The GST or Goods and Service Tax is arguably one of the most significant tax reforms in India that subsumes a vast number of indirect taxes like excise, service tax, and VAT (Value Added Tax) imposed by the central and state governments. It is presently being levied on both services and goods that are sellable in the subcontinent. Every year GST day is celebrated on July the 1st.
The implementation of GST is has offered a multitude of benefits to the industry, the Indian citizens, and also the government. The maximum retail price of many goods and services have reduced after it was implemented, and it is also being anticipated that the new tax regime will send a healthy stimulus to the sluggish Indian economy, and will make the indigenous products as well as the services internationally competitive. Many of the economists are suggesting that real GDP (Gross Domestic Product) will grow from 7% to 7.5% in 2018-19.
Some of the most acknowledged hits of the GST are as follows.
- The principled diplomacy played by the GST Council and the statesmanship demonstrated by its members
- The GST system is backed by technology and digitization of more GST services are on the anvil in the coming days
- Hugely beneficial for the MSME (Micro, Small, and Medium Enterprises) industry
Got rid of cascading effect of the taxation system
GST is necessarily one such comprehensive indirect tax, which was designed with the intention to place the indirect taxation system under one umbrella. Furthermore, it also eliminates what is known as the cascading tax or tax on tax. The following illustration can be studied for a better understanding.
Before the GST regime, a consultant providing services worth 50,000 rupees could charge a 15% service tax, i.e., 7,500 (15% of 50,000) rupees. Suppose, he then bought office supplies amounting to 20,000 rupees and paid 1,000 (5% of 20,000) rupees towards VAT charges. His total cash outflow will be 8,500 (7,500+1,000) rupees; as he will be required to pay 7,500 rupees towards output service tax, and without adjusting the deduction for VAT levied on stationary.
However; under the GST rule, the NET GST the consultant will be required to pay is 8,000 (9,000-1,000) rupees, after deducting the GST amount of 1,000 rupees charged on office supplies from the GST amount of 9,000 (18% of 50,000) rupees levied on services offered by him.
Increased threshold for registration
Earlier, in the VAT regime, any business having a turnover of over half a million rupees was liable for paying VAT in most states. It may be noted that this limit used to vary from one state to another. Furthermore, service tax was waived for service providers having a turnover under one million rupees. However; under the GST rule, this limit has been promptly increased to a whopping two million rupees, which exempts many small-scale service providers and petty traders. A 4×1 comparison matrix is provided below for a further understanding of the topic.
Tax: Threshold limits in Indian Rupees
- Excise: 15 million
- VAT: 0.5 million in most states
- Service Tax: 1 million
- GST: 1 million for the North-Eastern states and 2 million for others
Small-scale industries Composition Scheme
After GST was introduced; small businesses having a turnover amounting to two to seven and a half million rupees can seek benefits from this new taxation systems, as it provides an option for reducing the tax load with the help of the Composition Scheme, and this provision has successfully brought down the burden for tax and compliance for many small traders.
Less number of compliances
Before the GST era, VAT and service tax was charged, each of which used to come with their very own compliances and returns. A 4×1 comparison matrix is presented below for illustration purposes.
Tax: Return filing
- Excise: Monthly
- Service tax: Monthly for companies or LLPs (limited liability partnerships) and quarterly for proprietorships or partnerships
- VAT: Varies from one state to another, while some states ask to file a monthly return beyond a certain prescribed threshold, a few states like Karnataka do not have any stipulated limit, and they need a monthly return for any amount of transactions.
- GST: As only a single unified return is required to be filed under this taxation system, the sheer volume of fileable returns has come down sharply. There are about eleven returns needed for registering under the GST regime, and out of them, four are treated as primary returns that apply to all the taxable individuals under the GST rule. The GSTR-1 is the main basic return that is manually populated, while GSTR-2 and GSTR-3 are auto-populated.
Defined treatment for all Electronic-commerce players
Earlier to the implementation of the GST system, supplying goods for E-commerce was not categorically defined, and various VAT laws were put to practice for the said purpose. A brief and quick recapitulation of the case studies of Amazon-India and Flipkart will help the readers to grasp the point.
Every time these aforementioned online retailers delivered goods to Uttar Pradesh, they were required to file a declaration for VAT and also to state the delivery vehicle’s registration number. If relevant documents were not presented for whatsoever reason, the tax officials used to seize the goods at times. However; states like Kerala, Bengal, and Rajasthan chose to treat these E-commerce brands as mediators or facilitators; and did not ask them for VAT registration as it was not required.
All these ambiguous and differential compliances have been eliminated under the GST rule. For the very first time, GST has explicitly chalked out all the provisions intended to benefit the E-commerce sector, and as they are applicable pan-India, there is no room for any further confusion or complication with respect to the interstate transportation of the goods.
Just like a beautiful rose having thorns, any reform comes with both advantages and disadvantages, and GST too has its fair share of misses. Delayed disbursements for IGST (Integrated Goods and Service Tax) reimbursement has hit the exporters pretty hard and caused an economic slowdown in India. Also, there is a lot of chaos and fuss for claims and resolutions for ITC (Input Tax Credit).
The primary disadvantages of GST can be summarized as follows.
- Increase in costs because of new GST-compatible software purchases
- Increase in operational overheads
- Implemented during the middle of the fiscal year
- Online-only taxation system
- SMEs have to bear a greater tax burden
- Upgrading to GST is a time-consuming affair
Change is indeed never easy. It is crucial to take a cue from the global economies that implemented GST before India did, and learn how they successfully managed the initial hurdles after the introduction of a unified tax regime with easy input credits.