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The indirect tax levy on the product you buy will come down from 28 per cent to 18 per cent.
The Goods and Service Tax (GST) Bill has made quick progress in the last few months. Many people are not sure whether they need to worry about GST and its implications. After all, over the years, they have been buying goods and services and paying tax on the same. What they are probably forgetting is that GST is not just a new tax replacing the old one. It is actually about simplification. There are going to be some hits and some misses for the common man and that is something that you need to be fully aware of. Here are six implications of GST:
THERE WILL BE JUST ONE RATE OF INDIRECT TAX
The biggest advantage that GST will proffer is that it reduces all your indirect taxes to a single rate. When companies manufacture goods, they pay excise duty and this is passed on to you in the form of higher cost. When companies import raw material, they pay customs duty and that also gets passed on to you. Service tax is imposed on any service rendered within India and that is again a cost that gets passed on to you. In addition, there are a host of other costs. You pay VAT when you eat at a restaurant, you are levied Octroi when you move goods into a state, you pay entertainment tax when you watch a movie and so on. All these central, state and local taxes (except customs duty) will be merged into a single GST. You can just imagine how simple it could become.
MOST GOODS OF DAILY USE COULD BECOME CHEAPER
When you buy goods in India, you pay excise duty at 12.5 per cent and additional VAT at 14 per cent. That takes the effective rate of tax to about 28 per cent. More often than not, you do not realise that you are paying so much. The GST Bill will combine this into a single average rate. While the GST Council will decide on the final rate, it is estimated to be around 18 per cent. That means, the indirect tax levy on the product you buy will come down from 28 per cent to 18 per cent. In simple terms, your carton of flavoured milk will cost Rs 118 instead of Rs 128 under the GST regime.
SIN GOODS COULD BECOME MORE EXPENSIVE
Sin goods are hard to define, but the government has defined such goods as those that are not consumed daily. They are either a luxury product or one that is harmful to health. Items like cigarettes and liquor already attract a high level of excise duty and under the GST regime there may be a sin tax on such products and they may become more expensive. In addition, exclusive products like high-end vacation packages, premium shirts and high-end perfumes may also be treated as items of sinful consumption and taxed at a higher rate of GST.
MOST SERVICES COULD BECOME MORE EXPENSIVE
Today, when you take any service, you end up paying service tax. This is clearly mentioned in the bill or invoice. Service tax is charged at 14 per cent and in addition there is 0.5 per cent Swachh Bharat Cess as well as 0.5 per cent Krishi Kalyan Cess. This takes the total service tax levy to 15 per cent. Therein lies the catch! Under the GST regime, the average GST rate is likely to be set at around 18 per cent or even a tad higher. That means service tax will be replaced by a higher rate of GST. Let us assume that the final GST rate for most services is set at 20 per cent. This implies a five per cent increase in cost. A service that was costing Rs 115 will cost about Rs 120 after GST implementation. The GST will raise the cost of a long list of services ranging from eating out, trading in equities, buying insurance and going on a foreign tour. This can add up to quite a bit when aggregated across all the services that you avail.
ONLINE BUYERS CAN FORGET ABOUT MASSIVE DISCOUNTS
Most Indian buyers have been spoilt for choice in the last couple of years by massive discounts offered by e-commerce portals. The advantage was that these online portals were outside the tax bracket. With the implementation of GST, all that could change. The GST Council has already clarified that e-commerce platforms will be brought under the GST ambit. That means e-tailers will not be able to offer huge discounts to shoppers.
THERE IS SOMETHING IN GST FOR THE SMALL TRADERS
The big concern about GST was that small traders and businesses will be brought under its ambit. Compliance strain would add to the costs of companies with a small turnover and compress their already thin margins. The GST Council has, however, clarified that the basic exemption limit for GST will be set at Rs 20 lakh per annum. That means, traders and small businesses with annual turnover of up to Rs 20 lakh will not be subject to GST. This will keep millions of small traders and small businesses out of the ambit of GST. The threshold will be reduced to Rs 10 lakh in case of northeastern states, but that may not really impact business in a big way. Small traders and service providers can surely breathe a sigh of relief.
IN SHORT:
* Service tax levels may go up post GST but most goods of mass consumption will be cheaper
* Some products classified as sin products may become more expensive
* Buying from e-commerce portals will not be a big advantage as they also will come under the GST regime
* The threshold for GST will not be too stringent for small businesses and traders The real takeaway is that GST will add 2 per cent to the GDP each year. That would translate to an additional $40 billion income to the exchequer.
Rego is CEO and founder of Right Horizons, an end-to-end investment advisory and wealth management firm.
