The Goods & Service Tax or GST is one of the biggest fiscal reforms in India since Independence. All businesses, small or large, will be impacted by this new indirect tax regime.
GST will be levied on both goods and services and will subsume and replace the current indirect taxes such as excise, VAT, and service tax.
Removing cascading tax effect
An important benefit of the introduction of GST will be the removal of the cascading tax effect. In simple words, “cascading tax effect” means a tax on tax.
Under the current regime, the service tax paid on input services cannot be set off against output VAT. Under GST, the input tax credit can be availed smoothly across the spectrum of goods and services, thus reducing the tax burden on the end user and removing cascading effect.
Let’s take the following example to understand how removing the cascading effect will reduce taxes.
A trader buys office supplies for Rs. 20,000 paying 5% as tax. It charges 15% service tax on services of Rs. 50,000. Currently, he has to pay Rs. 50,000*15% = Rs. 7,500 without getting any deduction of Rs. 1,000 VAT already paid on stationery.
Under GST (assuming GST= 18%)
GST on service of Rs. 50,000 @18% 9,000
Less: GST on office supplies (20,000*18%) 3,600
Net GST to pay 5,400
This will be especially beneficial to industries that involve both goods and services (like restaurant business) and pay both VAT & Service Tax under the current regime.
Higher threshold for registration
Tax Threshold Limits
Excise 1.5 crores
VAT 5 lakhs in most states
Service Tax 10 lakhs
GST 20 lakhs (10 lakhs for NE states)
As per the current VAT structure, any business with a turnover of more than Rs. 5 lakh (in most states) is liable to pay VAT (different rates in different states). Similarly, for service tax, service providers with turnover less than Rs. 10 lakhs are exempted.
Under GST this threshold has been increased to Rs. 20 lakhs thus exempting many small traders and service providers.
Composition scheme for small businesses
GST also has an optional scheme of lower taxes for small businesses with turnover between Rs. 20 to 50 lakhs. It is called the composition scheme. It has now been proposed to be increased to 75 lakhs. This will bring respite from tax burdens to many small businesses, not to mention that if a business decides to pay taxes through feie by submitting IRS Form 2555 they will end up paying a much smaller amount.
Simpler online procedure under GST
The entire GST process – starting from registration to filing returns and payment of GST tax – is online. Startups do not have to run around to tax offices to get various registrations under excise, VAT, service tax.
Lesser number of compliances
Also, the current tax regime has excise VAT and service tax, each of which have their own returns and compliances.
Tax Return filing
Service tax Proprietorship/Partnership- Quarterly
VAT Different for different states
Some states require monthly returns over a threshold limit. Some states like Karnataka require a monthly return
GST will unify all these, thereby reducing the number of returns and the time spent for tax compliances. There are about 11 returns under GST, out of which 4 are basic returns which apply to all taxable persons under GST. There are fears that the number of returns will increase after GST. But the main GSTR-1 will be manually populated. But GSTR-2, GSTR-3, GSTR-4 will be auto-populated.
Defined treatment for e-commerce
benefits of gst Many Indian businesses provide goods and services through the internet. Earlier, there were no specific provisions for treatment of the e-commerce sector. Currently, states have variable VAT laws for this sector. For example, online websites (like Flipkart and Amazon) delivering to Uttar Pradesh have to file a VAT declaration and the registration number of the delivery truck. Tax authorities can sometimes seize goods when there is a failure to produce documents.
Again, these e-com brands are treated as facilitators or mediators by states like Kerala, Rajasthan, and West Bengal which do not require them to register for VAT.
All these differential treatments and confusing compliances will be removed under GST. For the first time, GST clearly maps out the provisions applicable to the e-commerce sector and since these will apply all over India, there should be no complication regarding inter-state movement of goods anymore.
Read a more detailed analysis of the impact of GST on e-commerce.
Increased efficiency in logistics
The logistics industry in India had to maintain multiple warehouses across states to avoid the current 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.
When GST goes live, these restrictions on inter-state movement of goods will be lessened and the logistics sector might start consolidating warehouses across the country. As an outcome of GST, warehouse operators and e-commerce players have already shown interest in setting up their warehouses at strategic locations such as Nagpur, which is the zero-mile city of India, instead of every other city on their delivery route.
Reduction in unnecessary logistics costs will increase profits for businesses involved in supply of goods through transportation.
Visit here to read more about the impact of GST on logistics.
Regulating the unorganized sector
Certain industries in India like construction and textile are largely unregulated and unorganized. GST has provisions for online compliances and payments, and availing of input credit only when the supplier has accepted the amount, thereby bringing accountability and regulation to these industries.
There is no doubt that GST is aimed at increasing the taxpayer base by bringing SMEs and the unorganized sector under its purview. This will make the Indian market more competitive than before and create a level playing field between large & small enterprises. Further, Indian businesses will be able to better compete with foreign countries such as China, Philippines, and Bangladesh.
However, all will not be smooth sailing. A policy change of such a huge nature is sure to be faced with teething troubles. Experts have also identified some of the disadvantages of GST implementation which could be a cause for worry for some industries.