Post-GST India Will See Improvement in ‘Ease of Doing Business’
The greatest changes the Indian economy has faced in the last few decades are: the demonetisation of Rs 500 and Rs 1,000 currency notes and the introduction of the GST. Economists believe that these two steps, amplifying each other’s effects, will be a game-changing decision.
Demonetisation has been extensively discussed and debated upon, so most of us might be aware about its implications. However, GST is still an uncharted territory.
Taxation is the basic source of revenue for the government of any country. These taxes can be classified into two types – direct and indirect taxes.
Burden of Direct and Indirect Taxes
Direct tax, i.e. income tax, is a tax that is levied by the government to be paid by every person or institution in the country, subject to some exemptions. It is paid out of and in proportion to the income of the person or institution.
Indirect taxes are levied by the government on goods or services. The suppliers of goods and services are liable to pay taxes on such supplies but they are recovered from the next person in the supply chain.
So, in fact, the burden of such taxes is borne by the ultimate consumers. They are paid by every person consuming such goods irrespective of their incomes. They are not directly paid to the government by the consumers, but collected by the suppliers of such goods or services from their customers (consumers) and subsequently paid to the government.
There are many indirect taxes in India, namely service tax, excise duty and customs duty levied by the Central Government and Value Added Tax (VAT) levied by the respective state governments.
You might remember that while eating at a restaurant, you eventually pay a little more than the prices you see on the menu. That is because of a little asterisk leading to the terms & conditions that say, ‘Taxes extra’.
How do Indirect Taxes Work?
As we can see in the diagram above, the steel supplier, in this case, supplies steel to the automobile industry and collects indirect taxes from them, which are subsequently deposited to the government.
Assuming the sales tax rate is a mere 10 percent, imagine the life cycle of a piece of steel worth Rs 100, originating from the mine and ending in the hands of the consumer.
The price of steel surged by a whopping 61 percent merely on account of taxes, in a case where:
• The tax rate has been assumed to be conservatively low (10 percent), and
• The number of intermediaries between the mine owner and consumer have been assumed to be unrealistically low in a country as gigantic as India with 1.3 billion people.
• Value additions of intermediaries have not been factored into the calculation.
GST: One Nation, One Tax
The introduction of GST is a single move unifying all the indirect taxes. From the day GST becomes applicable, all other indirect taxes will be abolished. Since our government has a federal structure, three types of GST will be levied – Central GST (CGST), State GST (SGST) and Integrated GST (IGST).
GST will ensure the free flow of credits throughout the supply chain as the credit of IGST can be utilised against CGST, SGST and IGST and vice versa. The only restriction in utilisation of credit is that CGST cannot be utilized against SGST and SGST against CGST. However, this does not pose a problem as both CGST and SGST are applicable on the same transactions.
So the CGST and SGST credits can be utilised against their respective output liabilities. This is the main reason why GST has been proposed to be introduced in the economy.
Will Give a Boost to the GDP
Economists predict that due to reduced compliances, free flow of credits and increased ease of doing business, the GDP growth rate can increase by a factor of up to 2 percent. Also, many MNCs which were reluctant to invest in India due to all these issues, will now be encouraged.
Now when you hear about GST in the news, you’ll be able to appreciate all the effort that is being put in for making it a reality and you’ll understand what its consequences will be.
(The author is working with various companies to analyse the impact of the GST on their business and assisting them through the transition. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
Also Read: Get GST Going, Improve It Later
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