The Goods and Services Tax (GST), an indirect tax introduced from July 1, 2017 is another step towards economic growth. Proposed in the year 2000, by the then NDA government, it took a decade and a half to see the light of the day after several deliberations. A good and simple tax as referred by the government is meant to make tax administration friendly, bringing all the businesses under the policy of One nation One tax and remove the difficulty of doing business within and across the state borders in India, making the country a common market place.
GST is an improvement of the existing VAT structure. Taxes are collected on economic transactions that create value, the taxes are paid by the consumer to the government through a third party i.e. business house. GST is intended to bring all the business firms into its ambit, to arrest the black markets and plug the tax leakages and generate a trail of invoices which supports effective audit. A ball park figure indicate that one crore business organisations will benefit due to this simple taxation procedure, they will have to pay only one tax and file returns for the same unlike the previous taxation system, where around seventeen different taxes were paid on an average. At the same time this reform will also effect the budget of around 125 crore Indians. This tax is based on the destination principle, which means taxation on consumption of goods rather than production, this single tax structure, will remove the cascading effect of taxes and will benefit the consumers.
The GST is categorised as Central GST and State GST, collected by the Union and the State Governments respectively. Transactions made within a single state will be levied with Central GST (CGST) by the Central Government and State GST (SGST) by the government of that state. For inter-state transactions and imported goods or services, an Integrated GST (IGST) is levied by the Central Government. Initially it was assumed that one tax rate would be implemented for all the goods and services, but it was not so, as the government had to address the concern of inflationary pressure on the budgets of the middle, lower middle and poorer classes. The essential commodities are exempted from tax; around 30% of the CPI basket is in the 0-5% bracket. The Act introduced four slabs for tax rate of 5,12,18 and 28 percent, of which 81 percent of items below 18 percent GST slab and 19 percent of items have been bracketed in the higher tax rate. This reform subsumes all the taxes into a single tax and ensures single price for any particular goods in any part of the country.
The concern raised on inflationary pressure on the goods and services due to the GST structure may be a little unfounded. The GST mechanism provides the registered business to avail the GST input credit to offset against the tax paid by it while procuring the raw materials and services, which will in turn reduce the cost of the goods and the services. This will encourage the firms to insist on invoices for all the goods and services availed by them to avail the input credit, this helps in addressing the issue of under reporting of incomes by the firms and corruption. The GST reduces the burden of filing tax returns to different authorities. The online submissions of tax returns reduce the unproductive paper work for the business houses, aligning with the concept of ease of doing business. GST abolishes the octroi and toll tax check posts across the country, ensuring smooth flow of goods across state borders, thereby reducing the time taken for deliveries in the supply chain. The convergence of several taxes into one tax provides the firms opportunity to concentrate on the core domain activity rather than spend energies on cumbersome compliances, in turn bringing in more productivity and profits, scope for expansion and generating employment opportunities. This friendly business environment will help attract domestic and foreign investments. Experts are optimistic of 2-4 percentage points growth in the GDP.
The registration for GST have been categorised based on the turnover. The businesses that have a turnover of 20 lakhs and less are exempted from the GST registration, businesses that have turnover between 20 and 75 lakhs may choose to register under GST or opt the composition scheme to pay tax 1-5% tax on turnover and businesses over 75 lakhs turnover will fall into the four slab tax.
GST is a major step towards ease of doing business. It encourages all the businesses to enter into the organised sector, on the flipside the unregistered players in the GST (small businesses) are put to disadvantage as they will not be able to avail the input credit, and run a risk of putting them out of business. The provision for the businesses under 20 lakhs turnover per annum leaves open loopholes for businesses to find way out to evade taxes, which can only add to the existing tax related litigations.
With just a fortnight into the new tax regime a justified step forward will have to wait and watch for its benefits to show on the economy.
By K.P. Venugopala Rao,
Deputy Director, SIBM Hyderabad