So, the finished product, that is the T-Shirt just manufactured, will have a new value of INR 100 + INR 30 = INR 130.
Now, in current setting, there is no option of set-off of taxes that have already been paid for. X had already paid INR 10 as tax at 10% rate. But, as he cannot set-off the tax he has paid, he will try to recover the tax he paid by charging 10% tax on the new value of the T-Shirt. So, X will charge INR 13 (10% of 130) when he sells the T-Shirt to the wholesaler (let us say, the wholesaler is Y). So, Y will have to purchase the T-Shirt for INR 130 + INR 13 = INR 143.
Once the wholesaler gets the T-Shirt, he will add some profit margin. This profit margin is the value he adds to the T-Shirt. Let us say that the profit margin he adds is INR 20. So, the new value of the T-Shirt will be INR 143 + INR 20 = INR 163.
However, Y will now charge tax of 10% on the new value of the T-Shirt. The tax amounts to INR 16.30.
Y will sell the T-Shirt to a retailer, say Z. Here when Z purchases the T-Shirt, he will not only pay INR 163 but will also have to pay the tax of INR 16.30. So, Z will acquire the T-Shirt for INR 163 + INR 16.3 = INR 179.30.
Now, Z will be selling the T-Shirt to the final consumer. But Z will also want a profit margin. Since, there is no tax set-off, he has to recover the tax he has already paid and then make some profit. Let us assume that he decides a profit margin of INR 10. So, the T-Shirt’s value now increases to INR 179.30 + INR 10 = INR 189.30. Now a tax of 10% will be applied on the new value. At 10% tax rate, the tax amount stands at INR 18.93.
So, when Z sells the T-Shirt to a consumer, he will actually be charging INR 189.30 + INR 18.93 = INR 208.23.
So, the consumer buys the T-Shirt for INR 208.23. Unfortunately, the consumer will have no way of recovering taxes he or she pays. So, the end user or the consumer takes the burden of these taxes:
- INR 10: Tax that manufacturer pays to raw material provider.
- INR 13: Tax that manufacturer charges to wholesaler.
- INR 16.30: Tax that wholesaler charges to retailer.
- INR 18.93: Tax that retailer charges to consumer.
So, the total tax component is INR 58.23. This is the tax that the consumer pay in the current system where the taxes already paid cannot be set-off! That’s a huge amount of tax.
In GST Structure
We will continue with the same example as we took above.
The manufacture (X) first pays tax of INR 10 which is included the price he pays for raw materials. X then adds value of INR 30 and the total value then becomes INR 130. At 10% tax, the tax amount at this stage should be INR 13. However, since the manufacturer already paid INR 10 earlier as tax, he or she can set-off that payment against the new tax amount. This will mean that the new tax will be INR 13 – INR 10 = INR 3. Now this new tax is actually 10% of the value X adds, which is INR 30. So, INR 3 is GST incidence in case of manufacturer.
So, now X will sell the T-Shirt to a wholesaler Y. The wholesaler will purchase it for INR 130 and add a profit margin of INR 20. The gross value for the T-Shirt will now be INR 150. Applying 10% tax, the tax amount comes to INR 15. Since under GST, the wholesaler can set-off the tax on the output he produces against the tax on output produced by the manufacturer, the GST incidence at this stage of supply line comes down to INR 15 – INR 13 = INR 2. This is only 10% of actual value added.
Now Y, the wholesaler will sell the T-Shirt to retailer Z. Z adds profit margin of INR 10. The gross value of the T-Shirt will now stand at INR 160. At 10% tax, the effective tax should be INR 16. However, GST allows set-off. This means that Z will set off the tax on product purchased from wholesaler against tax on output he produces. So, the effective GST incidence will now be INR 16 – INR 15 = INR 1. This is only 10% of the actual value added.
However, Z actually charges INR 16 GST, which is payable by the consumer. So, the final price the consumer needs to pay here is INR 150 + INR 16 = INR 166 where, the total tax stands at INR 10 + INR 3 + INR 2 + INR 1 = INR 16.
