Amidst long drawn political hand-wringing, lengthy discussions and months of speculation, the GST bill has been finally passed in the upper house of Parliament, the Rajya Sabha. The bill embodies the concept of “One nation, One tax”, and serves as the greatest tax reform in the history of our nation.
The lowdown on GST
GST, or Goods and Services bill is a consumption based tax which as its name suggests, is levied on the sale/manufacture/consumption of goods and services in the country. The GST bill is packing 3 major parts:
- Central GST (CGST) – charged by the Centre
- State GST (SGST) – charged by the State
- Integrated GST (IGST) – charged by the Centre for transaction of goods and services between states.
Post the constitutional amendment of the GST bill, both the Centre & the State will be able to simultaneously levy GST, which will incorporate all indirect taxes currently being levied, including excise duties and service tax. Thus, the entire nation will come under a unified tax blanket, making the incredibly complex process of individually paying VAT, central excise duties, entertainment tax, state tax etc. a thing of the past.
The GST rate is most likely to be agreed upon at 18-20 percent, and it can be implemented by April 2017. Also, as opposed to the system being followed earlier, GST is going to be implemented on consumption, rather than production.
What’s all the fuss behind GST?
Ask any trader, business house or MSME about the ease of doing business in India, and you will be greeted with sighs, exclamations and even expletives in some cases. Complying with the incredibly complex list of tax laws was a major task, and it required a great deal of time, effort and money to keep abreast with them all. This is one of the major contributors to India’s dismal ranking on World Bank’s ease of doing business rank. Out of 189 economies, India ranks 130.
GST aims to untangle the myriad web of laws, regulations and taxes and unify them with one single tax rate. Take a look at the supposed Macro implications of GST on India’s commerce ecosystem:
- A standard tax rate for all businesses will bring equality in the business ecosystem, and remove bias of any form encouraging healthy and honest competition.
- It will also help in curbing tax evasion malpractices. In the past, multiple business entities were created to avail tax exemptions by fooling authorities. Creating transparency was one of the core values behind the amended GST bill to counter tax irregularities.
- Compliance costs might come down with the unification of taxes and levies for certain industries.
- IT systems will have to be aligned to function seamlessly with new systems and processes, which might drive up costs for some businesses.
- Logistics and Inventory costs might come down because of tax unification. Earlier, different states had multiple taxes liable to be paid at the time of entry/exit. This will be done away with, and logistical hurdles will reduce greatly.
- Services might become dearer if proposed GST rate (18%-20%) becomes effective because current rate of Service tax stands at 15 %.
- Huge revenue boost is expected to happen with Input tax credit aimed to encourage suppliers to pay tax.
Implications for Startups & SMEs:
Although the rate hasn’t been decided yet, speculation is rife about the fate of startups after the implementation of GST. In spite of being seen as a positive step in India’s progressive tax reform policy, people are still wary about its implications on their business. We have listed down a few points that offer a quick rundown on what the GST bill might have in store for Startups and Small-Medium businesses alike:
The good news
- Entrepreneurs will only have to apply for one license for registering their business, and will be eligible to function all over India.
- Logistical nightmares will become a thing of the past with the removal of state entry taxes and levies. This will be a big boost to smaller organisations who earlier struggled to supply goods to multiple states and still maintain a healthy profit margin.
- SME manufacturers might stand to gain with GST. Tax incidence is expected to come down from the regular rate of 27-31% to somewhere around 20%.
- The implementation of GST will hopefully end SMEs paying indirect taxes as buyers, and filing their tax returns as sellers. This will bring down prices, which will also reflect in the reduction of Inflation.
- Right now, VAT remains the same for all businesses with turnover above 5 lacs. Businesses with revenue ranging between 10 – 50 lacs can apply for the VAT Composition scheme, which reduces the tax rate. This however has a separate criteria, and might not be suitable for everyone. With GST, tax liabilities will be greatly reduced for businesses with turnover of 10 – 50 lacs. Those businesses with a turnover of less than 10 lacs are exempt from paying GST.
The not so good news
- The proposal of reducing the tax exemption threshold limit from Rs. 150 lacs to 25 lacs will bring a large number of Small & Medium businesses under the tax scanner who were previously exempt.
- This will lead to additional compliance costs for a number of small – medium enterprises for registration and tax filing purposes.
- It would lead to an increased requirement of working capital for SMEs to discharge off the GST liability post generation of invoice.
- The GST levied on products & supplies will not be available as input credit for end consumers, so the cost will be carried on to them, resulting in increased prices of products.
- E-Commerce startups might have a reason to get worried after details have emerged of TCS (tax collected at source) guidelines of GST. Apparently, they will be required to file quarterly and monthly returns, and collect taxes from online sales.
- This will increase documentation and operational costs by a certain amount, and the increased burden is expected to be passed on to the consumer.
What might get affected?
The government is yet to hash out a solid framework and agree on a rate. Thus, most implications remain theoretical. But based on current reports, the government is fairly confident of meeting the April 2017 deadline. Despite the Centre’s confidence, 16 states of 29 have to pass and ratify the bill in their legislative assemblies, which remains to be seen. We will be on the lookout for more updates regarding this matter. In spite of the politics and core issues involved, this constitutional amendment to the GST bill will fundamentally change the taxation system of India.