A wind of change has been blowing since the introduction of the Goods and Service Tax scheme (GST) on July 1, 2017. This scheme was implemented with the core intention of ‘One Nation, One Tax.’
Despite many voices being raised for it and against it, one can’t deny that this tax reform caused the amendment of the tax rates and brought a unified front on many consumer goods across the nation.
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Let us break down GST in layman’s language. Before this reform, whenever a consumer buys a commodity or a service, they had to pay for not only the cost price but also service tax, CST, excise, and many such indirect taxes. Under the umbrella of GST, all such charges have been combined.
Thus, removing all the financial hassles for the end consumer. GST is a destination-based tax.
This indicates that the tax for a product will be levied only at the point where it is sold i.e., the point of consumption. One of its main focuses was the development of Small and Medium-scale Enterprises (SMEs).
GST is further divided as follows:
- CGST (Central Goods and Service Tax) is levied by the central government on intrastate sales of goods and services.
- SGST (State Goods and Service) is levied by the state government on intrastate sales of goods and ser Taxvices.
- IGST (Integrated Goods and Service Tax) is levied on interstate sales of goods and services. It is divided between the state and the central government.
Currently, we can observe GST slab rates as
- 0% corresponds to basic consumer products such as food grains
- 5% corresponds to mass consumption items such as Spices
- 12% corresponds to processed food
- 18% corresponds to basic living amenities such as toiletries
- 28% corresponds to white goods and 28% plus cess corresponds to luxury goods, aerated drinks, tobacco, etc.
Just as a coin has two sides, GST has its own pros and cons. For a comprehensive view of what may happen to the economic situation in India, we will need a longer time to consolidate whether GST is a boon or a bane.
Here, let us look into some of the immediate and observed benefits of GST:
Top 12 Immediate & Observed Benefits of GST
1. Similar Pricing in the Nationwide Market
In the earlier tax format, other than the various taxes mentioned above, another essential tax, VAT, was levied at the state level. Now, this tax varies in all states, thereby leading to a difference in the price of the same commodity in different states.
GST has brought uniformity in all such taxes, as it is led by the GST council, which has members from different states. Now, each state has its own representation in this council which helps in setting up of single tax on various goods and services pan India.
2. Greater Ease in Buying Goods and Services
Before the implementation of this tax regime, people used to travel nationwide to buy products from states which sell goods and services at a lower rate so that they could pay lesser taxes.
Because of the removal in price variation among the various states, the end consumer doesn’t need to put up with this faulty practice. Especially with the increase in online shopping, goods are at the fingertips of consumers.
3. The Overall Drop in the Marginal Tax Rate
This is a significant GST benefit to the consumer. A higher Marginal tax rate indicates that with the increase in investment, the incentives will decrease for a business. In the previous tax regime, the marginal tax rates were comparatively higher.
An overall drop of five percent has been observed from 27% to 22%. This is especially seen in the transport sector with a decline of 23.2%. (Source)
4. Removal of Cascading Effect of Taxes
The cascading effect of taxes means paying taxes over a tax. Whenever a good is made, taxes are attached to it as it moves through different stages of production. Thus, the succeeding movement of goods causes it to be taxed inclusive of the tax levied in the preceding stage.
When a commodity reaches the end consumer, the price to be paid increases tremendously, causing inflationary costs. Subsuming taxes prevents this cascading effect.
5. Comparatively More Transparent & Fully Online Taxation System
You might have observed how the complicated tax system before GST came into existence used to be. Computerizing the entire system has caused a good amount of increase in consumers’ trust in the system.
The entire process of filing taxes involved in GST is now entirely online and quite simple. This has reduced the complicated taxation routine, which was present prior to the GST.
Now, return filing has become way more manageable with the coming of cloud-based GST billing software. The process involves the uploading of invoices, and the software will automatically converge data in return forms from the invoices. Computerization also helps in quickly identifying errors, if any, in the invoices.
Also, Read: Top GST Number Search & Verification Tools
6. Provision of Composition Scheme
The composition scheme essentially helps the locally based businesses whose radius of working doesn’t go beyond the boundaries of a state. For such business owners, the turnover is less than Rs 1.50 crore.
The advantage of this scheme is that the assets have high liquidity due to low tax rates, lower record maintenance, etc.
7. Prescribed Routine for the E-Commerce Sector
As per the previous taxation system, there were no recorded regulations for the working of online brands. Also, each state had its own taxing laws earlier. Thus many laws were to be observed and kept.
But under the GST tax system, new regulations have helped in providing a common platform for working throughout the nation, thereby reducing all issues pertaining to interstate goods movement.
8. Increased Competency in the Logistics Sector
Due to the difference in VAT tax systems in various states, Logistics companies had to keep multiple warehouses throughout the nation to prevent tax payment for interstate movements.
With the implementation of GST, there has been a drastic decrease in the otherwise mandatory logistics costs. This has, in turn, increased profits for interstate goods movement-based businesses.
9. Reorganization of Business and Industries as a Whole
One of the essential objectives to implement GST was to bring all the unorderly sectors under the outlook of taxation, which would further boost the nation’s tax base.
This also brought into the picture the working of industrial machinery and its liabilities.
10. A Launching Pad for Startups
Under the purview of the previous taxation method, businesses with a turnover higher than five lakhs had to do VAT registration and VAT payment mandatorily. With the onset of GST, businesses and startups having a turnover of fewer than 20 lakhs don’t need to register themselves for GST, nor do they need to collect GST.
Similarly, Businesses and startups which have a turnover in the range of 20 lakhs to 50 lakhs need to pay GST, which is much lower than GST applicable for large-scale businesses.
This helps in leveling the field for small players and provides an equal footing in all their workings as their bigger counterparts. This provides a huge GST benefit to the Indian economy as the implementation of GST has provided an injection of many new businesses into the Indian economy.
11. Upliftment of the Lesser Developed States
The provision of SGST and IGST gives in a steady stream of finance to all the Indian states.
This is helpful, especially in states with higher local businesses, and lowers industrial investors as GST brings them to the same platform as the big players.
12. Hike in Indian Exports
The implementation of the GST tax has lowered the customs duties on exporting goods as compared to the previous taxation system. This, in hand with a lowered manufacturing cost for local markets, has brought a spike in the worldwide export business.
Thus, businesses that were previously limited to India have ushered in new competition at the global level. This move has instigated an increase in investments on a global scale, thereby boosting the Indian Economy.
Wrapping Up
Change is never easy. Seventeen years of councils and many discussions took place into bringing this tax scheme from being a mere idea to fructify finally on July 1, 2017. The free movement of capital, goods, and services is just one of its upsides.
Despite major criticism, the GST tax regime, which is still just two and a half years old, has been able to hold on its own because of the tremendous efforts on the part of the Government.
The GST council is still looking into perfecting this gigantic machinery of the government so that in the long run as a nation, we will be able to enjoy the benefits of such a financial unification.
Thirty-seven meetings of the GST council have happened to date and many amendments are still rolling out to stabilize the Indian economy based on feedback from various sources.
A massive rise in startups has been observed in pan India. With the initiative of ‘Make in India,’ SMEs have got a major boost.
To clear the obstructions to development requires us to make hard decisions but only time will tell how successful GST will turn out to be and how high it takes us on the economic scale on a global level.
Amaey Anand is a certified accountant with over 10 years of experience in the finance industry. He has worked with various organizations to streamline their petty cash management processes and reduce inefficiencies. He has also written several articles on financial management for leading publications such as Zensuggest and The Wall Street Journal.
