The Rajya Sabha passed the Goods and Services Tax (GST) Bill on 3rd August 2016. This paved the way for the implementation of the largest tax reform since India’s independence. GST is expected to reduce procedural hurdles, decrease tax avoidance, bring down costs, simplify the tax structure, and increase the tax base.
GST implementation will impact every sector of the Indian economy. The new tax will eliminate multiple indirect taxes, such as customs duty, value added tax (VAT), luxury tax, service tax, central sales tax (CST), and others. Based on the nature of goods and services, GST rates levied will be 5%, 12%, 18%, and 28% with some exemptions.
Service sectors, such as banking, telecom, and e-commerce may see a marginal increase in tax rates. Although costs of business loans and other financial products may rise, business and tax efficiencies in the long-term are expected to reduce the prices for consumers.
Here is how GST is expected to affect the economy and become a game changer.
- Implementation of a single tax eliminates the cascading effects of multiple taxes. The tax levied on taxes would be history and this will result in a decrease in the cost of the products.
- Until GST, different states levied varying tax rates. Therefore, companies opted for warehousing facilities based on these rates. However, with GST being the same, companies may set up warehouses with the aim to reduce their costs and offer improved customer services.
- Since GST is a single tax rate, production may be outsourced to different states. This would result in more opportunities being created across the country. As newer opportunities open up, companies may avail a business loan to expand their operations.
- Companies are allowed to claim input tax credit. This means that they will reduce their tax payments by an amount that has already been incurred while paying for the raw materials and other inputs. However, the credit is available only when the details offered by the recipients and suppliers match.
- As all levies are classified under a single GST rate, transparency and simplicity in the tax procedure are expected. As a wider number of goods and services are covered, tax collections are estimated to increase.
GST will replace several indirect taxes levied by the state and central government. For consumers, it provides tremendous benefits by reducing the burden of taxes. The successful implementation of GST will send out a positive symbol to foreign investors.
Implementation of GST may have some challenges. During the transition, working capital may be blocked due to the input tax credit lock-up. However, a commercial loan may be used to overcome the working capital issues faced by companies in the initial period in the post-GST regime.
The entire landscape of how business was carried will change after GST. Industries are advised to gear up for this change.