All You Need to Know About Goods and Services Tax (GST)

Goods and Services Tax or GST is a solitary tax that will include several indirect taxes that are imposed on the sale of products,Goods and services. GST will be levied on the manufacture, trade and consumption of altogether products, goods and services in India from July 1.

Topics covered

Why will we like GST?

How can GST change this?

Current Tax Structure

GST

Components of GST

GST Tax Structure

Impact of GST

Services

Shortcomings of GST

Why do we need GST?

The current legal system offers businesses a troublesome time for the reason that it involves manifold taxes, complicated compliance procedures, and intervention required by numerous state and central tax divisions. This contributes to making it extremely tough to setup a commercial business in the Republic of India that even nowpositions at 133rd place in concerns of doing business. The aim for announcing the GST statute in India is as a result of the subsequent elucidations:

Manifold taxes and tax cascading

In the present-day scenario of indirect tax edifice, about 20 taxes are imposed by the state and the central government beforehand a merchandise reaches the end customer.

At every solitaryphase of a supply chain, taxes are applied on the total worth of the product, even though it has already been taxed at the preceding level. This process of taxing already taxed goods is denoted as tax cascading. This materialises when the government does not provide credit for input tax (the tax that was paid at the previous stage) to the customer who buys the product in the next stage.

This substantial tax cascading increases the quantity of tax involved in the making of a product, which often is included as part of the manufacturing cost. This shifts the complete tax burden on the termination consumer, who will pay upwards of 30-35% in taxes by the time they buy a merchandise.

Interstate movement of goods is difficult

When goods are moved from one state to another, a Central Sales Tax (CST) of 2% is collected on the total value of the goods at the state border. For as an example, if you have got a textile saleroom in metropolitan area of Bengaluru and obtain clothes from say Ahmedabad, the truck carrying the consignment are charged 2 percent CST for every state border it crosses. This quantity gets accessorial to the value of the clothes that you simply obtain from the manufacturer. The constant onerous of interstate product delays their arrival, as time is wasted at tax checkpoints at each state border. 

Complex compliance procedures

A lack of a unvarying tax rate across the country means that Indian businesses today must follow multiple tax laws, follow various tax rates, and face intervention from tax authorities from many states. Businesses that sell goods across states must keep a separate record to manage costs according to each state’s tax rate, as well as manage piles of paperwork specific to each state’s tax laws. Not following these rules puts businesses at risk for heavy penalties from the tax department. All this additional work makes managing interstate taxes complex and stressful, and it often consumes a considerable amount of time, money, and resources.

How can GST change this? Instead of applying taxes on the total value of the product at each stage, the GST only imposes atax on value addition. Because it provides credit for the input tax paid at each earlier phase of a supply chain, this method considerably reduces the overall manufacturing cost.

Let’s take a closer look at how this works with a simple example.

Comparison of Current Tax Structure vs. GST

Note: In this example, we are assuming that all taxes associated with the manufacturing process have been paid and the selling price in the first stage is the final price set by the manufacturer (excluding VAT).

Current Tax Structure

Imagine a manufacturer who sells Washing machinesto a wholesaler located in the same state (we are going to call it State 1).

The wholesaler in State 1 adds value to the product/ adds his or her margin and then sells it to a retailer who is located in another state (let’s call it State 2). The retailer then adds his/her profit margin (value is being added to the product) and sell it to a local customer. The distributor additionally provides Washing machine’s installation services to customers on above the cost of the sale. If they were operational below this tax model, the manufacturer would begin the cycle by commercialism the Washing machine to the distributor for a damage of Rs.8000 + a VAT of about 14.5% creating the total of Rs.9160 (VAT is associated with the both parties are confined to thesame state).

The distributor present at state one would then sell it to the distributor set at state two for Rs. 10,000. However, because the Washing machine is being taken and bought from the distributor to a distributor setup in an exceedingly completely different state, a 12% GST(on the whole amount) is applied, and then the distributorreally owes Rs.11200 rather than simply Rs.10000. Then, the distributor adds a margin of profit of 2% over the acquisition worth of the Washing machine, and sells it to a local area client for Rs.13440 and additionally charges Rs.500 as installation charges. Hence, a VAT of 14.5% on 13440 and a service tax of 15 % on five hundred is applied to the group action, cost accounting the client Rs.14399.85 per Washing machine.

