December 3, 2015

GST will not make common man's life any better that soon

Even if the Goods and Services Tax (GST) Bill is passed and the new system is implemented from April 1, 2016, the common man will have to wait 4-5 years to enjoy its benefits.

GST is a system which is largely going to benefit business entities. For manufacturers and service-providers, GST means a pan-India market.

The soul of GST is its unique credit share. There would be a credit chain that wouldn't be broken.

Anyone who pays tax on the inputs of either goods or services will have it set off against tax liability on the finished goods and final service. This is called input tax credit or ITC.



Service tax, which constitutes 60% of the economy, may jump from 14-18% till GST is implemented.

In the GST regime, there would not be a cascading effect. Take, for example, a mineral water bottle. Once the bottle is out of the factory gates, state governments step in and impose state VAT.

If a bottle price is Rs 100, and excise duty and service tax is Rs 10 each, the price of the bottle becomes Rs 120.

On that Rs 120, state governments collects 10% value added tax (VAT). The final price of the bottle then becomes Rs 132 (100+20+12=132).

Manufacturers should have got a tax credit of Rs 20. Now, since the tax is paid to the centre, the state will not repay that money to them.

GST is a consumption-based tax. It is based on the "destination principle." GST is applied on goods and services at the place where the final consumption takes place. It is collected on value-added goods and services at each stage of sale or purchase in the supply chain.

GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services.

The manufacturer or wholesaler or retailer will pay the applicable GST rate but will claim it back through the tax credit mechanism.

Being the last person in the supply chain, the end-consumer has to bear this tax. Though this is the case even today for all indirect taxes, the difference under the GST is that with the streamlining of multiple taxes, the final cost to the customer will be lower on the elimination of double-charging in the system.

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