Goods and Services Tax (GST)
Before delving into what GST is, let’s understand how taxes are collected in India. Taxes can be broadly classified under three buckets – income, production and consumption. The central government has the complete right (almost) to tax income and production in the form of income tax and excise duty. When it comes to consumption, both the central and state governments levy taxes in the form of service tax and Value added Tax (VAT). Income taxes are directly collected from people who earn salaries or companies that report profits. The others are paid by producers (Maruti Suzuki) or service providers (restaurants) but are collected from buyers. These are called indirect taxes.
What would the GST do?
It would merge almost all the indirect taxes into one tax that will be applicable all over India at a single rate. A car produced by Maruti would attract a single tax rate irrespective of where it is purchased.
Why do we need this Constitution Amendment Bill?
With GST, both the centre and the states will have powers to tax both production and consumption. States, at present, don’t have the powers to levy taxes on production, except on alcohol. Changing this means amending the constitution. And, amending the constitution requires two-third majority in both the Lok Sabha and the Rajya Sabha. Plus, half the states have to ratify the bill.
What happens next? Will GST be implemented from next month?
- The Constitution Amendment Bill is like an enabling Act to roll out GST. The next steps include:
50% of states have to approve the bill.
- Once approved, both the centre and states will come out with laws that will administer GST.
- The final decision on what the GST rate will be is yet to be taken. It could be 15% or 18%.
- The technology and administrative platforms are being developed to handle paperwork but it remains to be seen when these could be rolled out.
Nevertheless, the Constitution Amendment Bill was the biggest task and it sorted out major issues. Now that there is a consensus, the rest would fall in place.
How will it benefit me?
It depends on the GST rate, which is yet to be agreed upon.
In 2010, Maruti’s Ritz attracted an indirect tax of 24%. This includes 12.5% VAT, 9% excise duty, 1-2% entry tax, 2% CST (Central Sales Tax), and registration charges.
Let’s say if the GST rate is 16%, then there will be a Rs 30,000 reduction in taxes. Of course, it depends on whether Maruti decides to pass on the benefit of this tax reduction.
If the GST rate is fixed at 18%, then all services will become costlier – from eating out to telephone bills – as the current service tax is at 15% including cess.
How will companies benefit from GST?
- Optimal location of warehouses – at present, companies have warehouses in each of the states they operate. If they don’t do so, the dealer (who buys goods from the producer) has to pay CST of 2%. Now, CST would be absorbed into GST. Therefore, companies can locate warehouses to optimally distribute their goods.
- Lower price could lead to higher demand – A reduction in price because of lower taxes will stimulate demand, and this in turn could lead to higher investments.
Are there any negatives?
Yes. Services account for more than half of the Indian economy. If the GST rate is higher than the 15% being levied now, then inflation will go up.