After several countries over the world had implemented the Good and Services Tax, In 2017 with the support of both the houses of the Parliament and the consent of the President of India, the Goods and Services Tax finally came into being after going through almost a decade of scrutiny. It was Atal Bihari Vajpayee’ Government that introduced the GST bill and it was Arun Jaitley, the Finance Minister of the then newly appointed Modi Government, who made it a reality.
Earlier there was a clear demarcation between the Central and State Government with regards to the tax being levied. The existing tax regime only empowered one of the governments at a time to levy taxes. But the GST empowers both the Central and the State governments at the same time to levy taxes and brings a unified tax regime to the country.
What is GST?
GST or Goods and Services Tax, is a central government levied tax that replaces many indirect taxes like VAT, excise duty, services tax, etc. It is a comprehensive, destination-based tax that is multi-staged and levied on every value addition.
It is a single domestic indirect tax for the entire country. It was passed by the Parliament on 29th March 2017 and came into effect on 1st July 2017.
When was GST implemented and why?
GST was first introduced by the Atal Bihari Vajpayee government but it was in 2017 that the Modi government became successful in implementing it. The earlier tax regime gave power to the central government or the state government one at a time but the GST bill would grant power to the central and state governments at the same time.
GST also sought to simplify the existing tax regime in the country, widening the tax-paying sectors and increase the government’s tax revenue.
What is the impact of GST on manufacturers, distributors and retailers?
For manufacturers, GST has come as a boon. It has helped reduce the tax on tax that manufacturers had to pay in the earlier tax regime. This allows manufacturers to produce goods that are cheaper thus increasing their sales. Manufacturers have to only pay one unified tax and this saves them expenses as compared to paying 25-26 % more in the earlier tax regime.
Most of the retail in India is unorganized so there is no huge impact of GST in this sector. But for small retailers, the ease of entry and the input tax credit facility offered by GST is the largest advantage. In the case of distributors, GST has gained a negative image. It is not true that GST has irrelevantly increased the tax on distributors but rather due to GST being transparent, there is no tax evasion as was happening earlier in the distribution sector.
What is the impact of GST on service providers?
Service providers have received a few benefits as well as disadvantages of the GST regime.
In terms of benefit, Service providers are free of cascading taxation as there is no excise tax or VAT, etc. Also, service providers can avail of the input tax credit on both their equipment as well as the services they offer. With extra taxes like excise and VAT, input costs have been reduced which means that service providers have to bear fewer costs for services they offer.
In terms of demerits, the decrease in cost to the service provided means that the tax has to be paid by the consumer which drives up the sale price of services. Again, service providers can avail ITC on the services they offer but at the same time, this means all the services they provide shall be taxed, even if they provide the services for free. The Certificate Program on GST Course to provide specialized and updated knowledge in the area of GST by skilling students and industry members.
Sector-wise GST Impact analysis
The agriculture sector is the largest contributor to the economy with almost 16%. Thus it was imperative that the government had to think about the effect on the agriculture sector. Initially many states like Maharashtra, Punjab, and Gujarat faced losses since there was no state collected VAT, etc.
But after the GST regime was solidly established farmers and agro-industries have begun seeing positive effects. Earlier common used materials like fertilizers had a tax rate of 5% but in the GST regime, this tax has been hiked to 12%.
The same increase is also seen in the case of machinery like tractors which attract a GST of 12%. This means that farmers and industries can claim ITC (Input Tax Credit) and reduce the overall cost of their supplies. According to many financial experts, GST has created a single unified agriculture market where farmers can sell their produce for the best price.
Earlier automobiles attracted Excise and VAT duties which collectively came out to be 26.5 to 44 %. Comparatively the present GST rates are very low and range from 18 to 28 %. Thus, GST has reduced the burden on the end consumer while paying the taxes for purchasing an automobile.
Also, importers and dealers of automobiles can rejoice as they can now claim ITC on the goods they sell and purchase. This was not possible in the earlier tax regime. Also, automobile parts have become cheaper as a result of the improved supply chain mechanism created by GST.
