Goods and Services Tax (GST) is a tax reform initiative by the Govt. of India aimed at replacing the current complex structure of indirect taxes with a simplified system. The GST implementation is expected to be effective from July 1, 2017.
The Central Government enacted four Bills paving the way for the reforms:
- Central GST (CGST)– The CGST will give powers to the Centre to charge a central tax after the prevailing taxes like central excise and service tax are subsumed.
- Integrated GST (IGST)
- Union Territory GST (UTGST)
- Bill to Compensate States– It is aimed at creating a consolidated fund for compensating states for any loss of revenue in the first five years of the implementation of GST.
Apart from that, all states but Jammu and Kashmir have enacted the State GST (SGST) law in their respective assemblies, which will enable the states to levy a state-level tax after taxes like VAT are subsumed. The states and union territories with a legislature, i.e., Delhi & Puducherry, will adopt the SGST Act and the 5 Union territories without legislatures will adopt UTGST Act.
Dual GST will be levied on the supply of all goods and services (intra-state) with SGST/UTGST and CGST being its components. The IGST, on the other hand, will be levied by the Centre on the inter-state movement of goods and services and will be the sum total of CGST and SGST/UTGST. The GST is a destination based tax and hence while the IGST will be levied on the imports, there will be no tax (zero-rated) on the exports.
Why the paradigm shift?
GST comes with inherent advantages. It will eliminate the multiplicity of taxes and their resulting cascading effects. The new automated system is expected to be more efficient and error free thus facilitating compliance and boosting economic growth.
Tax Rate Overview
The following images give an overview of some of the common goods and services and the tax rates under which they fall:
Gold and rough diamonds will be taxed at 3% and 0.25% respectively. Petroleum products are currently outside the GST ambit.
GST and Inflation: What does it entail for the consumers?
There are a lot of speculations about the kind of impact that GST will have on the various macroeconomic factors such as growth rate and inflation. At this stage, nothing can be definitively concluded. However, a few theories doing the rounds are as follows:-
- A large share of the Indian economy is driven by services, and since the average tax rate has risen from the current 15% to 18%, this is expected fuel inflation. However, it should be short term, i.e. at least until the time the service industry does not pass on the benefits of increased credit/partial or full benefits of reduced taxes to the consumers. Hence, restaurant bills, broadband and mobile bills, travel, and banking services are expected to become costly.
- The government uses the Consumer Price Index (CPI) for the calculation of inflation. About 50-60% of the basket of items in the consumer price index (CPI) will be exempt from GST. 30-35% will be taxed at a lower rate, and only 12-13% will be taxed at the normal rate. Thus, even if the normal middle-class consumer may feel the inflation in their daily lives owing to their consumption patterns, it might not reflect in the data released by the government.