Tax system in India is complex. When you go out and buy something, take a look at the taxes on the bill. You can find sales tax, service tax, Swachh Bharat tax, VAT etc. With so many taxes, it can be confusing to understand the purpose of each tax. Now here comes the long waited Goods & Services Tax – GST implementation.
In a move to simplify this, the Indian government has come with the Goods and Service Tax (GST). With GST implementation, there’s only one tax that you need to pay.
The GST implementation date is July 1st’ 2017. Since you’ll be paying it as well, here are some of the salient features of GST.
| Follow up comment: Government Council approved a list of more than 1200 items on 18/05/2017. Please click here to get the list. |
What Is GST?
The Goods and Services Tax, or GST, is an indirect tax that consumers will pay when they buy goods or services. It’ll replace all forms of indirect taxes that are currently in place.
At the moment, customers need to pay multiple indirect taxes. This is separate from service tax and central excise duty. These are levied at different points of the transaction for every good or service.
GST Bill will be implemented soon as States gear up for it. All indirect taxes will be fused into one tax rate and this will make few things cheaper or dearer.
Requirement of GST
The existing structure had many duplicates and repetitive taxation over the same service or good. These problems were:
Now following taxes will be combined in one – GST
Following taxes will still remain after GST implementation
What Will Be The GST Rate?
The GST India council decided on a 4-tier tax structure for GST at 5%, 12%, 18%, and 28%.
The lowest rate of 5% will be for essential items that are commonly used. Food items will be taxed at zero rates. For other goods under GST, there will be two standard rates of 12% and 18%.
For luxury items, tobacco, and aerated drinks, a tax rate of 28% will be levied. There’s also an additional cess with this tax.
Panel led by Chief Economic Advisor has recommended this 4-tier rate structure wherein some essential goods will be taxed at a lower rate of 5%; so-called demerit goods such as luxury cars, aerated beverages, pan masala and tobacco products at a higher rate of 28%; and all remaining goods at a standard rate of 17-18%.
If you compare it globally, except for Scandinavian countries, where the tax is levied at a standard rate of 25%, few others have been successful in sustaining high VAT/GST rates. For example, New Zealand introduced a tax rate of 10% on a base consisting of all goods and services except financial services. And in Singapore, it started as low as 3% and was raised gradually. Globally, the average rate is close to 16.4%, in Asia-Pacific 9.88%. Canada and Nigeria have the lowest rate of 5%.
Why Is GST Implementation Important?
The aim of GST implementation is to make India a single market by unifying the tax system. For entrepreneurs, GST helps in the smooth flow of goods and services and make things easier for entrepreneurs.
Each state in India has their own tax system. This has led to the compartmentalization of the market. GST has been designed in such a way that it simplifies the tax structure and ensures optimization when it comes to allocation of resources.
GST implementation means ‘one nation-one tax’ system that is meant to develop a congenial business environment. The government expects the GDP rate to grow by 1-2% due to the implementation of the GST.
How Is GST Calculated?
Calculating GST is easy. Suppose the GST rate on a good is 18%. The manufacturing cost of the product is Rs. 100. With GST, the price of the product will be Rs. 118.
The next level of the transaction will be when the manufacturer sells the product to the customer. Suppose the manufacturer decides the price to be Rs. 150. The GST will be 18% of the difference of the manufacturing price and selling price, that is Rs. (150-118) = Rs. 132.
18% of Rs. 132 is 23.76. So, the price of the product will be Rs. 132 + 23.76. This equals Rs. 155.76.
Should You Care?
At the moment, it’s too early to tell. However, there’s a good chance of purchases like groceries becoming cheaper.
Will GST implementation Affect The Price Of Shimla Apples You Buy In Bangalore?
Consider this scenario: You’re buying ‘Shimla’ apples in Bangalore. Taxes are added at every border when apple moves through different states. Only one tax is added under GST. In addition, GST will make tax calculation a lot easier.
This rule applies now:
GST implementation is a reality. There will be a huge impact in coming months on:
- Inflation
- Corporate Tax outgo- positive and negative impact both
- Central & State Revenues (Fiscal Deficit)
So if you note these are broad macroeconomic parameters of economic growth, hence will impact your markets for both equity and debt. And, so will impact your investments. Overall the exercise will have a positive long-lasting impact on our country.
Wait until the 1st of July and see how the tax structure of the country changes. So we will have more articles in coming times till the new system settles down.
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