The Goods and Services Tax (GST) is proposed to be implemented from July 01, 2017, and will effectively change the face of indirect taxation in India. Some of the key benefits expected include a simpler and more transparent tax system that will reduce tax evasion and boost revenues; more competitive manufacturing, especially in the MSME sector, thanks to reduction in tax cascading; and improved GDP due to a wider coverage of goods and services. This attempt towards bringing to life a “One Nation, One Tax” legislation will have far-reaching implications on every citizen, and will impact business finance and personal finances too. This is especially true for SMEs, as they will see a direct impact on their working capital. It is therefore prudent to plan for this crucial event.
Here is all you need to know about the GST rollout.
What is GST
GST is a unified system for indirect taxation, leading to the establishment of a new four-tier indirect tax structure that replaces the existing indirect tax regime. Essentially, four new indirect tax slabs will come into effect, i.e., goods and services will hereafter be taxed according to the slabs of 5%, 12%, 18% or 28%.
|Rate of Indirect Tax||Goods/ Service|
|Exempt||Goods of mass consumption such as grains and milk|
|5%||Essential items such as edible oil, tea, coffee, insulin, incense sticks, etc. that are exempt from excise duty and are charged at a VAT of 5%. Certain processed foods like sauces, pickles, and preserves as well.|
|12%||Goods currently taxed at 9% to 15% such as processed food and computers|
|18%||Goods currently taxed between 15% and 21% (soaps, smartphones, utility electronic items and, industrial inputs).|
|28%||Luxury goods such as SUVs, select consumables (aerated drinks, tobacco), white goods (AC, fridge) and goods that fall under the current tax bracket of 30% to 31%. Luxury and select consumables will attract an additional cess.|
These four structural slabs allow a provision to charge a maximum of 40% GST rate, i.e., a combination of 20% Central GST and 20% state GST.
Services will be taxed at a standard or default tax rate of 18%. Only five luxury services, i.e., five-star hotels, movie tickets, racing and betting (racing and casinos) will fall in the 28% tax bucket. E-commerce companies will be subject to 1% tax collected at source.
The build-up to the GST: A track of timelines
The story began with the Central Government releasing the Revised Model GST Law for public purview on November 26, 2016, and the setting up of the GST Council to discuss and approve the Bill. Thereafter, the Council met on subsequent occasions to discuss and approve the section terms, and targeted a rollout date of April 01, 2017. The latest is a meeting held on 11th June, wherein the tax rates for 66 items have been reduced. A rollout date of July 01, 2017 has now been set. As a result, four legal bills have been presented and passed for different categories:
- Central GST Bill (CGST): For supply of goods and services by the Central Government within the boundaries of a state.
- Integrated GST Bill (IGST): For supply of goods and services between different states, carried out by the Central Government.
- Union Territory GST Bill (UGST): For supply of goods and services in the Union Territories.
- The Compensation Bill: To govern the provision of compensation for revenue losses brought on by GST implementation, over the next five years from implementation.
All four bills have been passed in the Lok Sabha and subsequently the Rajya Sabha after a series of changes at the Centre. These bills have received approvals from 16 state assemblies with Delhi being the most recent.
Rules and Acts under the GST
The Government is also in the process of driving the GST Council to put together rules and acts for GST implementation. Following are the GST rules passed till date: Composition Rules, Valuation Rules, Transition Rules, Input Tax Credit Rules, Invoice Rules, Payment Rules, Refund Rules, Registration Rules and Return Rules.
Proposed outcomes of the GST for the Government
According to Finance Minister Arun Jaitley, India will evolve to be a more tax-compliant society thanks to the GST. He also clarified that the GST would not lead to inflation, addressing the Opposition’s concerns in the Rajya Sabha.
Here are some of the key benefits of GST:
- GST will cover the GDP more comprehensively by covering a wider base of goods and services A single indirect tax regime will be instrumental in removing cascading taxation, i.e., tax payment upon tax, or multiple taxation.
- GST will eliminate any direct interaction between the assessing authority and the tax payer by standardizing and automating processes, and will interlink incentives for compliance, making the tax system more accountable.
- Overall and on an average, tax slabs may see reductions and the industry may benefit from the greater cash flow that will ensue.
Despite these proposed gains, a closer look at the GST reveals certain drawbacks. Four slabs is a significant number of tax slabs for a unified tax regime, and the tax rates appear to be high. These factors are likely to lead to tax evasions and legal battles.
Proposed outcomes of the GST for tax payers and businesses
For businesses, the implications vary. The “Place of Supply” and the “Time of Supply” are two important considerations that businesses must reflect on.
Goods and service providers will be subject to the tax slab depending on the “Place of Supply”. If the “Place of Supply” is intra-state, then each company entity will need to register separately for the GST in each state of operation, and will be liable to a mix of CGST and the respective State’s SGST. For “Place of Supply” being inter-state, the business will need to register in the state of origin and avail IGST in the remaining states. This makes it imperative for businesses to register correctly to levy the appropriate taxation rate.
Business norms for supplier management will change, with input credit being made available to businesses, but compliance requirements will become more stringent, leading to additional costs for businesses. Businesses must therefore be prepared to plan their cash flows better in light of the GST implementation. This is particularly true with regards to input tax credit, which can have strong implications on working capital for SMEs. This might create a cash crunch in the short term, but will equalize over time.
With the GST rollout fast approaching, it is best to stay informed and be prepared for this sweeping change. We at Capital Float can help you do just that: Visit our GST blog to know more about GST and keep track of latest.