Trade Analytics

Goods & Services Tax (GST)

Theme: Goods & Services Tax

Launch Date: July 1, 2017

Duration: Ongoing

Location: Pan-India


Stakeholders: Government of India, State Governments, Industry, Consumers


OVERVIEW


India witnessed the launch of its biggest tax reform since Independence, the Goods and Services Tax (GST) characterized as 'The Good and Simple Tax' by the Prime Minister Mr. Narendra Modi, on July 1, 2017. While the Goods and Services Tax (GST) is focused on ironing out the creases left by the predecessor tax regime and enhancing ease of doing business, it will involve a wave of short term adjustments like obtaining multi-state registrations, interpretation of provisions, determining the place of supply, transitional issues, etc.


GST, which is a destination-based tax, has been introduced to subsume several state taxes like Value Added Tax, Entry Tax, Octroi, Luxury Tax, Purchase Tax, Entertainment Tax, etc. and federal taxes like Service tax, Central Excise Duties, Counter-vailing Duty, Additional Duties of Customs, etc. GST will thus replace all these taxes with one tax –




Source: GST Council


Impact


  • The framework of GST provides for a seamless flow of credit which would greatly alleviate the cascading effect of taxes, thereby contributing to the growth prospects of the economy.
  • Goods and service tax is actually an indirect tax reform which ultimately aims to remove the taxation barriers between states. This helps create a unified market which is unprejudiced towards state boundaries and provides unrestricted access to the entire nation to buy, sell, import, and export within the country.
  • This will create a uniform market across the nation, wherein consumers will be benefited due to reduction in prices of goods and services, and there will also be ease of trade for businesses to operate locally or across the nation or to operate competitively over the globe.
  • GST works on the principle of ONLY taxing the vendor’s contribution to the overall product’s value. Also, the tax paid is not included in the price of the product sold to the vendor next in the chain. This uniformly distributes the burden of taxation to all vendors (in the chain) in proportion to their contribution (value added) to the end product – levelling the playing field especially for vendors at the end of the product chain. Also, the tax rate for a product category is the same across the country – preventing arbitrage.
  • The logistics industry in India had to maintain multiple warehouses across states to avoid CST and state entry taxes on inter-state movement. Most of the times, these warehouses were forced to operate below their capacity, thus increasing their operating costs. With GST, restrictions on inter-state movement are lessened and the logistics sector can start consolidating warehouses across the country. Reduction in unnecessary logistics costs will increase profits for businesses involved in supply of goods through transportation.
  • Factors like reduced logistics costs, simplified procedures, lower tax burden, removal of cascading effect, etc. make the GST regime especially beneficial to startups in the country. Threshold of Rs 20 lakh is beneficial for small businesses.
  • GST has helped widen the tax base, with the number of registrations crossing 10 million.
  • IMF has projected that the GST reform in India is expected to drive the medium term economic growth rate to beyond 8%.

Prices in Conventional system vs GST – An illustration


Particulars

Conventional System (Rs)

GST System (Rs)

Manufacturer to Wholesaler

 

 

Cost of Production

5,000

5,000

Add: Profit Margin

2,000

2,000

Manufacturer Price

7,000

7,000

Add: Excise Duty @ 12%

840

-

Total Value (a)

7,840

7,000

Add: VAT @ 12.5%

980

-

Add: CGST @ 12%

-

840

Add: SGST @ 12%

-

840

Invoice Value

8,820

8,680

Wholesaler to Retailer

 

 

COG to Wholesaler (a)

7,840

7,000

Add: Profit Margin @ 10%

784

700

Total Value (b)

8,624

7,700

Add: VAT @ 12.5%

1,078

-

Add: CGST @ 12%

-

924

Add: SGST @ 12%

-

924

Invoice Value

9,702

9,548

Retailer to Consumer

 

 

COG to Retailer (b)

8,624.00

7,700.00

Add: Profit Margin

862.40

770.00

Total Value (c)

9,486.40

8,470.00

Add: VAT @ 12.5%

1,185.80

-

Add: CGST @ 12%

-

1,016.40

Add: SGST @ 12%

-

1,016.40

Total price to final consumer

10,672.20

10,502.80

Cost saving to consumer

-

169.40


Last updated: August, 2018