In the higher than an example, you'll be able to see that at each stage of the method, the applying of tax is non-uniform and also the method of obtaining ITC is broken by the presence {of completely different taxes of various types} taxes ruled by different authorities.

GST

Now, let’s taking the same example, however instead apply the GST model.

The manufacturer would begin the cycle by commercialism the Washing machine to the distributor for a cost of Rs.8000 + GST of 12% the full Rs.8960.

The distributor set at state one would then add value/margin to the merchandise and sell it to the distributor set at state two for Rs. 10,000. Here, associate IGST of 12%(on the worth accessorize that is = Rs.1040) is applied, and then the distributor really owes Rs.10124.8 rather than simply Rs.10000. Then, the distributor adds a margin of profit of 2 percent over the acquisition worth of the Washing machine and sells it to a local area client for Rs.12148.96 and additionally charges Rs.500 as installation charges. Hence, a GST of 12%on 12148.96 and a GST of 18%on five hundred is applied, cost accounting the client a complete Washing machine for Rs.12,982.76.

Looking at each the examples, one will see that the buyer/end shopper pays a comparatively lesser quantity below in the GST model. this is often as a result of GST utterly operates on the idea valuable addition, and then the sellers at each level get input tax credit/refund on the input taxes that they need to be paid at the time of sale.

Components of GST

From July 2017, Republic of India can follow the dual-GST model that is formed from the subsequent components:

SGST - A form of GST collected by the government

CGST - A form of GST collected by the central government

Both the taxes are levied once the sale of products and services happen at intervals the same state.

If the movement of products occurs between 2 completely different states i.e. associate interstate group action, a combined tax referred to as the IGST or the Integrated GST (SGST + CGST) are collected by the central government. The IGST can replace the presently levied Central nuisance tax (CST) of 22.

The tax quantity collected as IGST can later be distributed to various state governments.

For higher understanding, let's take a glance at the subsequent scenarios:

Scenario 1: Levy of SGST and CGST

Let us assume that you’re a distributor in the metropolis and you get product from a manufacturer in a place in Karnataka Since the sale and movement of products happen at intervals the state, SGST and CGST are levied on the sale. Also, the distributor gets step-down on the input SGST and CGST.

Scenario 2: Levy of IGST

Let us assume that you’re a distributor in Belgaum and you get product from a manufacturer in Karnataka. Here, the sale and movement of products happen between 2 completely different states, IGST is levied on the sale.

Scenario 2: Levy of IGST

Let us assume that you’re a distributor in Belgaum and you get product from a manufacturer in Tirupur. Here, the sale and movement of products happen between 2 completely different states, IGST is levied on the sale.

GST Tax Structure

The four-tier tax structure of GST has the subsequent slabs: 1.a zero rate, 2. a lower rate, 3. two standard rates, and 4.a higher rate. This article is aimed at providing a brief overview of each GST rate.

Zero rate

The zero rate tax is a nil tax that is applied on goods and services. This is equivalent to tax exemption and does not have any effect on the price of the product. Items that are eligible for zero rate tax are decided by the government.

As per the four-tier tax structure, the zero rate tax will be applied on 50% of the items of the consumer price index (CPI) basket - an index that constantly measures prices of commonly purchased consumer goods and services to measure inflation. The zero rate items could include such items as all food grains, cereals, milk, and other essentials.

Including zero rates as part of the GST structure will keep the prices of basic items in check, regardless of whether the government decides to increase tax rates in the future.

Lower rate

A lower rate of 5% will be applied to the rest of the items in the CPI basket and other items of mass consumption. This, along with the zero rate tax, will help prevent inflation from having much of an impact on zero rate and lower rate items, keeping the prices of all essential items in check.

Standard rate

There are two standard rates that have been finalized by the GST Council: 12% and 18%. Finance Minister Mr. Arun Jaitley, in his address to the press, said that the Council had finalized two standard rates in order to keep inflation in check.

Imagine a product, which is currently taxed at 13%, charged a rate of 18% GST. This would increase the price of the product by 5%, leading to inflation. To avoid this, the GST council decided to tax all goods and services that are currently taxed at 9-15% at a standard rate of 12%. Processed foods will also be taxed at 12%. The rest of the goods and services will be taxed the second standard rate of 18%.

All taxable services that are currently charged at 15% will now be moved to the 18% bracket. This could increase the price of a majority of services that are currently offered.

Higher rate

A higher rate of 28% will be levied on white goods. This includes items such as washing machines, air conditioners, refrigerators, small cars, etc.

