GST is one of the hot topics and an MBA aspirant should be able to present the facts on the same along with his/her views coherently. Experts at MBAUniverse.com bring forth key facts on this hot GD topic to help an MBA aspirant to take his/her view point while speaking in the GD round of a top MBA college.
Impact of fiscal and monetary policy changes on economy is more relevant to understand whether it would bring with it a wheel of growth or could prove against the economic and business interests of the country, an MBA student is supposed to know and must be able to speak about it in the GD round after gathering thought and analyzing the pros and cons of the same.
After a long nationwide debate on Goods and Service Tax (GST), the initiative was launched at midnight on June 30, 2017 in a ceremony held at Central hall of Parliament. Various provisions and benefits of GST were shared in their speeches by the Finance minister of India, Mr Arun Jaitley; the Prime Minister of India Mr Narendra Modi and the President of India Shri Pranab Mukherjee.
India’s biggest tax reform was launched at midnight of June 30 at Parliament's historic Central Hall, by President Pranab Mukherjee and Prime Minister Narendra Modi. GST therefore, became effective from July 1, 2017.
Current tax rates have been replaced by GST rates with effect from July 1. It is the fourth time since Independence that an event was held at the Central Hall of Parliament at midnight. The last three celebrated India's Independence. Congress boycotted the GST launch along with several other opposition parties. GST replaces a slew of indirect taxes with a unified tax and is set to dramatically reshape the country's 2 trillion dollar economy.
What is the GST
Goods and Services Tax (GST) is an indirect tax applicable throughout India which has replaced multiple cascading taxes levied by the Central and State governments. GST was introduced as The Constitution (One hundred and first Amendment) Act 2017 following the Constitution 122nd Amendment Bill. The GST is governed by a GST Council and its Chairman is the Finance Minister of India. The process of forming the legislation took 17 years. It was first proposed in the year 2000. The minimum tax rate under GST is 0% and highest tax rate is 28%.
- Under GST, Goods and services are taxed at the following rates: 0%, 5%, 12%, 18%, 28%.
- There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on gold. In addition a cess of 15% or other rates on top of 28% GST applies on few items like aerated drinks, luxury cars and tobacco products.
- A single GST has replaced several existing taxes and levies which include: central excise duty, services tax, additional customs duty, surcharges, state-level value added tax and Octroi.
- Other levies which were applicable on inter-state transportation of goods have also been done away with the launch of GST regime.
Activities covered under GST
GST is levied on all transactions such as sale, transfer, purchase, barter, lease, or import of goods and/or services. India has adopted a dual GST model implying that taxation is administered by both the Union and State Governments.
Transactions made within a single state will be levied with Central GST (CGST) by the Central Government and State GST (SGST) by the government of that state. For inter-state transactions and imported goods or services, an Integrated GST (IGST) is levied by the Central Government.
GST is a consumption-based tax the impact of which will be at the destination. The taxes therefore, are paid to the state where the goods or services are consumed and not the state in which they were produced.
IGST complicates tax collection for State Governments by disabling them to collect the tax owed to them directly from the Central Government. Under the previous system, a state would have to only deal with a single government in order to collect tax revenue.
GST: Different tax rates
- Lower rates for essential items and the highest for luxury and de-merits goods.
- Service Tax will go up from 15% to 18%. The services are taxed at lower rates such as train tickets and will fall in the lower slabs.
- Essential items including food is taxed at zero rate. The propose is to control inflation as food and essential items constitute roughly half of the consumer inflation basket.
- The lowest rate of 5% would be for common use items. There would be two standard rates of 12 per cent and 18 per cent, which would fall on the bulk of the goods and services. This includes fast-moving consumer goods.
- Highest tax slab will be applicable to items which are currently taxed at 30-31% - excise duty plus VAT.
- Ultra luxuries, demerit and sin goods like tobacco and aerated drinks will attract a cess for a period of five years on top of the 28 per cent GST. The collection from this cess as well as that of the clean energy cess would create a revenue pool which would be used for compensating states for any loss of revenue during the first 5 years of implementation of GST. The cess would be lapsable after 5 years.
- The structure is a compromise to accommodate demand for highest tax rate of 40% by states like Kerala.
- The principle for determining the rate on each item will be to levy and collect the GST at the rate slab closest to the current tax incidence on it.
