What GST Means for India? Explained – Tax Rate, Benefits and Impact

After Demonetization, the top trend that has been on every Indian’s mind is GST or Goods and Service Tax. Key question has been to understand what GST means. This indirect tax policy change is expected to be a game-changer for the country. Looking at unification of Tax Rates across states and providing benefits that reaches all citizens is one of the key benefits of GST. This bill has been in the talks for years but its only now that we are closer than ever to have it see the light of the day. With any new government policy, there comes a wave of questions, confusions and doubts. In this blog post, eWebBuddy tries to simplify and explain the various aspects of this new tax reform for India.

This post has been compiled and written by Divya Sethia, a Chartered Accountant. Please feel free to add your queries in the comments section.

While this article explains GST in detail, you can also check our quick guide for new GST registration.

Goods and Service Tax (“GST”), India’s most significant tax reforms, comes to effect on 1^st July 2017. After a decade of consideration, GST will finally be implemented to replace many of the prevailing Indian indirect taxes levied by Central and State Government like:

• Excise duty (tax levied at the factory-level sale of manufactured goods),
• VAT (tax levied on goods from whole sellers to retailers/customers),
• CST (tax for transfer of goods between states),
• Service tax (tax levied on sale of services), etc.

Income tax and export/import duties (except CVD and Special additional duty of customs) continue to prevail on as is basis.

What GST means?

Goods and Service Tax (GST) is a consumption based tax levied on manufacture, sale and consumption of goods and services. The underlying principle of GST is to tax goods at the point of consumption rather than production and simplifying the current system, wherein a good is taxed multiple times at different rates.

The primary reason to implement GST is to avoid the double taxation and enable credit of input tax against the output tax. Presently, a manufactured good is first subjected to Excise Duty (levied by Central government) on release from factory followed by a VAT (levied by state government) when sold to consumer. There is no provision of taking credit of the excise duty paid against the output VAT, thus resulting in cascading effect on taxes.

GST is a single tax from manufacture to the consumer. Under GST, credit of input tax paid at each stage will be available on the next stage, thus leading to tax on value addition only.

The list of taxes (Currently levied by Central and State) being subsumed by GST are as follows:

What is the GST Tax Rate applicable?

GST will have five broad slab rates —0, 5, 12, 18 and 28 percent.

Lower rates for essential items and the highest rates for luxury and de-merits goods, such as luxury cars, SUVs, tobacco, pan masala and aerated drinks, which will also attract an additional cess. Mostly all services, except those in the negative list of essential services such as healthcare and education, will come under GST with the four tax slab structure. The proposed rates for various goods and services are provided here.

GST will have two components, concurrently levied by central and state governments, forming “Dual GST”:

• Central Goods and Service Tax (CGST) to be levied by Central
• State Goods and Service Tax (SGST) to be levied by State

CGST and SGST will be applicable on all transactions except the exempted goods and services.

On inter-state supply of goods and services, Integrated Goods and Service Tax (IGST) will be levied by Central government based on destination principle.

The input tax credit of CGST cannot be taken against SGST and vice versa. However, input tax credit of CGST and SGST can be taken against IGST and vice versa. Input tax credit of IGST would be first used against payment of CGST and then SGST.

Refer illustration for clarity. The below illustration presents the intra and inter-state transaction model of GST:

What are the Benefits of GST?

Government:

• Ease of administration: A single tax system will be simpler and easy to administer than multiple taxes. Further, robust end-to-end IT infrastructure can be built for a simpler and single tax regime.
• Increase in tax compliance: Due to the seamless transfer of input credit from one stage to the other there is an in-built mechanism in the GST framework to incentivize traders to comply with tax.
• Reduction in cost: GST is expected to reduce cost of collection of tax revenues on account of its simplicity and improve efficiencies.

Businesses:

• Ease of compliance with robust infrastructure: A robust IT infrastructure will be the back-bone of GST enabling Businesses to register, make payments, file returns, etc. This will result in better compliance and transparency.
• Simplified accounting: Although, initially Businesses will have to incur cost to upgrade their accounting systems with the new GST regime but in the long run GST is expected to reduce the procedural costs due to uniform accounting. The Businesses will be required to maintain only three accounts – CGST, SGST and IGST against the excise/VAT/Service tax input and output records maintained currently.
• Uniform of tax rate: Doing business in the country will become tax neutral, irrespective of the place of operation, as GST proposes common rates across the country.
• Increase in manufacturing activities: Subsuming of central sales tax and availability of set-off of input credit on goods will reduce the cost of goods and services manufactured. This will improve the competitiveness of Indian goods in export markets thus boosting the manufacturing activities in the country.

Check this link to deep dive into the EY report for businesses

Consumers:

• Price reduction: Because of levying tax only on the value addition the overall tax burden on goods is expected to come down, thus reducing overall prices.