Thus, we see that under GST, the price for the final output declines and the concept of “tax on tax” in Non-GST structure gets eliminated.
Okay, so GST actually reduces prices of goods and services. That’s good news for consumers.
Types of GST?
You must have heard of CGST, SGST and IGST. What are these? Well, they are just various components of GST. CGST stands for Central GST that is applied by central government. SGST is State GST that is applied by state government.
When transactions of goods and services take place inside a single state, both CGST and SGST are applied.
However, goods and services may be transacted between two different states. In that case, which state should apply GST? That will cause the same old problem of tax on tax. Hence, the center will then apply IGST or Integrated GST. IGST will be roughly equal to the sum of CGST and SGST. For inter-state transactions of goods and services, states will not levy any taxes.
What are the advantages and disadvantages of GST?
Honestly, there are many advantages of GST but only a few disadvantages. In this sections, we will take a tabular look into those pros and cons of GST. So, let us begin…
|Advantages of GST||Disadvantages of GST|
|When it comes to businesses and industries, GST will lead to development of a comprehensive and highly robust IT system. Services like payments, returns, registration etc. will all go online. This will mean compliance will become easy and high level of transparency will be achieved.||It is very likely that the tax on services may go up quite a bit|
|With introduction of GST, the structure and rate of indirect taxes will become uniform all across the nation. This will make investments tax-neutral. In other words, businesses can quickly choose the most preferred business destination without having to worry about tax implications.||Various states such as Tamil Nadu, Gujarat and Maharashtra are not very happy because the current tax system is from where they earned a large share of the revenue. With GST in place, this will go down because the taxes they earn from manufacturing segment will go down.|
|Tax cascading will stop because of seamless tax credits not just throughout the entire value chain but also across state boundaries. Businesses will thus find an environment of less hidden costs and hence, greater transparency.||Some states actually attract investment because of the current tax system. When GST comes in place, taxation will become uniform and some states will lose business because businesses will then seek out for other places too!|
|With GST transaction costs will go down and hence, this will lead to formation of a more competitive environment. This will directly mean more optimal use of resources and hence, quicker economic growth.|
|Services and goods that are manufactured locally will experience a fall in cost. This means that Indian goods and services will become highly competitive in international trade market because prices will fall. This will lead to increased exports.|
|Also, as taxation procedure and tax rates become uniform across India, compliance costs will be greatly reduced.|
|GST will mean easy administration at both central and state levels. Because the wide array of indirect taxes will be totally subsumed within GST, keeping track will become easy. Also, since GST will call for a robust and strong end-to-end IT infrastructure, administration of indirect taxes will become far easier.|
|Tax compliance will increase with introduction of GST. It simply means that input tax credit transfer throughout the value addition chain. This will lead to leakage control.|
|Government needs to collect tax revenues. With introduction of a seamless GST system, tax revenue collection costs for government will reduce significantly.|
|When it comes to benefits for consumers, they need to pay higher taxes in current system because of numerous hidden taxes. With GST in place, prices for final products will be reduced as only one tax will be applied in value chain that begins from manufactures and ends with consumer.|
|Because leakages will be prevented and efficiency will be gained, many commodities will become cheaper because tax burden will be reduced.|
Is there a possibility that goods and services will become pricey?
Well, it is very likely that some services in India will become costlier. That’s because government is proposing GST of 17% to 18%. This is higher than 15% service tax that is currently applicable in India.
However, goods which are produced in India will see a decline in prices because the current tax system levies a consolidated tax of 17.5% to 27.5%, which includes both central excise tax as well as value added tax.
Unless and until the government declares the exact rates, it will become difficult to say whether the prices of certain goods will go up or not. However, supply for certain goods may definitely go down.
Some of the services that are likely to experience increase in cost include train and air tickets, hotel service charges, cellphone bills etc. Some of the goods that are likely to experience reduced pricing include water heaters, lighting products, air coolers, SUVs, fans, two-wheelers, cars etc.
Will there be an impact on inflation because of GST?
No one can say for sure until the rates are declared. The impact on inflation can be correctly assessed only and only when the government declares the rates. Once the rates are declared, assessing impact on inflation will become easy.
