GST: Brief Introduction

GST, or the Goods and Services Tax is a unified tax which is levied on the value added for the delivery of goods and services. The implementation of the new taxation system was put in place on the 1st of July, 2017. However, it might be interesting to note that the proposal for putting up a new taxation regime took place long before that. The idea of implementing GST was birthed in the year 2000 with the efforts of an Empowered Committee(EC) under the Late Shri Atal Bihari Vajpayee. However, it took a failed attempt to pass the bill in 2009 and several years of commitment to finally get it implemented under the government of Honorable Shri Narendra Modi.  In this piece, we’re going to look at the inner workings of this new taxation regime and also look at how India is affected by GST Impact, Examples, and Industry by industry breakdown is what we wish to take a look at.

GST was implemented in accordance with GST bills passed by the government. The government enacted four bills on 12th April 2017 laying down the GST Rules. These are as follows:

  • Central GST (CGST) Bill
  • State GST (SGST) Bill
  • Union Territory GST
  • GST (Compensation to States ) Bill

Also Read:  Difference between CGST, SGST and IGST

In order to pay taxes and comply with the new taxation regime a  business has to undergo the process of GST Application, as well as, filing requisite GST returns in order to maintain their business’ GST compliance.

As soon as a business registers themselves under GST, they are provided with a unique identifier known as GSTIN which they can confirm using the GST Verification. GST is a destination based tax which means the final burden of the taxation falls on to the end consumer of the goods and services.

GST Explained Simply

One of the major impacts that GST has had is the removal of the cascading effect of taxes. Cascading effects means a taxpayer had pay tax on sale as well as the purchase of goods and services. This was termed as the ‘tax on tax’. From one of the GST impact (s), this is one of the major ones. Let’s see how GST solves this problem with an example.

Here, We will assume the example of a  Levi’s Jeans manufacturing with 10% GST applicable.

Step 1: Manufacturer buys raw material for the jeans worth Rs. 1000 this includes the GST of Rs. 100 at 10% of 1000. The manufacturer then adds a value of Rs. 100 to the product. This makes the value of the product to be Rs. 1000+100 =1100.
Under the old system, this meant that the manufacturer had to pay Rs. 110 (10% of value) tax.However, under new GST rules, the manufacturer has to pay less tax because he has already paid Rs. 100 tax while purchasing the raw materials.  So the total tax that manufacturer has to pay is 110-100 = Rs 10

Step 2: Wholesale: The manufacturer passes on the jeans to the wholesaler at a gross value of Rs. 1100 inclusive of the Rs. 110 tax. The wholesaler adds his margin to the value of the products. (Let’s say Rs. 100). This makes the total value of the jeans to be Rs.1200 and brings the total tax value to Rs. 120(10% of 1200). Now like the manufacturer since the wholesaler also doesn’t have to pay the Rs. 120 tax because he has already paid Rs. 110 tax.
Therefore the total taxable amount for the wholesaler is Rs. 120-110=Rs. 10

Step 3: Retail: The wholesaler of goods passes on the goods to a retail store. The jeans now cost Rs. 1200. On this, the retailer adds his value (margin ) of Rs. 100 and the total jeans now cost Rs. 1300 with 130 Rs. Tax. Now whenever a consumer buys the jeans, the retailers do not have to pay Rs. 130 tax as they have already paid Rs. 120.
The total tax retailer has to pay is Rs. 130-120 = Rs. 10.

Notice, how at every stage each entity involved has to pay only Rs. 10 as the tax. This means now, there is uniformity in the way taxes are paid in the process for the sale of Goods and Services. GST has thus, unified the taxation system in the country and brought a much-needed clarity in the way goods and services are taxed in the country.

GST Impact

GST has simplified the taxation structure in India that is for sure. However, in addition to this, the new taxation regime also has several other impacts on the economy from which will help the ease of business. Let’s look at some of the GST impact (s) on the economy.

 Positive GST Impact (s) :

Listed below are some impacts of the implementation of the GST that will benefit the Indian economy :

  • Removal of Cascading effect of taxes/ Tax on Tax/ Double Taxation

    This effect of taxes stacking upon one another for services providers. This had been a major issue for all businesses as they were aggrieved with paying taxes twice. Under the previous tax regime, the transfer of goods came under the service contract. This meant that every invoice had the value of goods as well as services. Both of these attracted a rate of 70% each giving a total rate of 140%. Under GST, the taxes are unified under the supply of services and the taxation system is unified.

