India is known for its complex tax system. For startups and startups, it is impossible to navigate through various direct and indirect taxes. Constant changes in taxes, such as the service tax, are making things worse. But now, things are about to change with the new goods and services tax, commonly known as GST.
We understand what GST is, how it differs from other taxes, the applicability of GST, GST rates, its impact on your business, and the latest updates on your GST bill. To facilitate understanding, I will start with an example …
Mr. Sharma is a businessman who wants to start a business. For this, he needs various raw materials that must be imported from China and brought to Gurgaon, where he has his factory, by road through various states. Once he’s done with his costing process, he’s a bit upset.
First, he has to pay a customs duty for importing the materials in addition to the shipping costs. Okay, but there are many other taxes that he can’t seem to understand. He also discovers that when his final product is ready he will have paid the central and state governments at least 10 different taxes, not all exclusive to each other. Digging deeper, he finds many cases where the government also levies a tax.
Gasoline prices are the perfect example. The price charged to resellers by oil trading companies is Rs. 25.46 currently for a liter of gasoline. Now excise duties are charged at Rs. 21.48 per liter by the central government and adding the dealer commission, the price is now Rs. 49.22. This is not the end and the value added tax is now charged at 27%, bringing the final price to Rs. 62.51 in Delhi. At first, it may seem right for both governments to tax the product, but it is not that harmless. Here’s a tax on a tax! The state government collects 27% of the final amount in which the entrepreneur has already paid the central special tax.
The goods and services tax promises to alleviate this problem among many others. It is hailed as the turning point for the Indian economy and is labeled as the biggest change to the Constitution since India’s independence. The Goods and Services Tax or commonly known as GST will replace the indirect taxes collected by the central and state governments and provide a single and simplified process. It presents India as a unified market for entrepreneurs and also aims to return a large amount of black money to the mainstream economy. The tax will be applied at all stages of value creation.
GST calculation example
Suppose the GST is set to 20%. Assume that the cost of manufacturing product A is 100 and assuming a GST of 20%, the total amount is Rs. 120. The next step in taxation would be when the product is sold to consumers, say at the price of 150. Then GST will charge another 20% on the difference of Rs only. 150 and Rs. 120, that is, only 20% in Rs. 30 which is equal to Rs. 6. So the final price is Rs. 150 + Rs. 6. Unlike the case of the price of gasoline, now there is no tax on a tax. This eliminates the cascading effect of taxes that is very prevalent in our economy and has been simplified to an elementary level in the example.
As the GST will be applied at all stages of value creation, it will be very difficult for black money owners to participate in any part of the value chain with the GST without taking into account all other transactions. GST is estimated to provide an immediate boost from 0.9% to 1.4% of GDP.