However, experts are pretty much sure that despite the fact that some indigenously produced goods will go down, services charges will go up because at present only the center applies service tax. With introduction of GST however, states will also start implementing service tax. So, inflationary impact cannot be assessed until it becomes clear which services will cost higher than before.
How will GST impact India’s GDP?
There are two perspectives to this. First – the short term impact and second – the long term impact. The short term impact is really difficult to assess. India’s GDP may be hurt in the short term. Why so? That’s because 60% of India’s GDP is accounted for by the service sector. Since the tax on service sector will most likely increase, the GDP may take a negative impact. Experts also think that there may be a 20 to 70 basis points increase in headline CPI inflation. It may also happen that central government’s tax revenue will increase while some state governments will lose out on tax revenue.
In the long run however, there will be benefits. The tax system will become very efficient over time. Prices will become competitive because the costs will be reduced. Investments and exports will increase significantly because inter-state tax barriers will be removed. Over the time, inflation will remain structurally low and both state and central governments will start enjoying higher tax revenues. This will mean government fiscal consolidation will become greater over time.
What about the common man? How will GST impact Indian citizens?
Well, this is really difficult to say. In general prices of many goods will fall. However, there will be some goods and services which will experience a hike in price. One such good will be milk for example. Milk prices can rise because of GST, however, the state governments may decide to provide subsidized milk to the residents of the state.
When it comes to poor, it is really not possible to say the impact of GST. Well, food items such as fruits and vegetables may become expensive and of course, dining out in restaurants will not be a good idea for many. The items that will most like see fall in pricing are items like clothing, cars, air coolers etc. because they will no longer have cascading tax. Food items usually didn’t have the cascading tax problems and hence, those items can likely become more expensive.
What about BPL people?
This is a serious concern. People below poverty line will not have to bother about products like cars and air coolers and neither do they have to think of dining at restaurants. However, when it comes to basic sustenance, food is likely to take some hit. Good thing however is that with GST when collected from larger tax base will keep government treasury plump enough to pump more and more money into poverty alleviation and social programs. Greater subsidy can be expected for BPL people. So, GST may after all help.
Will salaried people be impacted by GST?
Get it damn straight! Salary or no salary, GST will impact everyone. This is because, GST is basically indirect tax which is replacing the older system of indirect tax. So, if someone is purchasing a product or a service, GST is to be paid. So, if a person is salaried, he or she will not stay immune to GST. The same is true even for a businessman or businesswoman.
Will India’s federal structure experience any change because of GST?
Most likely no! States should keep enjoying the current level of autonomy. This is because of the fact that central government actually carried out constitutional amendments and ensured that GST is synchronized with those amendments. This will result in state and central governments to levy taxes concurrently and also simultaneously collect the taxes without affecting the federal structure of India.
Why isn’t the GST Bill a Money or Finance or Tax Bills?
This is a really brilliant question. We have noticed that GST Bill is often known as the Constitutional Amendment Bill despite the fact that it is actually affecting taxes. So logically, one should be inclined towards thinking GST as a Tax Bill or a Finance Bill or a Money Bill.
The problem is that the taxation powers that centre and state governments enjoy is bestowed by the Constitution of India under Seventh Schedule’s List I and II.
List I empowers the Centre to pass taxation laws, for example, the income tax. On the other hand, the State gets power from List II wherein a state can pass laws related to taxes such as the sales tax.
Because GST will actually be subsuming several taxes which were designed in accordance with Indian Constitution, it becomes necessary to amend the Constitution itself. Since the amendments were constitutional, both houses of Parliament had to pass the bill and then the President had to give a green signal. This is the reason why the GST is not a Money Bill or a Finance Bill or a Tax Bill. It is a Constitutional Amendment Bill.
What was ratification required from 50% of Indian states for the GST?
Remember that it was a constitutional amendment. For such amendments, two-thirds of the parliament (both Rajya and Lok Sabha) and 50% of all Indian states need to provide approval. It is only then the federal nature of Indian set up can be preserved. No wonder, GST had to clear all hurdles to become effective.
