India is not good for its complex tax system. For new businesses and startups, it becomes impossible to navigate through various direct and indirect taxes. Constant and variable changes to taxes like Service Tax are making things even bad. But now, the things are set to change with new Goods and service tax – commonly called as GST.
Now lets understand what is GST, how it is different from other taxes, GST applicability, GST rates, its impact on your business and latest updates about GST bill. To make things easy to understand, I will start with an example..
Mr. Vikram is a businessman who wants to start a clothes business. For this he needs various raw materials which have to be imported from China and will need to be brought to Rajasthan Ajmer – where he has his factory – by road through various states. Once he gets down on the process of estimating his costs he is a little troubled.
First, he needs to pay a customs duty for importing the clothes on top of the shipping charges. This is fine but there are a lot of other taxes which he seems to be unable to comprehend. Also he finds out that when he has his final product ready he will have paid the Central and State Governments at least 10 different taxes not all of which are exclusive of each other. On diving deeper he finds many cases where a tax is also taxed by the government.
Petrol prices are the perfect example. The price charged to dealers by the Oil Marketing Companies is Rs. 25.46 currently for a litre of petrol. Now Excise Duty is collected at Rs. 21.48 per litre by the Central Government and adding the dealer commission the price now is Rs. 49.22. This is not the end and Value Added Tax is now charged at 27% which takes the final price to Rs. 62.51 in Mumbai. At first it may seem fair that both the Governments tax the product but it is not that innoxious. There is a tax on a tax here! The State Government charges 27% of the final amount in which Central Excise Duty has already been borne by the businessman.
The Goods and Services Tax (GST) promises to remove this problem among many others. It is being known as the game changer for India’s economy and is being labelled as the biggest change in the Constitution since India’s independence. The Goods and Services tax ( GST) will replace the indirect taxes levied by the Central and State Governments and provide for a single and streamlined process. It presents India as a unified market to business owners and also aims at bringing a lot of black money back into the mainstream economy. The tax will be implemented at every step of value creation.
Consider goods manufactured in Maharashtra and are sold to the final consumer in Jaipur. Since Goods & Service Tax is levied at the point of consumption, in this case, Jaipur, the entire tax revenue will go to Jaipur and not Maharashtra.
Example Of GST Calculation
Let us assume that the GST is set at 20%. Suppose that the manufacturing cost of a Product A is 100 and assuming a GST of 20% the total amount is Rs. 120. The next step of taxation would be when the Product is sold to consumers, let’s say at a price of 150. So the GST will charge another 20% on just the difference of Rs. 150 and Rs. 120 i.e. only 20% on Rs. 30 which is equal to Rs. 6. So the final price is Rs. 150 + Rs. 6. Unlike the case of petrol pricing there is no tax on a tax now. This eliminates the cascading effect of taxes which is very prevalent in our economy and has been simplified to an elemental level in the example.
Since the GST will be applied at every step of value creation it will be very difficult for black money owners to participate anywhere in the value chain with the GST without accounting for all other transactions. The GST is estimated to provide an immediate boost of 0.9% – 1.4% of the GDP.