  • Increase in Competitiveness

    Under the old taxation system, taxes used to constitute about 25-30% of the retail price of the goods and services. The implementation of GST, prices have gone down since the burden of paying tax has fallen onto the end consumer of the goods and services. Therefore, there is a scope for businesses to produce more  at lesser effective costs, leading to a rise in competition

  • Simplification of Tax Structure 

    The tax calculation under the system of GST has become much more simplified. This replaces the multiple stages of taxation under the old tax regime. This saves a lot of resources for calculation of taxes. It has also united the taxation laws under various state governments.

  • Clarity for Software Industry 

    The software an IT giants of the country have some clarity for the payment of taxes. Under the old system of taxation,  there was some dispute on as to whether they need to apply for VAT  or Service Charge on their products. GST clearly distinguishes between products and services and the way taxation is applied to them.

  • Economic Union 

    The GST impact on the transportation of goods and services from state to another has been a very welcoming change. Goods can be easily transported from one place to another under the new regime. This encourages businesses to have a PAN India presence. The movement of goods across state borders can be done easily via the procedure of generation of the e-way bill.

  • Inputs held in Stock

    The service providers will be able to access the CENVAT credit of input that is held in the stocks. The provision is best applicable when users migrate from taxation form to the other such as from exempt category to a taxable category.

  • Increase in exports  

    The cost of production in the domestic markets has dropped due to the implementation of the Goods and Services Tax. this leads to a positive influence in increasing competitiveness in the international markets leading to excessive exports.

  • Repairs and Maintenence 

    Service Providers dealing with delivery of repairs and Maintainance services will enjoy the benefits of both the credit of input and credit of input services with the accordance with the GST system. Under the old regime, the repair service providers could only benefit from the credit of input services which, was a very limiting compensation for the service providers.

  • Reduction of Input Costs

    Since the abolishing of the multiple levels of taxation and the introduction of a single tax on value addition, the cost of inputs will decrease. The taxation on inputs such as VAT, Excise duty is no longer valid and no longer a headache of services providers.

Negative GST Impact (s):

The newly implemented tax regime is not entirely perfect and there are some inherent flaws with the system of the Goods and Services Tax. Some of these are listed below

  • Lack of a Centralized Registration

    The previous taxation system allowed the taxpayers to register from all over the country via a central authority. However, with the implementation of GST, taxpayers have to register GST from their state and pay the Central Tax.

  • Taxation for Free Services

    Even if a particular provide any service(s) for free they are still eligible to be taxed for it. Supplies made without consideration will now be taxable.

  • Taxation for Free Services

    Even if a particular provide any service(s) for free they are still eligible to be taxed for it. Supplies made without consideration will now be taxable.

  • Service Costs to Consumer

    The rates of taxation to the end consumer will increase. The GST is destination based tax which means the burden of the tax falls on to the end consumer

  • Lack of centralized System of Accounting

    Businesses in every state have to maintain their personalized accounting records since there is no centralized registration of business. Every state is financially accountable to that state for taxation. Accounts will be separate
    for central and state taxation for each business

  • Return Filing

    As a business owner, you have to file GST returns listing detailing all the business transactions such as purchases sales etc periodically. The decentralized registration is the cause of filing for so many returns as you have to file the returns for every state your business expands into. A business owner has to file close to 37 returns in a financial year. This procedure could be very burdensome

  • Public Education

    As the new taxation system is put in place, taxpayers and businesses have to be educated on the inner workings of the taxation system. The GST tax regime has changed the system completely and hence taxpayers and the general public have to be informed on how this will impact day to day business activities. This will take up a lot of resources and money.

Industry-Wise GST Impact

In the above section, we discussed how the overall economy India will feel the GST impact. Following is the breakdown of the GST impact sector-wise of different parts of the economy.