How will tax evasion be prevented by GST?
Remember we talked of leakages earlier? We actually meant evading taxes, which is a very common practice in India. However, when GST is implemented, GSTN will be setup. GSTN is nothing but a robust IT system. With this system in place, a number similar to PAN will be allocated. This number is known as Universal GST Number. This number will be given to everyone in supply chain, which includes traders, stockists, manufacturers, retailers and wholesalers. This number will then help government to track whether they have paid taxes or not. This will help to prevent tax leakages.
Is there a difference between GST and VAT?
GST and VAT are different but they are pretty similar. VAT stands for Value Added Tax, which is implemented at various production as well as distribution stages when the value of the product increases. Since GST will be applied in the same process, VAT actually becomes first step towards GST implementation. However, there is one key difference between VAT and GST.
VAT is designed only and only for goods. It never includes services. For services, there is a separate form of tax known as service tax. GST on the other hand is applicable to both services and goods. It will have a uniform rate.
Also with VAT, there are several other forms of indirect taxes. These all taxes will simply vanish once GST is implemented, thereby making GST significantly different from VAT.
Is GST good or bad compared to VAT system?
GST is a consumption tax which is basically destination based. The modus operandi for GST is that only value addition gets taxed and at each stage or either production or distribution, members of supply chain (manufacturers, retailers, wholesalers, traders, stockists etc) can actually claim input tax credit. This make GST very effective as compared to current CST or VAT system. Some of the key benefits of GST compared to VAT are mentioned below:
- All states will have uniform tax law.
- Tax on tax – that is cascading tax will be wiped out.
- Concessional forms’ concept will cease to exist.
- Disputes caused by rate classification will be minimized to a great extent.
- Buyers in other states will not have to bear CST (central sales tax) cost.
- In case stocks are transferred between states, reversal of input tax credit will not be possible.
- Businesses will enjoy more credits compared to what they get now.
- Compliance becomes easier.
Any difference between 18% general rate and RNR?
The GST model that is currently present is a draft. Specific rates have not be given yet. 18% is a proposed rate. The rate will be finalized only after the Central government and State governments reach a general consensus.
RNR on the other hand is basically the abbreviation for Revenue Neutral Rate. This is an economic rate at which both central government and state governments will start collecting the exact same amount of taxes that are currently being collected. States and Centre needs to reach consensus on this RNR before they can declare the GST!
Well, let us put it this way…
Currently in this old tax regime, both central and state governments are making revenue. The objective of the new tax system will be to ensure that the current level of revenue that is extracted from current complicated tax system can also be extracted from the new tax system. Loss in revenue is not acceptable. So, there has to be a rate at which neither the centre and nor the states will lose revenue. This is called RNR or revenue neutral rate.
Thus, only when the revenue neutral rate has been achieved, the GST rate can be fixed. So, RNR is not only important but also necessary and it is different from the GST rate.
Will there be separate registration numbers?
Yes, the tax payers will need to have a separate CGST registration and a separated SGST registration. Now the SGST registration needs to originate from the state from which services and goods supply takes place. This registration numbers will then be linked with PAN or Permanent Account Number.
In GST regime, there will be no such thing called centralized registration. In case of existing taxpayers of the current tax system, a migration will be done to the common portal of GST. When that is done, additional information may be required and then, additional documents may be demanded by government authorities.
What will be the service tax rate after GST is implemented?
Get it straight. GST will be completely replacing service tax. This means that once GST comes in place, service tax will become extinct. That concept will no longer exist. The GST rate will be uniformly applied on services. The question is, what will be the GST rate. Well, experts are suggesting that the Revenue Neutral Rate should be somewhere at 15% to 15.5%. With RNR at that rate, the GST rate of 17% to 18% will be the best bet. So, if GST stands at say, 18%, the tax on services which is currently at 15% will then be replaced by GST of 18%.
GST has components. How come it is a unified tax?
Unified does not mean a single tax. Unified actually means uniform tax. The components of GST are CGST, SGST and IGST will be levied simultaneously as necessary. Whatever gets levied, there will be just one body which will be administering the whole tax system. This is why it is called unified tax or uniform tax.
