Our nation is in the phase of witnessing a drastic change in its current complicated indirect tax regime. Modi led NDA Government has carried on its predecessor’s (UPA Government) dream of making India into a single unified market for the world as well as for its people by the implementation of system called GST.
GST or ‘Goods and Service Tax’ is the name given for the major reform in Indian tax scenario since 1991 which is likely to be implemented in next fiscal year (2016-17).This system of indirect taxation is currently implemented in approximately 125 countries around the world. Global average of GST is 16.4% whereas the current Indian indirect taxation system ticks an average of 26% (tax levied from factory till it reaches consumers).
In layman terms, GST is a taxation system which subsumes around 16 current indirect taxation methods like Customs duty, Excise duty, Sales Tax, VAT etc. into a single method and thereby reduces the complexity of understanding and collecting the indirect taxes in India. Proposed Article 366 (12A) of Indian Constitution defines GST as “Any tax on supply of goods or services or both except taxes on supply of alcoholic liquor for human consumption “.
Now, what changes are these tax reforms going to bring in our day to day lives? Will this new rules and laws burden us with further cost or will it lessen our expenses, broaden our understanding and widen our happiness? We hope to give you an answer by the time you finish reading this article (However, things discussed in this article are based on the limited research and knowledge sharing we had in ZGC organization).
GST will be levied on goods as well as services all over India unanimously unlike the present system of separate rates, method & procedures for different sects of goods and services. This creates a massive opportunity to claim back taxes we pay for the goods we purchase and services we receive from all over India, against the taxes we collect during sales in our own hometown. This in fact solves the earlier chaos of impracticability of claiming tax paid during purchases from another state, against the taxes collected during sales in our own state (because of applicability of Central and State VAT).
GST is levied based on the destination principle which means that tax will be levied and given to the state where goods or services are used. It has two components included within the rate, which is CGST (Central Goods & Service Tax) and SGST (State Goods & Services Tax).This is to share the revenue from tax collection between central and state governments. Along with this, an additional rate of 1% will be added to the normal GST rate for inter- state transaction.
Another doubt that creeps in our mind would be the fear of rise in cost of purchases/consumables due to this flat levy of tax rate. But our finding has been against this apprehension.
Let me explain to you with a short illustration:
In the current scenario of pre-GST times, if a manufacturer produces an AC at a cost of Rs.10000/-, additional costs of Excise duty of 12.36% amounting to Rs.1236/- (Rs.10000*12.36%) and further cost of VAT of 12.5% amounting to Rs.1404.5 (Rs.11236*12.5%) will be added up to the cost of AC before it reaches the hand of a normal customer. Our simple math shows that a tax percentage of 26.4% has been levied on the AC in current scenario. When GST is implemented, since tax is levied on the destination principle, GST percentage will be flatly on the Factory cost alone. Say 20% is the GST rate Government is planning to fix for the coming year, then the cost of AC for a consumer would be Rs.10000/- * 120%, which comes to 12000/-.
From the above illustration, I am sure you would have clearly understood how simple the tax levy has been made under GST system and also the reduction in the quantum of tax added as cost to a customer like us.
Presently, the Finance Minister Mr. Arun Jaitley is anticipating on a GST rate between 18% to 23% which undoubtedly will place people of India on a benefitting position. However, the deciding factor for this issue is the assent of parliament regarding including Petrol into the bracket of items on which tax has to be levied. If GST is proposed to be levied on Petrol, GST rate will very likely fall between our predicted tax rates. A Council in the name of GST Council is formed in the center to monitor and recommend on the changes required for smooth transition to GST implementation.
With the progress with which things are moving in the parliament, we are optimistic about the ‘ACHE DHIN’ ahead with tax costs lessened, rules implemented and justice granted to the people in India.