GST – The New Reign

India welcomes GST with a rigid heart and a rattled mind.

GST looks a lot more complicated than it is. It is the first substantial reform in the economic sense, in India, in several years. It is bound to create confusion, frustration and become abhorrent, before it becomes another irrefutable law. But it would undeniably solve many problems of pricing and taxation that have been encountered by both producers and customers. Lowering prices and certainly, increasing transparency, and laying a path for easier estimation of taxes are just some of many of its advantages.

The Goods and Services Tax (GST) represents an indirect tax reform which will remove tax barriers between states and create a single tax rate. GST will benefit both consumers and manufacturers and/or producers. Although primarily, the rate mentioned was 27%, plans are charted out for 0% on food, and 5-18% on other goods, which is much more realistic, especially because too high a tax rate can cause inflation, as was the case with Singapore during its GST introduction. However, GST in India is still too high in comparison with Singapore, where it is 7%. And in Malaysia, GST is 6%. Malaysia, infact, makes a GST exemption on financial services, and Singapore treats them at 0%, if they are sold to non-residents. Malaysia, in addition, gives clear instructions to different sectors for easier application of GST and sets the limit of revenue for which GST would be applicable.

In India, GST is, for obvious reasons, relatively new. The economy is habituated to multiple levels and types of taxes, both direct and indirect. In the previous tax system (before the 1st of July 2017), taxation powers were divided between the centre and states, where income tax, including the tax on company profits, was in the domain of central government as ‘direct tax’, while taxes on consumption have been under the domain of state governments. In this way, taxes have been duplicated if goods were produced in one state and sold in another state. When the manufacturer bought raw material, he paid tax at the central level, called central excise, at the factory gate. However, when the manufacturer sold his product to the consumer, he also included a tax of the state government called a tax on consumption or Value Added Tax (VAT), in the sale price. The problem arose when goods were manufactured in one state, say Uttar Pradesh, and sold in another state, for example in Delhi. In such a case, in addition to these taxes, an “export” tax called Central Sales Tax was added, which was collected from the state where the goods are manufactured, in this case, Uttar Pradesh. In this way, India, although one country, has been divided by tax, which has been a cause of increased prices on goods and services.  GST aims to repair precisely this.

In the new GST system, all taxes will be collected when goods are sold to the final consumer, which will ensure transparency, avoid double taxation (“tax on tax”) when goods are sold between states, and bring in many other benefits. This would provide manufacturers the possibility of reducing prices, because they will be credited for previously paid taxes; the tax would not be included in the final price. Logically, this would decrease the prices, but only if the government does not set high tax rates, with which the effect may be lost. The tax system will also be more transparent and much easier for comprehending, while costs and time for tax calculation will be drastically reduced.

GST is a destination-based tax, so it is only important where goods are sold. It would be beneficial to export-oriented businesses because it does not apply to exported goods. Furthermore, it will widen the tax base, which will benefit the government with higher tax revenue.

 

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