Now that all the speculation and hullabaloo about the Goods & Service Tax (aka GST) is finished; Government of India has planned to roll it out from 1st of July. A lot has been written about GST already but despite that there is still a lot of confusion. Some people are confused if GST would be beneficial for them or not, & some are worried as to what could be its impact on inflation. Its implementation matters to millennials because although GST is not expected to impact prices on essential commodities, it could probably lower it further down. GST has been fixed for both goods and services with the idea to unify different tax rates. It will a huge development in India’s tax reforms. It can impact our standard of living, choices involving purchase of assets and our financial planning.
What is GST?
GST is an indirect tax that will be implemented throughout India from 1st July 2017. Following the passage of the Constitution’s 122nd Amendment Bill, GST is set to replace the current taxes levied by the Central and State governments. GST will be applicable to close to 1211 items in all. These items will be taxed under a 4 tier tax structure (5, 12, 18 & 28%). The following currently levied taxes would be unified under GST:
- Entertainment Tax
- Entry Tax
- Advertisement Tax
- Tax on lottery
- Central Excise Duty
- Service Tax
- Countervailing Duty
- Special Countervailing Duty
- Value Added Tax (VAT)
- Central Sales Tax (CST)
- Luxury Tax
- Purchase Tax
GST is essentially a tax only on value addition at each stage from manufacturer to the consumer. The consumer will hence bear only the GST charged by the last dealer in the supply chain. Lowest rates are assigned for essential items with highest for luxury items. Demerit goods such as cigarettes for example would be levied with additional cess (tax over another tax). The collection of this cess would go into the creation of a revenue pool which would compensate states for any loss of revenue during the first 5 years of the implementation of GST.
GST is levied on all transactions related to purchase, lease, sale, barter, import of goods or services etc. The GST implemented in India would be dual in nature i.e. Both Union & State Government. Transactions made within the state would be levied with Central GST (CGST) and State GST (SGST). For transactions between two states or between countries, Integrated GST would be levied, only by the Centre.
Benefits of GST
For the consumer
- A single tax proportional to the value of goods and services means only one tax to be paid by the final member of the supply chain i.e. Consumer.
- Reduction in the overall tax burden will be led by efficiency in gains and prevention of leakages in between the supply chain.
For industry and businesses
- A robust system creation; as various services such as payments, returns, registrations etc. can be done online.
- Abolition of hidden costs is possible thanks to seamless tax-credits all along the supply chain. This would also create a uniform structure to carry out business activities as the tax would be neutral.
- Reduction in transaction costs will lead to players competing more than just costs, for various segments of products & services.
- Costs of locally manufactured goods will reduce. Uniform procedures and tax rates will reduce compliance cost, as well.
For the government
- With one tax replacing multiple ones, GST would be simpler to administer for central and state governments.
- Higher revenue is estimated with GST decreasing the cost of collection of tax revenues.
- Automating compliance procedures will reduce errors and increase efficiency
GST Structure (Item wise breakup)
GST is divided into 4 tax slabs
0% GST on commodities such as food grains, rice, wheat, fresh meat, chicken, eggs, milk, buttermilk, curd, natural honey, fresh fruits, vegetables, flour, bread, salt, stamps, printed books, newspapers, bangles, jute, handloom, hotels and lodges with tariff below Rs.1000.
Also, 0.25% GST would be levied on rough cut diamonds and 3% on gold.
Slab 1 (5%)
5% GST on packaged food items, kerosene, coal, medicines, small restaurants, railway, air fare, spices, tea, coffee, frozen vegetables, fish fillet, milk powder, cream, apparel below Rs.1000 and footwear below Rs.500
Slab 2 (12%)
12% GST on frozen meat products, sausages, animal fat, fruit juices, ayurvedic medicines, packaged dry fruits, butter, cheese, tooth powder, ghee, incense, coloring books, umbrella, sewing machine, cell phones, non AC hotels, business class air ticket fertilizers, and apparel above Rs.1000
Slab 3 (18%)
18% GST on footwear above Rs.500, instant food mix, mineral water, steel products, tampons, notebooks, preserved jams, sauces, soups, ice-cream, preserved vegetables, refined sugar, pastries, cakes, cornflakes, tissues envelopes, camera, speakers, monitors, branded garments, financial services, telecom services and air conditioned hotels that serve liquor.
Slab 4 (28%)
28% GST on alcohol, chocolate wafers, pan masala, aerated water, paint, deodorants, shaving creams, after shave, hair shampoo, sunscreen, ceramic tiles, cigarettes, chewing gum, water heater, dishwasher, washing machine, weighing machine, ATM, vending machines, vacuum cleaner, shavers, automobiles, motorcycles, five star hotels and tobacco.
GST’s impact on us
We are already in June, when the petrichor signals the onset of rains. With 1st of July approaching, car, AC, washing machine and shoe sellers are seen clearing out their stock with pre-GST sales and discounts. This is a rain of discounts which needs to be enjoyed by everyone.
From 1st July, on road prices for small cars are expected to go down marginally. But car manufactures are seen handing out attractive discounts towards luxury cars.
Prices for car batteries, paint, cement, movie tickets, fans, water heaters, air coolers, entry level cars and 2 wheelers are set to reduce. On the flip side, mobile phone calls, textile, branded jewelry are set to become expensive.
Implementation of GST will almost surely put us on par with nations that have a more structured tax system. It will provide a level playing field for our country’s businesses to perform trade and boost the Indian economy by removing indirect tax barriers between states.