GST, which was popular the world over, was finally adopted by India in July 2017. Appreciated because of its simplicity, GST promises to get rid of the woes associated with indirect taxation. Most of the tax payers and income tax consultants in India have welcomed the reforms GST has bought with it. GST has benefitted all the entities involved in taxation – the businesses, the government and the consumers.
Let us explore in details the benefits GST provides over indirect taxation to all these entities.
Benefits to Businesses
A major chunk of the taxes that government of India gets is from the business sector. It is therefore crucial for the government to ensure that they face minimum difficulty in paying taxes. The earlier, indirect tax regime had two major drawbacks. One, the taxes and the paperwork involved was too complicated to follow and resulted in reluctance of small businesses filing income tax. Second, the cascading effect of the taxes made the tax rate higher than the GST tax rates in most of the cases. Typically, indirect taxes (excise duty, VAT, entry tax, input taxes, etc.) increased the cost of goods by about 30% to 35%, which was affecting tax payers. Service tax too (at 14.00%) included the non-creditable VAT / CST on the input and capital goods used for providing the service. The cascading effect of these taxes made businessmen wary of the tax regime. GST, with its simple tax slabs, makes it easier to compute the taxes. In the period before GST, most of the states made it mandatory for businesses with an annual turnover of Rs. 5 lakh or above to pay VAT. The limit for exemption for service tax too was only Rs. 10 lakhs. With GST in place, majority of the states have placed an exemption on GST for a turnover of up to Rs. 20 lakh. This has immensely benefitted small businessmen.
E-commerce, which is a thriving business especially in the COVID 19 era, too suffered with complicated VAT laws. If a seller wanted to deliver goods to buyers in different states, he had to first file VAT return and mention the details of the deliverer. This led to confiscation of goods in some instances if the checking authority deemed that the documents furnished were inadequate. Another benefit of GST is that its provisions will help to streamline the process of online compliances and payments and thereby help in regulation of unorganized sector. GST replaces a plethora of taxes with a single tax. This is expected to encourage manufacturers and service providers to expand their business. And since GST is completely online, it allows entrepreneurs, especially start-ups, to register their business with minimum hassles.
The Indian courts at all levels are flushed with indirect tax litigations. Numerous legislations and diverse interpretations by businesses and departments have resulted into these rampant litigations. Also, the litigations have to be fought for decades before a verdict could be expected. Litigation has resulted into wastage of time and money. GST, with fewer and simplified legislations, has the potential to reduce the number of litigations.
Benefits to Government
One of the most important revenue for any government is the taxes it imposes. Indeed, in most of the developing and developed countries, taxation has a lion’s share in the revenue. Governments collect these taxes to garner money for all its schemes and development of infrastructure. As far as India is concerned, these taxes include income tax, corporate tax, GST, union excise duties and customs tax. GST contributes most to the exchequer - more than 1/5th of the total revenue comes via GST collections. Since businesses are at the heart of all taxation, the governments of all nations strive to make the taxation process simple and transparent. The aim of GST too is to benefit everyone by keeping the taxation uncomplicated. By doing this, the government encourages everyone with even rudimentary knowledge of taxation to pay taxes. Additionally, this increase in tax base will automatically help the government increase its revenue. Even if there is a 3% rise in the number of GST payers, it translates to a sizeable population in a country like India.
GST is designed to be a value added tax since it is not levied on the gross price of a product sold by a company. Rather, GST is charged on the products after accounting for the inputs that go in the making of the product and its associated costs like logistics, advertising, marketing, etc. GST taxes supply of all transactions in goods and services and keep the concessions and exemptions to a bare minimum. Levy of GST across the board without any significant tax holidays or concessions will enhance the tax revenue both for the central and state governments. There is one more intangible benefit to the government. The indirect taxes charged for decades have resulted in cumbersome bureaucracy and administrative hassles. GST keeps the tax structure simple, eliminating the hurdles of administrative issues. In other words, GST should help the government streamline the tax administration and decrease litigations.
Benefits to Consumer
The first and foremost benefit of GST to the end consumer is the decrease in the rate of taxation. Under the indirect tax regime, the consumer could end up paying in excess of 30% of the cost on the goods or services. The GST Council has fixed the rates in four slabs of 5%, 12%, 18% and 28% under GST. In most of the cases, the consumer will have to pay at the most 18% tax; very few items and services attract a GST of 28%. The reduction in tax will increase consumption. Another benefit of GST is the reduced time for transport. With VAT and other taxes, moving goods from one state to another was extremely cumbersome and time consuming. The transport trucks literally had to wait for hours while passing from one state to another. This not only increased delayed the transportation process; it also increased the cost to the end consumer. By ending interstate taxes, the GST has facilitated seamless movement of goods from one state to another. This ultimately benefits the consumer in terms of time and money. In the previous tax regime, we had State Value Added Tax (VAT) which was levied on sale of goods. As the rate of tax was different from states to states, there was variation in prices. Also, certain taxes and duties (eg. entry tax) was levied only in certain states. The government of India envisions GST as ‘One Nation One Tax’. This will result in a uniform price for all the products and services throughout the nation, making the end consumers happy.
India has been slow to adopt GST, which has already been adopted by many developed countries for the benefits it offers. Of course, for a country the size of India, there will be challenges in implementing the change of the way taxation is done. We shall discuss these challenges in another article. GST consultants have helped ease the changeover from the earlier complex tax regime to the present simple taxation, benefitting businesses, consumers and the government itself.