Tax Planning


How Can GST Help India?

24 Nov, 2014

As a young person, do you feel doing business in India is difficult? And see migration to the West as the only plausible solution? If that is the case, then the proposal of having GST as a standardized tax would have been music to your entrepreneurial ears.

Many rightly look at the Goods and Services Tax (GST), the proposed replacement to Central Sales Tax, as the second paradigm shift after the liberalisation of 1991.

GST proposes an efficient and synchronised consumption tax system in the country. GST is a complete national level tax on the production, sale and consumption of goods and services, a transparent and rational system. Estimates suggest benefits of $15 billion a year for the Indian economy via better growth, exports, and employment.

Problems with the Current Tax System

Present tax system is confusing even to the experienced players. And this is how: -

  • CENVAT or the Central Tax on Manufacturing does not categorically define manufacturing and valuation methods
  • Exemption of Services from State Taxation creates problems when goods and services are provided together under composite agreements
  • Tax Cascading or a tax-on-tax where tax is levied at every stage in the production-distribution supply chain without reductions for taxes paid at earlier stages.
  • Complexity gives cause to disputes and litigations and encourages evasion

Features of GST 

Over 140 countries have adopted GST. France did it first in 1954. The proposed Indian GST is:

  • Two tiered in the form of central GST and state GST.
  • It will be simple with the Two Rate Structure. Lower rate for essential-basic commodities, standard rate for general goods, and higher rate will apply for precious metals. Petroleum, alcohol and tobacco are likely to be outside GST.
  • It will be imposed on goods and services imports.
  • Central GST and State GST will be administered respectively by the centre and states to lower tax competition between them. 
  • GST will be taxed at 14-16% and will not be an additional tax. Currently, services are taxed at 10% while total indirect tax on commodities is 20%. GST may also cause abolition of other taxes that create multiple taxation layers. Moreover, there will be no distinction between goods and services.
  • GST will help create a singular Indian market by unifying state economies.
  • Based on Value Added Tax (VAT) Principle, GST will be imposed only on the estimated market value added in each stage of the production-distribution supply chain. This will help avoid the cascading effect of tax and lowers overall tax.
  • Central and state GST both will be paid only at the point of sale and both will be charged on the manufacturing cost. This brings down prices.

Merits of GST

By avoiding the cascading effect, GST lowers production costs and prices. Consumption increases and spurs production. Plus it simplifies compliance through a common market. These features make it good for:

  • Economy as production, inter-state commerce and economic activity will increase. The National Council of Applied Economic Research (NCAER) estimates GST to appreciate economic growth by 0.9-1.7%, exports by 3.2-6.3%, and imports by 2.4-4.7%
  • Manufacturers, exporters, and corporations will benefit from lower tax burden and reduced production cost. Simpler compliance would allow more focus on improving competitiveness.
  • Consumers will be able to make purchases at lower prices.
  • Governments and tax officials would face lower tax related hassles.

Summing it up, GST is a potent tool for India to cross over to the 21st century world. Administrators will however do well to avoid its major pitfalls of incorrect claims and faulty accounting methods.

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