Why cannot there be a single GST? What is the purpose of CGST and SGST?
It is a constitutional design. The Indian Constitution gave the Centre and the State governments to design and implement laws for taxation. This means that if a single GST is applied, the states will lose autonomy. This is not acceptable. States need to have their autonomy in order to maintain the federal structure of the Indian Republic. So, in interest of maintaining federalism, the Indian government has to provide the two components – CGST and SGST.
Which taxes will no longer exist after the GST is implemented?
Once the GST is implemented, several indirect taxes will simply cease to exist. This will happen at both the central and the state level. The list of taxes that will no longer exist once GST is applied are given below in a tabular format:
|Central taxes that will be lost||State taxes that will be lost|
|Central Excise Duty||Sales Tax or State Value Added Tax|
|Additional Excise Duty||Entertainment Tax apart from the taxes which are implemented by local bodies.|
|Service Tax||Central Sales Tax which is levied by the Centre but is collected by the State government.|
|Countervailing Duty, which is nothing other than additional custom duty||Entry Tax|
|Customs’ Special Additional Duty||Octroi Tax|
|In case of Kerala – the Fat Tax|
How does tax distribution happens under GST?
We know that there are three components of GST: the CGST, the SGST and the IGST.
Now, CGST is the central component. This tax will go to the Centre. There is no distribution required.
Similarly, SGST is the state component. This tax will go straight to State governments and hence, there will be no need for distribution.
The problem will come in case of IGST or Integrated GST. Only central government applies this tax when inter-state trade happens. This is when the distribution mechanism comes in play.
The steps followed will be:
- Inter-state seller will adjust credit of all three components and pay the IGST to the central government.
- The state from where the export is taking place will SGST credit (used for making IGST payment) to the centre.
- The dealer who imports will then claim IGST credit while he discharges output tax liability he has. This liability consists of both CGST and SGST. This claim will take place in the dealers own state.
- The importing state then gets the IGST credit that has been used for making SGST payment.
- GST is destination based. This means that final product’s SGST will go to the state consuming the product.
Will any duty remain intact in case of imports after GST has been implemented?
We all know that imports are subject to various customs duties. However, when the GST is implemented, special additional duty and countervailing duty will no longer exist. However, the basic custom duty that is applied in current tax system will continue to exist. This means that GST and basic custom duty will apply for all imports. Basic custom duty will continue to exist unless it is specifically exempted.
How will GST impact financial relationship between Central and State governments?
India has a federal structure wherein, states get autonomy. The federal structure and state autonomy is reflected by the fact that both State governments and Central government can create laws with respect to taxation and implement the same. This is why a dual GST structure has also been proposed and passed. There will be three separate acts:
- SGST Act
- CGST Act
- IGST Act
All these acts will determine the functioning of the GST. Also, there will be some common rules when it comes to supply place, origin place, valuation determination etc. As a result of this, states as well as Union government will actually have simultaneous jurisdiction on the whole supply chain that operates in Indian economy.
Because both Union government and State governments will maintain jurisdiction, they will be required to work closely in a very well-coordinated fashion. Also, the their component called the IGST will require that state and central governments work closely to ensure that the collected tax under IGST is properly distributed to respective states. On top of that, state governments may actually end up making losses initially because of GST implementation. The central government is bound to compensate the state governments for such loses for a period of 5 years straight. This means that the financial relationships between Union government and various state governments will improve over the coming years.
Will the tax revenues increase once GST is implemented?
The answer is yes! However, this will not happen overnight. Once GST is implemented, there may be negative impact on GDP but apparently tax revenues will stay unaffected compared to present model because of the RNR. In the long run, GST will do the following things:
- Various indirect taxes will be consolidated.
- Tax base will be widened.
- Exemptions will be cut down.
- Exemption thresholds will be lowered. In case of Central Excise Tax, the exemption threshold will be reduced to INR 10 lakhs compared to INR 1.5 crore that is present in the prevailing tax system.
- Double and cascading taxation will be mitigated.
