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GST Bill: India’s Biggest Tax Reform

by Abhimanyu Dhamija

Goods and Services Tax (GST) is an Indirect Tax that has been recently introduced in India and is a comprehensive multistage and destination-based tax. The GST bill has subsumed almost all the existing indirect taxes except for a few, and it is imposed at every step of the production. However, it is meant to be refunded to all the parties other than the consumer at various stages of the production. Also, this tax is collected from the point of consumption and not origin, unlike the previous taxes.

How Does GST Work?

Businesses that make taxable supplies must be registered under the GST and hold a GST Identification Number (GSTIN) if their annual business turnover has exceeded the specified minimum threshold.

Businesses can collect an Input Tax Credit on GST paid for supplies of goods and services only if you are registered. GST is charged on the value or selling price of the product in question.

Any GST levied during business operations in the form of input tax can be recovered as under the Input Tax Credit mechanism provided for businesses registered under the GST Act.

If the output tax is higher than the input tax during the relevant taxable period, the difference is sent to the Government. However, if the input tax is higher than the output tax, the Government refunds the difference.

When you charge GST, you are required to issue a GST compliant invoice that shows the amount of GST charged and the cost of the supplies separately. The tax invoice must be issued within 21 days from the time of supply.

The following particulars must be shown in the tax invoice:

  • The words ‘tax invoice’ must be displayed clearly and prominently
  • The serial number of the tax invoice
  • The date on which the invoice was issued
  • The supplier’s name, address and, GSTIN
  • The supply recipient’s name and address
  • A concise description of the goods and service that were applied for
  • The number of products or services supplied
  • Discounts offered
  • The total payable amount that excludes tax, tax rate and the total chargeable tax shown separately
  • The total amount payable that includes the total chargeable tax

Advantages of the GST Bill

Eradication of the Cascading Effect of Tax

A cascading effect of tax implies that the consumer of a product bears the cost of multiple taxes previously levied during the purchase and sale of raw materials used in production. This causes a tax-on-tax effect that increases the cost of production, thereby, discouraging businesses from complying. The GST seeks to eliminate this by providing an input tax credit mechanism.

Increased Threshold for Registration

Since the implementation of the GST is going to heavily rely on the Digital India project that will seek to digitize most of the databases for government schemes, it will allow more individuals to register it and increase the overall tax compliance in the country.

The Provision of Composition Scheme for Small Businesses

The GST Composition Scheme allows small businesses to bypass the regular GST filing procedure and pay GST at a fixed rate of turnover. This scheme is available for businesses that have an annual turnover that does not exceed Rs. 1 crore. The composition scheme is designed in a way to incentivize small and medium-sized businesses to be tax compliant.

Straightforward and Simple Online Registration

The GST Registration process can be completed online, thereby, removing the stress of long queues in the Income Tax office and reducing the time it takes for a business to be tax compliant.

Concretized Laws for E-commerce Operators

Under the previous tax regime, the taxation surrounding e-commerce operations within the country was quite ambiguous. The GST has done away with most of the ambiguity relating to the taxation of e-commerce operators and has provided clear tax regulations for this sector.

Higher Efficiency for the Logistics Sector

The myriad of taxes surrounding the movement of goods between states had caused logistic firms to set up hubs and transit points to avoid state Value Added Tax (VAT). As State VAT is only charged on goods supplied directly to dealers, but if the goods are moved from a warehouse they are considered stock transfer and do not attract state VAT. The setting up of these warehouses had increased the operational costs of logistic companies. The GST has subsumed many taxes like the State VAT, and has allowed logistic companies to redesign their supply chain and take advantage of efficient practices like bulk-breaking and cross-docking.

Regulations Under Gst for the Unregulated Sector That Includes Construction and Textile

Sectors like construction and textile were relatively unregulated under the previous tax regime and this lead to a lot of non-compliance in this sector. The GST Act has clearly laid out regulations for this sector and has brought a good level of transparency and simplicity to this sector.

Disadvantages of the GST Bill

  • Increase in costs as the GST software needs to be purchased
  • Businesses that are not familiar with the GST regime have to grasp how to operate under GST rules.
  • GST has lead to an increase in operational costs in some cases.
  • Small and mid-sized enterprises (SME) face the hike in tax as the yearly turnover threshold is now Rs. 20 Lakh.

Impact of GST Bill in India

In the service sector, most of the tax burden is carried by domains like the IT services, the Insurance industry, business support services, Banking and Financial Services, and telecommunication services.

These pan-India businesses will now watch this burden reduce. However, they will have to separately register each business outlet in each state that they operate in.

Sector-wise Impact of GST Bill

Logistics

Given the sheer size of the Indian subcontinent, it is not surprising that the logistics sector functions as the backbone of the economy. The importance of the logistics sector cannot be emphasized enough.

Under the previous tax system, players in the logistics sector in India would maintain multiple warehouses across states to avoid taxes being levied and state entry taxes.

Most of these warehouses were operating well below their capacity and were adding to operational inefficiencies as a result. However, under the GST regime, India has become a single market where goods can be moved freely between states.

E-commerce

The concept of paying a single tax from manufacturing to supply has eradicated the need for sellers to register on multiple tax platforms and file separate returns.

The GST has opened the doors for small and medium-sized sellers to compete with their larger counterparts.

Under the earlier tax system, sellers were generally confined to their respective states, drastically limiting their marketing potential. With the introduction of GST, e-sellers are no longer having to bear the brunt of dealing with varying tax structures.

Pharma

GST on pharmaceuticals has eliminated the cascading effect of multiple taxes applied on one product. However, the MRP may have to be revised to combat the hike in price.

The traditional cost and distribution model has been replaced with efficient supply chains due to the removal of the Central Sales tax. Pharmaceutical companies experience significant improvement in operational efficiency compliance, allowing them to provide life-saving medicines at affordable costs.

Agriculture

GST has proven to be an essential catalyst in improving the transparency, reliability, and the overall timeline of the supply chain mechanism within the agricultural sector. This, of course, has resulted in a reduction in wastage and cost for the farmers and retailers.

GST has also reduced the cost of heavy machinery required to produce agricultural commodities.

Fertilizers constitute a vitally important element of agriculture. They were previously taxed at 6% (1% Excise + 5% VAT). However, under the GST regime, the tax on fertilizers has been increased to 12%. It is the same case with tractors. Now the manufacturers can claim an Input Tax Credit.

Real Estate

Real estate is known to be one of the most important sectors of the Indian economy as it accounts for 6-8% of its GDP. Real estate used to be taxed at 12% and is now being taxed at 5%. The big real estate players opine that the compilation of taxes into a single tax has helped accelerate growth in this sector.

Conclusion

The GST is India’s biggest tax reform and has brought about many changes in the way we do business. There still are a number of glitches to iron out but with time the GST Act is poised to become more effective and efficient.

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