IMPACT OF GOODS AND SERVICES TAX IMPLEMENTATION

Author: Tressa Maria Joseph (Symbiosis Law School, Hyderabad)

 

INTRODUCTION

Every country in this world seeks to maximize the benefits provided to each of its citizens residing within the country. Be it economic, social, educational or any other benefit, every country has a particular economic and social structure or in other words, a system which is formulated by the early leaders of that country after understanding and analysing the needs and circumstances which are particular to that country. Many countries have uplifted millions of its citizens from the social evil of poverty and have helped them break the shackles involved in the vicious cycle of unemployment by bringing in efficient and well- articulated reforms in their economic and social systems from time to time and according to the situations. A country’s social and economic structure can work effectively only if its performance is observed and analysed continuously on a regular basis by well-known experts in that field. If required changes are not introduced at the right time and in the right way, it can lead to such problems which in the end may not have solutions and affect the citizens in very substantial manner.

The tax structure in any economic system plays a vital role in stabilizing the economic climate of a country. Taxes are the means by which the government of a country tries to earn revenue by demanding for a compulsory payment of a small proportion of the income earned by its citizens. Taxes form the major source of income in the government budget which will be later used by the government to introduce projects and developmental plans for the benefit of its citizens. The tax structure does not merely depend of the income of the individuals, it is also levied on the production and manufacturing processes undertaken in the country. A tax structure can work successfully only if there are fair regulations which will be applied on all citizens with no regard to the occupation undertaken by them. Sometimes due to high taxes levied on the production and manufacturing processes, the final price of the product is very high and becomes a huge burden on the consumer and makes it problematic for consumers to change their economic lifestyle according to such changes.

India ranks second in the list of the most populated countries in the world. India’s economic environment is very business friendly and there are millions of large and small size producing units for both capital and consumer goods. The tax structure in the country is quite complicated considering the massive quantum of goods and services produced in the country. Such attributes are in accordance with the circumstances in the country given the fact that India’s economic growth is spread over a long period of time and the economic structure has undergone many changes. After a detailed analysis of the features of the present and existing tax structure, the reputed economists of the country have felt a need for a simpler and less complicated tax structure which will not place a burden on the persons in the receiving end. This led the different finance ministers and economists to develop a plan for incorporating the scheme of Goods and Services Tax(GST) into tax structure of the country.Goods and Services Taxwill bring about significant reforms in the tax structure which is mainly comprised of many indirect taxes was introduced on July 1 2017. The introduction and incorporation of Goods and Services Tax into the tax structure is something that gathers interest and attention so as to know what significant impact this legislation introduced under The Constitution (One Hundred and First Amendment) Act 2017 will bring about in the economy. This article will focus on the impact of Goods and Services Tax, the different changes in the tax structure accompanied with this momentous reform.

The article will be divided into the following sub topics

  1. What is Goods and Services Tax?
  2. Features of Goods and Services Tax.
  3. Advantages of Goods and Services Tax.
  4. Impact of Goods and Services Tax.

WHAT IS GOODS AND SERVICES TAX?

The Indian tax structure is comprised of many indirect taxes which is levied at different stages of production from the first very step of buying raw material till the final product reaches the target market. According to Investopedia, “An indirect tax is a tax that is paid to the government by one entity in the supply chain, but it is passed on to the consumer as part of the price of a good or service. The consumer is ultimately paying the tax by paying more for the product. An indirect tax is shifted from one taxpayer to another.”[1]

Indirect taxes levy different taxes the burden of which can be shifted to another. Various types of indirect taxes are levied by the Government at different stages of production and the persons involved in each of these processes shift the burden to the person in the next stage and this process goes on affecting the final consumer in the end in the form of high prices. For example, when a product was manufactured, the centre would levy an Excise Duty on the manufacture, and then the state will add a VAT tax when the item is sold to the next stage in the cycle. Then there would be a VAT at the next point of sale[2]. Indirect taxes lead to high prices of goods and services in the economy and is levied at the same rate no matter what the income of consumers might be. Consumers in the market are overburdened and it naturally affects the different other areas of the economy. Some examples of indirect taxes in India are Sales Tax, Service Tax, Excise Duty, Customs Duty, VAT, Entertainment Tax, Luxury Tax etc. Direct Taxes are also a part of the Indian tax structure but it mainly includes indirect taxes.

