Goods and Services Tax is considered as the biggest post-independence indirect-tax reformation in India as it has redesigned the whole concept of taxation. Being a techno-driven and consumption-based administration, it is completely transparent and convenient than the previous tax structures. Additionally, it has disregarded evils to society like tax-evasion and bribery. In the long haul, it not only brought an excellent boost to the Indian economy and society but also the government revenue increased. It practically removed the cascading effect of the previous tax system.
Overall price control
GST is a value-added tax that is collected at each level of a supply chain. In the earlier indirect tax regime, in certain cases, the tax paid on procurements were not available for setting off the output tax liability. For e.g. the excises paid by manufacturers were not available for set-off against State-level VAT.
Suppose the manufacturing cost was Rs.100 and the excise paid on it is Rs.12.5. Now, as he won’t get the credit of excise against VAT or Service tax, he will not include or pay VAT on 100 but will make the bill of 112.5 at the time of sale and thus VAT will be charged on Rs.112.5. This is nothing but an increase in cost ultimately known as “cascading effect of tax” i.e. “tax on taxes”.
In GST this cascading effect is removed as the Input Tax Credit (“ITC”) is available for all goods and services at each and every stage of the supply chain. So, now the final price of goods and services was lowered due to the seamless flow of ITC between the manufacturer, retailer and service provider. This lead to a systematic reduction in costs.
The year-on-year Consumer price index was over 6% in July 2016, which now has reduced to a little over 2% in January 2019.
Previous tax regime was loaded with multiple taxes at the state level which included VAT, Entertainment Tax, Luxury tax, Taxes on lottery, betting and gambling, State Cesses and Surcharges, Octroi, Entry Tax and purchase tax. Also, multiple taxes at the central level were also levied which included Central Excise Duty, Additional Excise Duties, Service Tax, and Additional Customs Duty.
This multiplicity of tax kept the consumers confused and unsure on taxes being charged. Consumers were never able to cross-check the correct levy and payment of taxes, leading to consumers being overcharged on account of false taxes. GST being based on a PAN-India model tax system, consumers have become vigilant before paying taxes.
GST being a “ONE NATION ONE TAX”, has helped rationalize and revolutionize the whole economy.
Reduction in logistic cost
A leading logistics company recently said that after the implementation of the E-way bill and GST, heavy transport vehicles i.e. Trucks are covering 10-15% more distance as compared to earlier regime. In earlier regime trucks were hovering around 300-350 km per day, however, after the implementation of GST this distance has increased to 400-410 km per day. This has helped in the reduction of logistics costs. This cost reduction has brought India at the cusp of a logistic revolution.
On the operational side, a National Logistics Portal is also being developed by the Ministry of Commerce and Industry, it is planned that all stakeholders like traders, manufacturers, logistics service providers, infrastructure providers, financial services, Government departments and groups, and associations will all be on one platform. The aim is to reduce the logistics cost from the present 14% of GDP to less than 10% by 2022.
Anti-Profiteering measures in GST ensures that every time there is a change in GST rates resulting in rationalization of tax rates, the benefit is being passed on to the consumers. Profiteering happens when you inflate your product prices unfairly to create a higher profit margin. GST regime does create an opportunity for profiteering. Imagine if you were paying Excise @ 12% before GST, but you are now moved to 5% after GST. If you kept your prices the same, your profit margin would increase. However, since one of the big goals of GST is to create lower prices for consumers, the government considers this profiteering. Thereby the main goal of India’s anti-profiteering clause is to prevent suppliers from taking undue advantage of GST by passing on the “commensurate reduction in prices” to final consumers.
Recently the government has rationalized tax rates in the real estate sector from 12% /8%(with ITC benefit) to 5%/1%(without ITC benefit) also giving a one-time option for ongoing projects to adopt the tax scheme.
Homebuyers were forced to pay multiple taxes on real-estate buys in the pre-GST regime, and in the post-GST regime, they were forced to pay full taxes without benefit of ITC being passed to the consumers. Thereby commodities were always overpriced. With this new tax regime consumers are ensured that they are bound to pay a realistic price with the full benefit of Input tax credit flowing to them without any discretion of suppliers.
Electronic way-bill (“E-WAY BILL”) is a document generated online under the GST system when goods of the value of more than INR 50,000 are being transported. This is a mandatory document issued online by government servers which captures the place of origin and place of destination for all such movement of goods with value and tax involved in it. Implementation of the E-way bill has reduced the extent of rampant tax evasion in the country, thereby increasing the revenues of exchequer reducing the fiscal deficit.