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India’s Biggest Tax Reform: The GST Bill

The Goods and Services Tax bill or GST Bill called to be India’s biggest tax reform since independence; was finally passed by Rajya Sabha on 3 Aug 2016 will simplify the present system of taxation. It will convert the country into a unified market by substituting all indirect taxes with one tax.

The GST will be implemented from 1st July 2017.

What is GST?

GST is Goods and Services Tax, an indirect tax levied when a consumer buys a good or a service. The GST is a single indirect tax for the whole nation, which will make India one unified market. It is a single tax on the supply of goods and services, right from the manufacturer to the consumer , removing various layers of taxation such as VAT or Sales Tax, purchase tax, state-level taxes like entertainment tax, entry tax, luxury tax etc.
 As per various analysts, GST Bill may increase India’s GDP by 2%.

How much would be tax as per GST?

Today, we pay  VAT of 14%, Excise Duty of 12% on goods (totaling to 26%), 15% service tax on services. So, the rates may be anywhere between 12% and 26%. 
The average worldwide GST rate may be around 18 %.

What problems GST will solve?

Currently, we pay the various type of taxes. For example, when we buy biscuit, it includes VAT or CST, Excise Duty, Customs duty on the imported raw materials, etc. So, at present, we pay multiple taxes on the same product. 
For example, the food we buy at hotels has VAT as well as Service Tax.
GST will be only one tax on the supply of goods and services, right from the manufacturer to the customer. GST will help in initiating an era of a transparent and corruption-free tax administration. It is set to remove the current shortcomings of the supply chain owing to the multi-layered and complicated policies.
Credits of  taxes paid on every stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage.
The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. 

The images below show the price of good with and without GST as it moves from Manufacture to Wholesaler, From Wholesaler to Retailer and from Retailer to Customer.
The cost of Good With and Without GST as it moves from Manufactures to Consumer.

What becomes expensive and what becomes cheaper under GST?
The implementation of the GST will make manufacturing cheaper, leading to lower prices of manufactured goods. 
On the other hand, services are likely to become costlier under the GST.
For manufactured consumer goods, the current tax regime means the consumer pays approximately 25 to 26 % more than the cost of production due to excise duty and value added tax. 
With the GST rate expected at 18%, most goods are expected to become cheaper.
At present, the effective service tax rate is 15% and it applies to almost all services other than essential ones such as ambulance services, cultural activities, certain pilgrimages and sports events. If GST is implemented, the rate will increase to 18% causing services more expensive. 
Consequently, eating out, staying at hotels and air travel may turn costlier. Similarly, insurance premiums and investment management which attract a service tax currently, will also become costlier with the higher rate of GST.

Taxes that GST will replace:

Central taxes:
  • Service Tax
  • Cesses and surcharges.
  • Central Excise Duty
  • Duties of Excise (medicinal and toilet preparations)
  • Additional Duties of Excise (goods of special importance)
  • Additional Duties of Excise (textiles and textile products)
  • Additional Duties of Customs (commonly known as CVD)
  • Special Additional Duty of Customs (SAD)

State taxes:

  • Value Added Tax (VAT)
  • Entry Tax (all forms)
  • Purchase Tax
  • Luxury Tax
  • Entertainment Tax (not levied by local bodies)
  • Taxes on advertisements
  • State cesses and surcharges.