Previously, the tax on white goods was around 27% (including an excise of 12.5% and VAT of 14.5%), but the cascading effect elevated the tax as high as 30-31%. This will be minimized by the new higher rate of 28%.

Additional cess

The additional cess, which had been a topic of debate since the proposal of the GST rates, is now finalised.

People worried that demerit goods (such as tobacco product and aerated drinks), that were antecedent taxed at 65 and 4%, would become cheaper and too simply accessible with the new higher rate of GST set at 28. Keeping this in mind, the new GST structure they shall collect an extra cess above GST. The cess can solely be applied on demerit product like luxury cars, tobacco products, pans, and aerated drinks. the proportion of the extra cess is, however, to be determined by the govt.

Benefits of GST

Many industrialists and finance specialists believe that the GST can rework the method we have a tendency to do business in the Republic of India. Here’s however the GST would bring major edges to businesses.

Reduced tax value and step-down

The credit for the tax paid at each stage of the availability chain is given to the patrons, that they'll use to offset the acquisition they create at succeeding stage. additionally, to reducing the tax burden on the client, this may additionally scale back the producing and damage of the merchandise. At the tip of the day, this reduction in additional prices can facilitate shoppers save additionally with each purchase, making them additional happy and prepared to pay than before.

Free movement of products

When product area unit captive between states between 2 completely different states, a combined tax referred to as the IGST (Integrated GST) are collected by the central government. This integrated tax amounts to the sum of the SGST and the CGST. For example, if the SGST and CGST are charged at 12% each, then an IGST of 24% will be charged on interstate trade.

This will eradicate the need for businesses to make upfront payments during interstate transactions, to pay CST at state borders. Additionally, the IGST, in conjunction with a fully computerized GST system, will help businesses keep better track of their tax credits during interstate transactions. This will allow for free movement of goods crosswise the country, making India a more amalgamated market.

Automated compliance

In addition to doing away with tax cascading, the GST will streamline taxation with simple compliance Tax handling will be much easier once the entire taxation process moves to an online platform known as the GST portal. From registering for the GST to filing returns, everything will be done online through the GST portal. This will provide increased self-reliance for small and medium businesses, reducing costs and freeing up resources that were previously spent on managing taxes.

Impact of GST

Agriculture

Agriculture has always been the root of the Indian economy. With that in mind, the government has been exempting many food items such as meat, eggs, coarse grains, fruits, and vegetables from the CENVAT (Central VAT), even though cereals and food grains are associated with a state VAT (Value Added Tax) of 4 percent.

This is going to change with the implementation of GST as all the indirect taxes associated with agriculture will be merged together and streamlined across all Indian states. A majority of agricultural goods will be exempt from tax. To be more specific, 50% of items that are currently present in the Consumer Price Index (CPI) basket will be exempt from tax. The remaining 50% of the items will come under the lower tax bracket of 5%.

Fast Moving Consumer Goods

Fast Moving Consumer Goods (FMCG) industry includes food, beverages, household and personal care items. These are currently liable to a total tax of >26% (this is the result of a 12.5% excise and a VAT of 12 to 14.5% on top of excise). This excludes most of the agricultural processed products that either enjoy a VAT exemption or are liable to a lower bracket of taxation (4-5% of the value). With GST at a rate of 12-18%, we will see a drop in the prices of most FMCGs.

More than pricing, the greatest impact of GST on FMCG companies would be on their product distribution and warehousing. As of today, the distribution costs for FMCGs account for up to 7% of business turnover, and to keep it as low as possible, they establish warehouses in every state where they operate (this is done in-order to avoid Central Sales Tax, or CST, on interstate sales). Based on demand, the goods are transferred among warehouses and sold to distributors locally.

Under the GST, local and interstate supply would be tax neutral and India would be treated as a single common market. This shift would allow companies to reconsider the location of warehouses from a tax saving standpoint to a market-centric one that offers more savings and faster deliveries.

Manufacturing

The manufacturing sector encompasses a wide range of industries. Currently, this sector is subjected to an array of taxes such as the excise duty, VAT, CST, etc which are levied at each level and are added to the whole value of the product (this is known as tax cascading). One of the biggest challenges of this sector is to try and reduce the cost of production while delivering the maximum value to end customers. The new GST regime will make it easier on this sector by contributing to a lower cost of production as tax at each level will be charged only on the value added to an item. One of the major defects of the current indirect tax regime – the absence of tax credit for central/union taxes over state taxes and vice versa – could be eliminated by allowing unrestrictive tax credit under GST.