  1. Consumer Goods and Services
    The GST Rates for the products by the FMCG industry has been set at 18-20%
  2.  Transportation Industry
    The tax rates for cabs as well as air travel has been reduced to 5% which has been seen as a welcome move.
  3.  E-Commerce Industry
    Since the inception of GST,  e-Commerce operators collect 1% of the net value of taxable supplies. This tax is also called the Tax Collected at Source (TCS).
  4.  Entertainment and Hospitality Sector
    This is one sector which was affected heavily with the tax rates increasing to 28%. As a result of this, movie tickets, hotel rates etc. will be much costlier than before.
  5.  Financial Products and Services
    Financial Products and services have been affected the most  such as funds and insurances and loans from NBFCs  etc have seen drastic taxation changes under GST
  6. Start-Ups and MSMEs
    GST has become very friendly for startups, as well as, companies with MSME/SSI Registration. Schemes and provisions for empowering these sectors of the economy have been put in by the government to enable ease of doing business in India. One of these provisions is One-Day Company Registration.
  7. Inflation and Economic Activity
    The rise in tax rates under GST is said to raise inflation.
  8. Stock Transfers
    The introduction of the GST regime means that the taxes levied on branch transfers and input tax can be claimed later via GST returns.
  9. Export of Goods and Services
    Exports have been exempt under the provisions of GST. In addition, the availability of the input tax credit is welcome by the government. All an exporter has to do is to register IEC (Import Export Code).
  10. Gold and Gold Jewellery Prices
    The tax rate for Gold and Gold Jewellery has been brought down to 5%.
  11. Rent 
    There is no GST on house rent. The exemption limit for renting out commercial property is ₹  20 lakhs.
  12. SEZ
    The GST taxation regime has exempted SEZs completely from any kind of taxes. 0% tax rate.
  13. Affordable Housing
    The purchase of housing is not at all taxable, an under construction houses carry a GST tax rate.GST rates for houses bought under CLSS, EWS, LIG, MIG1/11, will be 8%, after the deduction of the cost of the land. Houses out of these categories will be levied 12% Tax.
  14. Real Estate Sector
    The real estate sector is benefitting from this taxation system because it has introduced transparency in the system with the agents, as well as, builders have to do RERA registration.
  15. Logistics
    The pre-GST tax rates for logistics was a gigantic 26% which has been reduced to a moderate 18-21% and brings a huge relief to the logistics sector.
  16. Automobile Industry
    The introduction of GST means the absorption of many indirect taxes and duties which were levied on the sale of vehicles. These have been done away with.
  17. Chemical Industry
    The implementation of GST has been touted to be very beneficial for the chemicals industry.
  18. Tobacco Industry
    The new rates under GST for the tobacco industry are in total less than the combined taxes during the pre-GST era.
  19. Stainless Steel Industry
    The introduction of GST has been a welcome change for the stainless steel industry. The new taxation system facilitates the stainless steel industry. The GST for primary steel industries has been set at 18 %. This helps them grow better as an industry
  20. Coal Sector 
    The implementation of GST has drastically lowered the rate of transportation of coal which now stands at 5% via trains, simplifying and facilitating logistics with regards to coal transportation.
  21. Power Sector
    The electric and lighting sector are benefitting nicely from the implementation of the new tax regime as the rate of taxation has now become 18%.
  22. Exports
    As we mentioned above, under GST, the indirect taxes and excise duties with exports have been done away with. An integrated GST, IGST, has replaced all the indirect tax and hence exports have been promoted in this new taxation structure.
  23. Domestic Appliances and Electrical Machinery 
    GST impact on electrical appliances isn’t significant since the rates of taxation under the new regime are 25% which is close to the pre-GST rates.
  24. Job Works
    Special provisions have been put in place for the removal of goods for job-work and receiving back goods after processing from the job-worker carrying no GST number. The benefit of provisions is extended both to the principal and the job worker.
  25. Indian Railways
    The railways have been affected very little by the implementation of GST as the tax rates have been kept at a lowest of 5% in order to benefit the passengers.
  26. Hospitality Industry
    This is one of the industries which have been benefitted from the implementation of GST,  the rates of GST have been reduced from the previous 27%
  27. Aviation Sector
    The GST rates for airline fuel have been increased causing unrest in the industry.
  28. Pharmaceuticals Industry
    The Pharma industry has had an increase in cost GST impact, with the costs of medicines rising by 2.3% for medicines in the 12% bracket and medicines with 5% tax rate will see no rise in MRP.
  29. Cement Industry 
    The tax rates for this industry will get absorbed in the cost of cement production.
  30. Digital Advertising Industry
    The fast-growing will have none to very little GST impact as these methods are very cost-effective in comparison to traditional marketing techniques.
  31. Sweet Makers
    There is a bit of confusion surrounding the taxation on sweets. This confusion arises mostly because taxpayers are confused whether to pay 28% tax or not since many variants contain 5% or higher cocoa content. In addition to this, Badam Milk, Basundi, and Rasmalai are also a source of confusion as should they be classified under sweets 5% tax or beverages 12% tax.
  32. Handicraft Sector
    Handicrafts have been taxed heavily by the government in the the new tax system which has not been a popular decision with many artisans.
  33. Alcohol Industry
    GST isn’t imposed on alcohol, however the prices of alcohol have been increased. Beer prices are going to rise by 15%, and hard drinks, as well as, the wine will have a 4% increase in price attributing to the GST impact.

Conclusion

Winding up, we would like to indicate that the introduction of GST has been a breath of fresh air to the taxation system in India. This simplifies a lot of the taxation problems with value addition for the delivery of Goods and Services in the country. In addition, even though it will take a lot of time to educate businesses and make them compliant to the new taxation system in India, it is a step in the right direction for businesses in the long run.

How LegalRaasta Can Help

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