A huge amount of logistics expense is saved by the FMCG sector, courtesy of the GST tax regime. The earlier tax regime saw the FMCG incurring a distribution cost equal to 2-7 % but the GST tax regime brought it down to 1.5%.
Due to smoother supply chain management, tax payment, input credit claim, and CST removal, consumer goods have reduced in prices which have led to consumer goods becoming cheaper and reduction in the cost of transportation and storage of goods.
The good news for freelancers is that under the new GST tax regime is, freelancers are exempted from taxes up to a turnover limit of INR 20 lakhs.
This proves beneficial as most freelancers do not have higher turnover rates than INR 20 lakhs. Software sold by freelancers is also exempted from taxes under the GST regime and this has made software cheaper for the consumers.
The impact of GST on E-commerce is a two-sided tale. On one hand, the E-commerce industry benefits from the efficient supply chain created by the GST regime reaping the benefits of a transparent transport system with less amount of paperwork and compliances to think about. On the other hand, E-commerce industries are taking a hit as costs of storing and warehousing goods have increased.
The taxes levied on E-commerce increase since the company has to pay taxes even for goods that are not sold. Additionally, they can claim ITC only after their goods have been sold. This has caused a spike in the pricing of goods on E-commerce sites.
The logistics sector has been one of the best benefits of the GST regime. Under the GST regime, inter-state check posts have been removed and this has increased the speed and efficiency of the logistics chain throughout the country.
The logistics sector has also seen other improvements in terms of reduced transportation cycle times, enhanced supply chain & turnaround time, consolidation of warehouses, etc.
In the case of Pharma industries, GST has done a huge positive impact but has also created a few negative effects. In terms of positive, many lifesaving drugs, oral hydration salts, and diagnostic kits have fallen under the minimum tax slab and this improves the health care of the society.
Also, the establishment of the GST regime means that pharma companies and industries do not have to pay repeated excise duties and VATs. But on the negative side, components for ayurvedic medicine have high taxes as they come under cosmetics and this poses a great difficulty in a nation that is very dependent on Ayurveda.
Under the new GST regime, the real estate industry has seen a solution to many of its problems like cascading of taxes. Under the earlier tax regime builder had to pay excise duties and VAT. But with the unified GST regime, sellers have to pay GST but will get ITC which they can pass on to the buyers. This reduces the overall tax incurred on properties.
Startups that are making a transition will incur some losses in the new GST regime as its implementation reduces the threshold to pay excise duties from 1.5 crores to 40 lakhs. This means that some startups that were earlier exempted from taxes will have to pay them now.
But in the longer run, startups will face much-wanted relief as the market becomes unified and there is the ease of movement of goods. Also, startups will have a lot fewer compliances to deal with in the new GST regime.
GST regime for the telecommunications sector has been bitter-sweet. Though telecommunications can claim ITC on imported pieces of equipment and goods, they cannot avail ITC on diesel which attracts taxes of about 100 %. Telecommunication companies have to pay a higher tax rate also as the earlier tax rate has been bumped up from 15% to 18%. The woes of the telecommunication sector have also been increased with the added compliances that they have to adhere to under the new GST regime.
In the case of the textile sector, the GST regime looks to create some huge shifts in the industry. The first area GST affects is the ITC that a business can claim. Earlier, there was no option to claim ITC on imported pieces of equipment and materials which attracted heavy excise duties.
But under GST, the capital of a company shall be eligible for ITC. The catch here is ITC cannot be claimed if a company sources its raw materials from the unorganized sector or composition scheme taxpayers. Though initially there were high prices due to GST, in the long run, the unification of the market will help India compete in the foreign market.
The GST regime is relatively new in the country and still requires acclimatization on the consumer’s end. The successful implementation in all the aspects of the country can help provide the country’s economy a much-needed boost. GST can also help the local market become competent enough to compete with foreign markets. S20 provides the best certified GST course with practical training and case studies that help them in their careers.