What is GST Bill?
Indian government is introducing revolutionary GST bill to curb income tax scammers and business who avoids IT by gaming the system. However, the main intention behind this new bill is to give all business a relief from different types of tax by combining them into one single tax. Want to know what is GST bill? We have recently seen people talking a lot about GST bill being passed in India, and all the social networking platforms including Facebook & Twitter are flooded with posts related to the bill. So, what exactly is this GST Bill? GST (Goods and Services Tax) Bill is going to be the biggest ameliorated in the history of Indian economy since it started 25 years ago. This change is going to take place in the indirect tax structure that has been implemented ever since, and the passing of the bill is an initial step towards the reality. The 122nd Constitution Amendment Bill has been passed in Rajya Sabha a few days back with the good wishes of the Congress (who were the main reason) after displayed a broad view of the political consensus throughout the years. However, most of us are yet to know what is GST and what is does, and how it is different from other regimes, the functionality of the bill and when the bill will become an act. Here’s a brief answer to all those questions explaining how GST works.
When will GST Bill becomes an act?
GST Bill as of now has just got passed in the Parliament. It only comes into total implementation once after being enacted in more than half of the state legislative assemblies. In other words, if more than half of the state assemblies think that GST Bill causes more economic damage to their state if implemented, the bill will be canceled.
How does GST Bill work?
The functionality of GST Bill can be explained in three phases:
- 1st Phase: A shirt manufacturer has initially bought raw materials of worth Rs 100 (Cloth, Buttons, Thread, Stitching Equipment) including a tax amount of Rs 10 and started manufacturing the shirt. As the hard work he puts in producing the shirt adds up to a certain value, the value of the shirt is hiked by Rs 40. Now, the gross value of the shirt is Rs 140. Assuming the 10% of the tax rate on this gross value, the output tax is Rs 14. If GST bill becomes law, he can skip this tax of Rs 14 and only pay the effective incident GST on the shirt which is (14-10) Rs 4.
- 2nd Phase: The next stage is passing the shirt from the manufacturer to the seller. The seller purchases the shirt for Rs 140 and adds a certain value while transporting, for example, say Rs 25. The gross value of the shirt then becomes Rs 140+ Rs 25 = Rs 165. Again, applying a 10% tax on this, will give output as Rs 16.5. On applying GST bill, the incidence comes out as (16.5-14) = Rs 2.5.
- 3rd Phase: In this stage, the shirt reaches the retailer. Again, the retailer adds a value of say Rs.15 and makes the gross value of the shirt as Rs 165+ Rs 15 = Rs 180. 10% tax application makes the output as Rs 18. However, the incidence on the retailer will only be Rs 1.5 (Rs 18 – RS 16.5) according to the GST Bill.
In the end, the total GST value on the entire manufacturing chain per shirt is Rs 10 + Rs 4 + Rs 2.5 + Rs 1.5 = Rs 18 which is far less than the traditional tax output. Overall, this is a big saving in the tax and it will also make the system more transparent. However, it is still unclear how government is going to generate more revenue out of it.
The GST bill is clearly going to put a huge impact of those filing service tax as it is likely to hike to 18%. Government is expecting to get extra revenue from the service tax segment while giving benefits to the end users by keep the tax low on goods and manufacturing business. Service related business are going to take a huge dent. It would be also interesting to see how this affects “kachha bill” system in India.
Let’s take a look at the types of GST before understanding what is GST.
Types of GST
It is also essential to know different types of GSTs explained by the prime minister as well as finance minister. Since GST is likely to impact state government more, it is still in question how the government is going to take care of it. They have already announced a 100% compensation till 2020 but it would be interesting to see what is their proposal after 2020. It is necessary to please state government as well as they are going to loose huge revenue due to this. There is a provision for this too.
- Central GST: CGST is a tax charged service of commodities and several other products. It also includes charge/tax levied on transportation. This revenue usually goes to the central government. Input tax credits (ITC) are given to the state government as well. India is going to adopt dual GST mode. ITC could be utilized against the Central GST payment only. This is still unclear and more information shall be provided about it.
- State GST: SGST is a state tax output that is collected on Sales, Entertainment, luxury, octroi, property, municipality, recreation, Food, Lottery, Gambling etc. This tax is levied by state government as well as local bodies only. They shall be used for the welfare of the state only. Only state government can impose that and it could be different according to different states. However, government is planning to put a cap on this. There is also a provision of 100% compensation for the state government.
- Integrated GST: IGST is charged when the goods and services are exchanged between two states. For example, if a product is moving from Gujarat to Delhi, then the respective state government can levied the charge on it. This revenue will be shared between both state and central government. This is where most of the states are opposing as it can affect their revenue. Many states are against this and government is looking for a solution to this situation.
A more indepth information on different types of GST shall be provided very soon. Meanwhile, check the presentation on GST to understand it better.
Advantage and Disadvantage of GST
It has its own advantage and disadvantages. First of all, it will ensure that no cascading of taxes happen. Check the image below to understand how it is going to avoid cascading tax. Let’s assume that the GST is 15% at present
Advantages of GST
Following are some of the advantage of GST
- Removes multiple or cascading taxation
- Manufacturing and other cost may go down further making things cheaper in India
- No hassle of multiple tax making it possible for the business to breathe
- Lessens the burden on shoulder of business to go through different formalities and tax system
- Encourages FDI
- Make it easy to establish a business
- Indirectly IT loot will be curbed
- Puts India in the list of other 140 counties where GST is already applied
However, GST is not as bright as you think. Considering the BJP governments nature and tendency to introduce new taxes and cess can make it difficult for the normal people.
Disadvantages of GST
Following are some of the disadvantage of GST bill
- Tax substantially go up from 14% to 18-20%
- Service tax will increase making service sector more costlier
- Tax on retails would be almost double.
- Imported goods would be taxed at higher rate by around 6%
- Dual control compliance cost can go high
- It could make it difficult for small business
- Manufacturing states are at loss due to this
- Octroi issue is to be resolved
- Cess is yet to be calculated so this can increase the overall tax
There is a healthy discussion and explanation about GST on quora which you can go through for further simpler explanation. Overall, GST is going to revolutionize the Indian tax system. It is a much welcome and anticipated change. Over 140 countries have the GST system and this move has been welcomed by USA and many other countries. It will also make foreign business much easy. Consequently, it will open the door for FDI and more businesses.
Let us know your view about GST bill. For more information about the same you can follow our dedicated GST bill portal.