Goods and Services Tax (GST) is the new tax system established in India. It is an indirect tax that applicable throughout India which have replaced the multiple cascading tax system. By the use of this system, taxes that levied by the central and state governments will be combined. “Only one” indirect tax has to be paid by the trade and industry and all the other indirect taxes will be subsumed in GST. Under GST, goods and services are taxed at the following rates, 0%, 5%, 12% and 18%.
GST is actually a dual tax model.
The tax payer has to pay only one tax called GST and it will be divided between state and central governments.
- SGST – State GST, collected by the State Govt.
- CGST – Central GST, collected by the Central Govt.
- IGST – Integrated GST, collected by the Central Govt.
Rates affected by GST:
Pharmacy products, construction materials, processed food items, FMCG goods, ready-made clothes, economy class airfares, entry level electronic items, budget hotels and restaurants, luxury cars etc. The rate of these type of things will get decreased due to the effect of GST.
Because of manufactured consumer goods, the current tax regime means the consumer pays approximately 24%-26% more than the cost of production due to VAT (value added tax) and excise duty. So with the GST rate expected to be 18% for most goods, they are expected to become cheaper.
And the following things become costlier with the establishment of GST.
High-level hotels, jewels, home appliances, mobile bills, small and mid-sized cars, cigarettes, aerated drinks, movie tickets, air and train tickets, cab services, etc.
The effective service tax rate at present is 15% and it applies to almost all services. Under GST, this rate will increase to 18% making services by and large more expensive.
Also, luxury goods and services have been pegged at a higher rate (along with an additional cess), with the rationale being that those who can afford luxury can afford taxes too.
Goods like petroleum, alcohol, and tobacco may be excluded – A high tax rate would stoke inflation as service taxes will rise more steeply – Fiscal stress if expected collection efficiency doesn’t materialize early.
Advantages of GST
Tax complications get simpler
GST will replace 17 indirect tax levies and compliance costs.
Increase in Revenue
Evasion set to drop – Input tax credit will encourage suppliers to pay taxes – States and Centre will have dual oversight – The number of tax-exempt goods will decline.
One country, one rate
It’s currently fragmented along state lines, pushing costs up 20-30%
Logistics, inventory costs will reduce
Checks at state borders slow movement of trucks. GST will remove the system.
For many capital goods, input tax credit is not available. Full input tax credit under GST will mean a 12-14% drop in the cost of capital goods. Expected: A 6% rise in capital goods investment, 2% overall.
Make in India
Manufacturing will get more competitive as GST addresses cascading of tax, inter-state tax, high logistics costs and fragmented market
Increased protection from imports as GST provides for appropriate countervailing duty.
Less developed states get a lift
The current 2% inter-state levy means production is kept within a state. Under the GST national market, this can be dispersed, creating opportunities for others.
GDP lift HSBC estimates an 80 basis point rise in GDP growth over 3-5 years. NCAER pegs this at 0.9-1.7% thanks to the elimination of tax cascading.