Goods and Services Tax is the country’s most ambitious economic reform since liberalisation. In the year 2000, the then Prime Minister A.B. Vajpayee set up the committee to draft Goods and Services Tax law. In 2017, the Rajya Sabha passed four supplementary Goods and Services Tax bills and final Goods and Services Tax was launched on July 1. Goods and Services Tax seeks to unify all these different taxes and levy only one single tax will be levied at different stages of production. The separate taxes levied by the Centre and different State governments will be submerged into one single tax on products and services. According to the website of the Central Government for creating awareness about Goods and Services Tax, “Goods and Services Tax is one indirect tax for the whole nation, which will make India one unified common market. Goods and Services Tax is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes Goods and Services Taxessentially a tax only on value addition at each stage. The final consumer will thus bear only the Goods and Services Taxcharged by the last dealer in the supply chain, with set-off benefits at all the previous stages.”[3]Goods and Services Taxis expected to boost the performance in the country’s manufacturing sector which has the issues of declining exports and high infrastructure costs by reducing the amount of taxes at different stages of production.

FEATURES OF GOODS AND SERVICES TAX

The basic feature of this scheme is the one unified tax on goods and services. The different taxes levied by the Central and State government in different stages of production will be removed and one single tax will be levied in the same place which will be distributed equally between the Central and State Governments. For example, if there is 18% tax imposed on the purchase of raw materials, 9% of the tax amount will be an income for the Central Government and the other half will be accrued to the State Government. All the Central and State Government taxes will be submerged leading to one tax in all parts of the nation. This brings about an effective solution to the problem of rise in prices of the products when they are distributed to different parts of the country i.e., for those goods in transit. Manufacturers and producers, in addition to consumers, will have to pay only for the actual price of the product in addition to the reduced tax rate.

When Goods and Services Tax is implemented, there will be 3 kinds of applicable Goods and Services Taxes:

  1. CGST (Central Goods and Services Tax): where the revenue will be collected by the central government
  2. SGST (State Goods and Services Tax): where the revenue will be collected by the state governments for intra-state sales
  3. IGST (Integrated Goods and Services Tax): where the revenue will be collected by the central government for inter-state sales.[4]

At the Central level, the following taxes are being subsumed:

  • Central Excise Duty,
  • Additional Excise Duty,
  • Service Tax,
  • Additional Customs Duty commonly known as Countervailing Duty
  • Special Additional Duty of Customs.

At the State level, the following taxes are being subsumed:

  • Subsuming of State Value Added Tax/Sales Tax,
  • Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States),
  • Octroi and Entry tax,
  • Purchase Tax,
  • Luxury tax
  • Taxes on lottery, betting and gambling.[5]

Another feature of Goods and services taxis Input Tax Credit. It helps the producer to claim the tax paid by him if he paid those taxes which were meant to be paid by the other producers in the previous stage of production. It will be applicable on those products produced after the implementation of the scheme. “Input tax credit will not be available for purchases made from non-compliant businesses,” pointed out Suresh NandlalRohira, partner, Grant Thornton. It is a provision which allows businesses to deduct Goods and Services Taxpaid on input material purchases and is a vital pivot around which the new system will operate. In a nutshell, it can be said that Goods and Services Taxwill bring about two main benefits. One, it will reduce the increasing effect of taxes and two, by allowing input tax credit, it will reduce the burden of taxes and mostly prices.

ADVANTAGES OF GOODS AND SALES TAX

Goods and Services Taxis a comprehensive scheme and it has many benefits and advantages to its name. These advantages will revamp the existing tax structure and will bring about a substantial change in the Indian economy. As mentioned above, it is one of the most well formulated economic reform the country has seen in many years and this will put India on par with foreign nations which have a more structured tax system. Benefits will be accrued to businesses, consumers, the Central and the State governments. This scheme of having one consolidated indirect tax helps the economy in the following ways.

Benefits for businesses and industry,

  • Robust IT system:

Goods and Services Taxrequires a comprehensive IT system to be its foundation. All the transactions relating to goods and services in the country will have to be computerised requiring businesses to have computer systems and equipements. All tax payer services such as registrations, returns etc can be electronically done leading to transparency and easy compliance.

  • Uniformity of tax rates and removal of cascading:

With the introduction of this scheme, the tax structure in the country gets unified and the tax rates across the country becomes uniform helping to maintain the certainty of doing business across all parts of the country. A system of tax credit throughout the process of production ensures the reduction of cascading of taxes helping businessmen to perform in an economic manner.

  • Improving competitiveness and exports:

With minimal cascading of taxes comes the reduction in the cost of transactions in business enhancing the production and competitiveness of the businesses. Competitiveness help businesses to grow and expand their operations helping them to undertake operations of international business. It will help businesses to undertake exports since the cost of locally produced goods goes down. It will boost the performance of Indian business in the international market and earn foreign exchange and improve international relations.

Benefits for Central and State Governments,

  • Easy administration:

When the Central and State taxes are removed and one integrated tax is levied, it becomes easy for governments to administer the tax structure and ensure that taxes are levied in a way that generates maximum efficiency. It helps the government to exercise proper control and power over the businesses in the country and ensure penalties for those failing to pay the required taxes.