Another major challenge faced by the manufacturing sector today is transferring goods from one state to another while also acquiring raw materials from another state. This is because the state border checkpoints that ensure material scrutiny and location-based tax compliance take up roughly 60% of a truck’s transit time. These unproductive transit hours coupled with regulatory impediments reduce the efficiency of Indian manufacturers as compared to their international counterparts.

The new GST regime will once again better the situation by unifying the Indian market and facilitating a smoother flow of goods within the country. Although border checkpoints may still exist for some time, the lesser scrutiny at these checkpoints will greatly reduce transport hassles.

E commerce & Supply Chain Logistics

According to the Constitution (122nd Amendment) Bill that advocates the GST regime, when we talk about supply, it does not differentiate between “supply to oneself” and “supply from one person to another”. This means that both the act of selling goods as well as transferring goods from one state to another will be treated in the same way. Though we cannot say for sure, if this was enforced, it will warrant a redrawing of warehouse strategy in-order to optimize organisational profits (you won’t be needing too many warehouses anymore). This will transform warehouses into fulfillment centers instead of distribution centers.

This means lower distribution and holding costs, less bureaucratic red tape, and an increased ability to focus on your market. That being said, the additional 1% tax, envisaged as a replacement for Central Sales Tax, may not be available for credit, which will add to the cost of products.

Further to this, the GST has two major benefits:

Because of the availability of input tax credits on inter-state sales, you are now exempt from any form of tax cascading.

With no CST or octroi on top of sales taxes in the picture, you no longer have to need to maintain extra warehouse steps in your supply chain.

We saw the impact of GST on our offer chain logistics; currently, let’s see however it additionally affects our e-commerce trade. With no tax laws presently in site for this trade, taxes area unit obligatory by state governments supported their out-of-date and non-uniform tax laws. The GST aims to correct that, by increasing its assets and levying a homogeneous charge per unit for product and services everywhere the Republic of India. this may lead to fewer rules, lesser work and consecutively consistent item costs and quicker product shipments and returns.

Services and Technology

On the and aspect, GST can eliminate multiple tax levies and permit for deeper penetration of digital services. At constant time, it'll be an obstacle to that corporation that have many delivery centers and offices operating along to service one contract. this is often as a result of every center is needed to come up with a separate invoice to each acquiring party.

Telecommunication

On the brilliant aspect, GST can bring down/streamline {the prices the prices} of handsets across states due to uniform taxation and lower production and distribution costs. On the opposite hand, decision charges and web knowledge IT rates can go up if GST goes up to extraordinary 15%

Media & diversion

Things area unit wanting bright for DTH suppliers (Direct to Home dish tv providers), film producers and multiplex players presently susceptible to a non-uniform diversion tax above normal service taxes. this is often as a result of the GST regime can bring down the tax levied on their services by 2-4%.

Additionally, the GST will provide input credits on all taxes levied below this regime; mean additional revenue gained for these service suppliers and an attainable reduction within the costs of their services. 

Insurance

Life, health and motor coverage can become dearer from April 2017 as taxes can go up by a third.

Air Travel

Air travel in the Republic of India can become much more pricey, because the current service tax of 6-9% is replaced by a GST of 15-18%. (It’s higher to shop for a tourer and pass road than pass air as cars are cheaper with GST )

Shortcomings of GST

Multiple registrations

According to the model GST law, a business ought to register for GST in each state wherever they need associate establishment/ branch/outlet / warehouse (in easy terms, you want to register each request address that belongs to your company individually). Let’s take associate example wherever you have got a business that has 20 branches across 20 completely different states that sell product regionally. With GST coming back to result, you may get to register for GST altogether the 20 states for SGST and register with the central government for CGST. That brings it to a complete of 21 GST registrations.

No Threshold limit for E commerce Suppliers

E-commerce operators aren't eligible for the brink limit (Rs. 20 lakhs) that's presently out there for alternative businesses. regardless of their annual turnover, registration is necessary and that they can get to pay GST. this may have an effect on many brick and mortar stores, 

Multiple Returns

According to the GST regime, each business ought to file 3 returns on a monthly basis. This amounts to thirty-six returns in an exceedingly financial year. This makes compliance tough for businesses as they're going to got to pay a major quantity of your time in filing returns.