- Tax burdens will be lowered, which will promote voluntary compliance.
- Various untaxed services will now be taxed. This too will promote voluntary compliance.
- Sectors operating in parallel economy will be incorporated in mainstream.
Now these factors, according to experts from Deloitte Haskins & Sells LLP, will actually help increasing tax revenues through use of GST.
One interesting thing about the GST that there is a standard rate and this standard rate is determined by Revenue Neutral Rate or RNR. However, most of us do not know that there may be differential GST rates for selected goods. For instance, there will be 40% GST on demerit goods which include things like luxury cars, aerated beverages etc. Again, there will be certain goods where GST will be about 12%. In general, it is expected that standard rate for GST will be 16% to 18%. So, GST rates can vary depending upon the goods.
The growth in tax revenue can happen for the following reasons:
- Service sector which currently delivers 15% in service tax will now start offering higher GST. This will mean increase in revenue for government.
- Implementation of GST will ensure that credit free flow with Indian supply chain will be reduced very significantly. This means that exemptions will be reduced, increasing tax revenues.
- GST will encourage compliance but more importantly, the population of people paying taxes will be increased significantly. This will ensure that tax revenues increase.
Why will states require compensation, if at all, after GST is implemented?
Many state governments are worried that once GST is implemented, they will start making losses. This fear is true in case of those states which have heavy manufacturing setup. However, the question is, “why are those states afraid in particular?”
There is a problem. The current or prevailing tax system is origin based. This means that taxation takes place in the place of origin of the goods and services. GST on the other hand is destination-based taxation. This means that tax will not be collected in the state where the consumer is located. This shift means that the states with manufacturing units will start making loses because they will no longer earn revenue that they used to.
Who will take care of such revenue losses? Well, it will be the responsibility of the Union government to make up for the revenue loss. This is why compensation will be needed.
While this shift in tax paradigm will be one of the primary reasons for revenue loss of many states, they will also be plagued with another problem.
State governments were allowed to impose various forms of indirect taxes including things like entry tax, purchase tax, entertainment tax and more. Once GST is implemented, these taxes will be completely subsumed. They state governments will then not be able to introduce new taxes at will. This means, state governments will, to some extent, lose autonomy. This may also lead to significant loses and hence, the need for compensation.
What effects will GST bring down on states?
States will suffer to a great extent when the GST is introduced. The effects of GST on states are summed up below:
- Tax revenues will now go to destination states instead of origin states. This will lead to revenue loss.
- Various taxes like luxury tax, entry tax, purchase tax, entertainment tax etc. will be completely abolished. This may lead to revenue loss as well.
- Fiscal autonomy of states will be diluted to a great extent. This means that the states will no longer have enough power to create new taxes at will or even change tax rates.
- Revenue of states may increase because of the services received in the states. Since GST will potentially increase tax collected through services, state tax revenues may increase.
- States will get to learn how they need to tax various services. They will have to especially learn about dealing with dual taxation on services as well as prevention of evasion of taxes.
How will GST impact consumers?
There will be both good and bad. Many goods will become cheaper because tax on tax or cascading tax will be removed completed. However, certain goods may actually become pricier. The government is yet to disclose the exact goods that will fall under the gambit of GST and the GST rates for such goods.
In case of services, most of the services will become pricier. This is where the consumers will lose a bit.
Some people may actually ask about medicines. In the current tax system, many life-saving drugs enjoy low duty rates. It is not yet clear whether they will continue to enjoy the same low rates under the GST framework or not.
Similarly, dining out at restaurants may become expensive while products like clothes and cars may become cheaper.
The exact impact and the extent of impact of GST on consumers cannot be described clearly unless government actually gives the rates of GST for goods and services. We need to wait until the rates are available.
Conclusion: GST is a major overhaul of the tangled tax system prevailing in India. In the long run, GST will improve tax revenues for state and central governments but in the short run, adverse effects may take place and increase fiscal deficits for both state and central governments. As of now, we can only predict. For the actual results, we need to wait till April next year when GST will be implemented. There will be chaos at the beginning but later when things get streamlined, India will surely benefit.