The Goods and Services Tax Network (GSTN)
Government has created GSTN as a non-profit organization. As per the government website on GST, "Goods and Services Tax" Network (GSTN) is a nonprofit organisation proposed to be formed for creating a website / platform for all the concerned parties related to the GST, namely stakeholders, government and taxpayers to collaborate on a single portal. When up and running, the portal is supposed to be accessible to the central government which allows it to track down every transaction on its end while taxpayers are advertised to have the ability of connecting this to their tax returns. However its efficacy and efficiency is yet to be tested. The IT network was touted to be developed by unnamed private firms. The known authorised capital of GSTN is ₹10 crore(US$1.6 million) in which Central Government holds 24.5 percent of shares while the state government holds 24.5 percent and rest with private banking firms for smooth running of the transactions.
The Cheaper and costlier after GST launch
Effects and impact
The GST is expected to fuel inflation in the short term. The GST rate starts at 5% and goes upto 28%. The 18% taxation on services such as restaurants; movies are bound to increase prices. Another problem with the GST is not including liquor and petroleum under GST’s ambit. These are major revenue sources for the government.
After the introduction of the GST, while costs of essential food items may not increase, other consumer goods and services in India including food, hotel charges, insurance and cinema tickets will become costlier. Upon its introduction in the country, GST led to a number of protests by the business community, primarily due to an increase in overall taxes and hence the prices of goods. Thousands of cinema theatres in the states where higher rate of GST has been applied on movie tickets went on strike.
However, with the launch of GST, the check posts across the country are abolished ensuring free and fast movement of goods. The central government has assured states of compensation for any revenue loss incurred by them from the date of GST for a period of five years. However, no concrete laws have been framed to support such action.
Taxes replaced by GST
The following taxes have been replaced by the GST:
- Central Excise Duty
- Commercial Tax
- Value Added Tax (VAT)
- Food Tax
- Central Sales Tax (CST)
- Entertainment Tax
- Entry Tax
- Purchase Tax
- Luxury Tax
- Advertisement tax
- Service Tax
- Customs Duty
Assume that the GST is set at 20%. Suppose that the manufacturing cost of a Product A is 100 and assuming a GST of 20% the total amount is Rs. 120. The next step of taxation would be when the Product is sold to consumers. Suppose the product is sold at a price of 150. The GST will charge another 20% on just the difference of Rs. 150 and Rs. 120 i.e. only 20% on Rs. 30 which is equal to Rs. 6. Accordingly, the final price is Rs. 150 + Rs. 6. GST will be applied at every step of value creation. The GST is estimated to provide an immediate boost of 0.9% – 1.4% of the GDP.
GST is in a form of comprehensive indirect tax on manufacturing, sales and consumption of goods and services within the country. It is based on the input tax method. The tax is levied and collected at each stage of sale or purchase of goods or services.
Benefits of GST
- GST is a right step to move forward with the ‘Make in India’ vision. GST gets rid of multi tier and multiple taxation system in the country
- GST-registered businesses will be able to claim tax credit to the value of GST they paid on purchase of goods or services as part of their normal commercial activity.
- GST is a destination based tax as against the present concept of origin based tax. The tax structure is much simpler and easier to understand.
- According to a report by the National Council of Applied Economic Research, GST is expected to increase economic growth by between 0.9 per cent and 1.7 per cent.
- Taxable goods and services are not distinguished from one another and are taxed at a single rate in a supply chain till the goods or services reach the consumer.
- Reducing production costs will make exporters more competitive. The reduced cost of locally manufactured goods and services will increase the competitiveness of Indian goods and services in the international market
- GST eliminates complexities in the present taxation structure and consequently prevent the loss of nearly 50% of the advantage of lower manufacturing costs that India has over the western nations
- Single authority will have the administrative responsibility to levy tax on goods and services
- Implementation of GST assures a single taxation system in the entire country for all goods and services making tax compliance easier and more effective
- GST may prove detrimental to the growth of small scale industries. Basic exemption limit in excise of Rs. 1.5 Crores taken away in GST, which will affect the Small Scale Industries. Lakhs of industries in India are surviving only for one reason that they are not required to pay excise if their turnover does not exceed 1.5 crores.
- Services which hitherto were charged on receipt basis will be charged on accrual basis.
- GST is required to be paid, once invoice is raised even if there is no certainty of receiving the payments for the services rendered
- Number of goods and services have become costlier after launch of GST. It would increase inflation in the country which is already reeling under the pressure of demonetization.
(Published on July 5, 2017)