For a tax reform intended to make business simpler in India, understanding the consequences of GST for the common man seems pretty complicated. Don’t despair! We did the homework for you.
GST stands for “Goods and Services Tax.” The idea behind it is to make taxation simpler: one nation, one tax. GST will replace at least 17 state and central taxes, easing the way we do business in India.
Just think about the amount of paperwork, time, and effort that having a single tax will save! Doing business across states can be such a hassle that many companies prefer not to expand beyond local borders rather than to deal with the tortuous paperwork and complex accounting that entails inter-state transactions. Just ask any truck driver how long it takes to cross inter-state borders, the number of forms he has to fill out, the idle time killed in waiting for an inspection and the bribes paid to clear through tax tools.
GST will save paper, time, and will eliminate double taxation, which currently is a tremendous obstacle to economic growth. With GST, a business will only pay taxes on the added value, the difference between the tax a business pays to a vendor and the tax that business collects from a customer.
One tax and one tax only will be such a blessing. For accountants, it will be like spending a sunny day at the beach, feeling the ocean breeze. Selling your products inter-state will be like taking a walk in the park.
But how will the calculation of this value-added tax work? Here’s where the fun begins. Let me explain:
Say that you own a mithai shop and buy sugar to make mithai for ₹105, of which ₹100 represents the cost of the material and ₹5 represents a 5% tax that the sugar producer charged you.
You make mithai with this sugar and set their price at ₹130. You add ₹15.60 for the 12% tax that processed foods will pay under GST and then sell it at ₹145.60.
Under the current (soon to be old) system, you would have to pay the government the ₹15.60 in taxes you collected, leaving you at a ₹25 profit. That is, ₹145.60 (retail price, including tax) minus ₹105 (cost of materials, including tax) minus ₹15.60 (taxes) = ₹25 (profit).
With GST, you will pay the government only the difference between what you collected in taxes and what you paid for raw materials, ₹15.60 – ₹5.00 = ₹10.60. That would leave you with a ₹30 profit: ₹145.60 (retail price) minus ₹105 (cost of materials including a ₹5 tax) minus ₹10.60 (difference to pay on taxes) = ₹30 (profit). The ₹10.60 represents a tax on the added value. The following figure summarises this:
Scenario 1: No change in prices
Yes, with GST business will pay less in taxes and make bigger profits.
Now, why would the government do this when what they need to do is to increase the tax revenue? It sounds crazy! It does, but for a start, a lot of people are not paying taxes in India. The government’s reasoning is that if taxation becomes less of a burden, as it will be with GST, producers, wholesalers, and retailers will have an incentive to collect taxes and pay them. Combine that with the government’s efforts to transform India’s cash-heavy economy into a cashless economy, which makes tax evasion more difficult, and the government will end up with higher tax revenues.
And what’s for the final consumer? Implementing GST may lead to lower prices for the final consumer because when taxation decreases, and it becomes easier for vendors to make larger profits (shown in our example above). Vendors may be inclined to reduce their revenue margins to increase competitiveness. Using our sugar and mithai example, under GST, a producer may want to lower her unit margins from ₹30 to ₹25 to make her merchandise more attractive, sell more, and still end up making more money than before.
Scenario 2: Prices go down
Here, the producer profits remain the same and the benefits are transferred to the consumer.
So far so good? Well, it gets a little complicated: For a start, there will be two taxes: a Central Goods and Services Tax (CGST), and State Goods and Services Tax (SGST), which combined will compose a single tax, GST. Still better than 17 different taxes, huh? Although, in the case of an inter-state purchase, it will be only one tax, an Integrated Service Tax (IGST) that will apply instead of the other two. IGST = CSGT + SGST. And in the case of union territories, a UTGST will apply instead of an SGST. You won’t pay more, but you may need to differentiate between those three on your reporting… Ouch! Tell your accountant to add a mosquito to his day at the beach.
Still, it will be much easier than before, right? All goods and services taxed at the same rate, half goes to the states (SGST), and half goes to the central government (CGST)… Well, all services will be taxed at the same rate, apparently 18%, but goods will be taxed at different slabs: 0% for commodities such as wheat and rice; 5%, for mass consumption goods such as spices, teas and other everyday products; 12%, for processed foods; 18% for manufactured, non-edible goods, such as refrigerators; 28% for white goods and cars; and 28% plus a compensation cess for luxury goods, such as motor vehicles, and de-merits goods, such as pan masala (135%), tobacco (290%), aerated beverages (15%), and others. The idea behind a compensation cess is to compensate states for any revenue loss due to the implementation of GST.
What? Who’s going to remember all those numbers every time you make a sale? What will Modi want next, the blood of my first born?
Relax. GST can be a bit complex but much less so that the current system. Our advice? Prepare. Upgrade your accounting software. You don’t buy just one bale of sugar to make one shirt. Your daily operations are too knotty to keep track of sales and taxes manually. Get a legal copy of Tally if you haven’t done so already and make sure that your POS will be GST ready to consider which goods pay which slab of GST. Pay vendors electronically, so you never miss a receipt. Charge your customers electronically, so you never have to collect the information twice. Never, ever guess. Humans are fallible. Let computers do the hard work! At the end of the day, it will be just a matter of running a report and checking the balances: you paid ₹5000 on taxes, you collected ₹6000, you owe the government ₹1000.
ePaisa will be GST ready. Plus, it’s so easy to use, you won’t lose much time training your staff on how to deal with the new tax system.