Goods and Service Tax in India - Working, Benefits, Challenges and Impact on Business

What is GST?

Goods and Service Tax is a tax on goods and services, which is levied at each point of sale or provision of service, in which at the time of sale of goods or providing the services the seller or service provider can claim the input credit of tax which he has paid while purchasing the goods or procuring the service. The system is developed in such a way that it avoids the cascading effect and the final consumer bears the burden of all the tax.

How will it work?

Generally, the dealers registered under GST(Manufacturers, Wholesalers and retailers and service providers) charge GST on the price of goods and services from their customers and claim credits for the GST included in the price of their own purchases of goods and services used by them. While GST is paid at each step in the supply chain of goods and services, the paying dealers don't actually bear the burden of the tax because GST is an indirect tax and ultimate burden of the GST has to be taken by the last customer. This is because they include GST in the price of the goods and services they sell and can claim credits for the most GST included in the price of goods and services they buy. The cost of GST is borne by the final consumer, who can't claim GST credits, i.e. input credit of the tax paid. This mechanism in entirety ensures the neutrality of the tax.

Benefits/Positives

* Elimination of multiple taxes and elimination of the cascading effect

GST will have a positive impact on the Supply chain since multifarious taxes like octroi, CST will cease to become a part of the supply chain cost. There is no cascading effect either as tax is levied only on the value that is added to the product between two transactions. This is likely to result in a reduction in the prices of commodities in the long run as manufacturers and distributors would pass on the benefits of the lower costs of carrying on their businesses to the consumers, which may result in higher sales leading to better economies of scale.

* Moving away from cash economy

Another interesting shift that is expected to happen is the dynamics of GST forcing many of the enterprises out of the "cash" economy to a "bank" economy. In developed economies the average cash transaction done by the businesses is just about 15%. In the case of Indian SMEs it is estimated to be close to 60%. Even a marginal shift will lead to more money moving through the banking system, making more money available for investments and capital formation.

* Greater fund availability and creation of capital

At a macro level, introducing GST would bring more tax revenues as more goods and services would be subject to tax, unless specifically exempted. With the number of exemptions significantly be reduced leading to wider tax base, the government could consider reducing the GST rate benefitting the Industry and the consumers . GST also makes the tax collection process more water tight resulting in higher revenues for the government exchequer. Here again, such improvements could only result in government reducing the GST rates as the system matures.

* Path to better corporate governance

GST calls for some highly disciplined financial management, transparency and maintenance of company account. This produces several benefits for the organization starting from contributing to good corporate governance, better credibility with banks, suppliers and clients and finally a higher corporate value that could translate into market capital at some stage.

The dual GST model proposed for India comprises of Central GST and State GST being administered simultaneously on supply of goods and services. In its wake, Government has several challenges to tackle.

Challenges

* Legislative challenge

The power to levy the taxes can be given to the Union or both to the centre and the state governments. If the power is given to the Union, then the Central Government can implement a single GST law for the Union and the States. But, if the power is given to both the Centre and the States, then the States can exercise its own power to raise revenue independently of the Center. It requires to be seen to what degree there is concurrence among States to dilute its power of taxation. However, a common GST is the need of the hour to curb the possibility