1. What Is GST?
The Goods and Services Tax (GST) is an indirect tax, that is, it is a tax levied on the consumption of goods and items, versus a direct tax that is levied on income.
It replaces a plethora of central and state taxes, such as excise duty, service tax, sales tax, with a single tax structure.
While in principle GST is meant to be a single tax, in India it’s actually a dual tax – Central GST and State GST and then there’s Integrated GST on the inter-state supply of goods and services.
2. Will Consumers Pay More Tax Or Less?
There is no simple answer to this question.
GST rates have been determined by the GST Council (a council of state finance ministers and the union finance minister and minister of state for finance).
While the Council decided on four tax slabs (yes, they say one nation, one tax, but it’s not) a few items, such as gold, have been taxed at a separate rate.
- 5 percent
- 12 percent
- 18 percent
- 28 percent
Gold will be taxed at 3 percent. And rough diamonds at 0.25 percent. Many items, such as fresh vegetables and fruits and healthcare and education services, are currently taxed at nil or 0 percent. So technically, that makes it seven applicable GST rates.
Don’t forget several items are currently not covered by GST, not yet at least.
Now to answer the question posed above - will GST raise the tax burden on consumers or lower it?
For some goods and services, such as soaps, toothpaste, hair oil, SUVs, economy air travel and travel services consumers will pay less tax.
In the case of biscuits, detergents, air conditioners, cement, financial services, branded garments, luxury hotels and telecommunication services, consumers will pay more tax.
For a detailed list of rates read this - Tax Rates Before And After GST
But, broadly speaking, GST is not expected to substantially increase your cost of living.
3. If GST Doesn’t Reduce My Tax Burden What’s The Point Of It All?
So why move from the current indirect tax structure to GST?
Because of three key reasons:
- It eliminates instances of double taxation and prevents the cascading of taxes, thereby lowering the overall tax burden for several goods and services.
- It reduces exemptions. (Hopefully the GST Council will not add to the tax rate slabs).
- To avail input tax credit (credit for tax paid at an earlier stage of manufacture) supply chains will prefer tax paying entities. This will discourage evasion.
- It requires online filing of returns. This will also help reduce evasion.
While in the early months GST may cause confusion and disruption, over time it is expected to provide a smoother indirect tax system, that casts a wider net prompting more people to pay tax and boost government revenue.
THE GST STORY
4. So When Does The GST Circus Come To Town?
Phew! Finally a question that has a simple answer.
On midnight of June 30, the central government is throwing a special bash in the Central Hall of the Parliament. A gong will be sounded at midnight to signify that GST has arrived.
But, it is not necessary that big changes will occur in your life starting July 1. Yes, some markets, such as cloth markets in Gujarat, may remain shut as traders protest GST. Others, such as retail chain Big Bazaar, are hosting a GST Mahurat sale to get rid of old stock on which the company has paid taxes as per previous rates.
Some companies may, depending on the GST rates that apply to them, revise prices of goods and services starting July 1. Others may get into the groove slowly.
The real impact on business and trade, and hence consumers, will only be known in the weeks and months to come.
On the near-term growth trajectory, economies that have implemented GST in the past experienced a front-loading of consumption in the months prior to GST. However, the front-loaded impact stemmed from rising tax rates following the implementation of the GST. In this context, considering that we expect limited impact on inflation, we also do not expect a front-loading of consumption either. Growth impact, if any, could arise from the preparedness of the corporate sector (particularly the small and medium-sized enterprises) in implementing GST.Morgan Stanley Research Report, June 2017