  • Higher revenue efficiency:

Implementation of Goods and Services Taxwill lead to a reduction in the cost of collection of taxes of the Government. This will ensure that the government can collect its taxes on time and can earn revenue on a regular basis which will eventually lead to higher revenue efficiency.

Benefits for consumers,

  • Reduction in the final price:

When numerous taxes imposed at different stages are removed and a single tax is introduced, it will reduce the final price of the goods and services which was formerly a result of various indirect taxes, the burden of which was shifted through many production processes. Reduction in the price of goods and services will decrease the cost of living which will help those with meagre income to utilise their earnings in an economic manner. When this happens, citizens in the country can save more and each of them can survive in the face of the drastic economic changes in the economy if at all with the help of savings.

  • Relief in tax burden:

Due to a single and transparent tax, the overall tax burden on the consumers reduces. Consumers will not be overburdened due to many indirect taxes, helping them to utilise their earnings reasonably and economically eventually leading to economic prosperity of the nation.

IMPACT OF GOODS AND SALES TAX

The impact of Goods and services taxis wide and some apprehend it be the biggest change or reform the Indian economy has seen since liberalisation. TheGoods and services taxregime was implemented on July 1, 2017. Economists and tax specialists have warned that there would be prolonged disruption and the economy inclusive of the tax structure will take time to stabilise and function normally. The main fear in the minds of the citizens is regarding the changes in the prices of goods and services, particularly, essential commodities and services. In response to that, false information has been spread in the economy that the introduction and implementation will lead to a huge rise in price making it hard for the average income earners to make their ends meet. This led to various kind of protests by traders from across the country, hours before the Goods and Services Tax rollout, with trains being stopped in certain parts of the country. Though it is been lauded for several reasons, small traders and businessmen are apprehensive about the ‘disruptions’ the government had warned about over the next few months. Their dissatisfaction reflected in ‘mass strikes’ organised a day before the launch. For instance, the textile sector is facing a triple whammy- increased taxation, unpreparedness and lack of awareness. This makes it all the more important that the impact followed by the different kinds of consequences which will follow after the introduction and implementation of goods and services taxshould be made known to the wide masses so that the same will be accepted without the fear of not knowing anything. As Navin Kumar, the chief of Goods and Services Tax Network says, “The fear of unknown is the biggest challenge in the rollout of Goods and Services Tax.” This holds to be very true in the way citizens have reacted to the prospects of the implementation of Goods and Services Tax.

With the integration of various taxes into one unified tax, there will be an explicit change in the price of goods and services produced and sold in the economy. The following goods and services will have a rise in price:

  • Mobiles and Services
  • Stationery
  • Fashion accessories
  • Cement
  • Sports Goods
  • Skincare products
  • Textiles/garments
  • LED, CFL and other light fittings
  • Eating out
  • Art, Painting
  • Household appliances
  • Liquor
  • Gold Jewellery
  • Financial Services.

The following goods and services will have a decline in price.

  • Kitchen Utensils
  • Sand lime bricks and fly ash bricks
  • Automobiles
  • Eggs
  • Movie and theatre tickets
  • Travel
  • Healthcare

This list helps us understand the change in prices of goods and services. Implementation of Goods and Services taxwill lead to an increase in expenditure on public capital and there will be continuing political stability which will drive economic growth according to the Financial Stability Report, 2017. All companies have to file all returns and invoices on a regular basis and update the same regularly. The verdict of the experts is unanimous- disruption in the short term followed by normalisation and tangible benefits in the long term. The benefits include streamlined supply chains, no cascading taxation, wider tax base and a unified market. The complexity of the final tax structure and a completely computerised filing system in a country where 60% of the small businesses are not computerised are primary impediments to compliance by small business. According to HSBC, Goods and services taxwill only add 0.4% to GDP because the multiple tax rates and exemptions announced under it are far from an ideal structure.[6]Some of the other changes are

  • 5% tax on fertilisers instead of 12%
  • 18% tax on tractor parts changed from 28%
  • 12% tax on construction instead of 18%
  • Pulses which are registered and branded will cost an additional 5%.
  • Packaged tamarind will cost 12% more.
  • Packaged drinking water will go up to 18%

Such changes in the rate of taxes in the construction sector will make construction and ultimately housing more affordable and economical which help in the realization of the dream housing for all in the near future. But the increase in the price of food products will lead to an increase in household expenses and will also lead to an increase in the services provided by hotels and restaurants.

By the analysis of the impact of Goods and services tax, we can comprehend as to how Goods and services tax has affected the economy. There are various legal complications involved in the same. The leading tax lawyer Arvind Data has said, “The Goods and Services Tax, in the current form is the most terrible thing to happen, and will add only to complexities.[7] The effects of Goods and services taxare manifold. In some ways, it helps the economy to reform itself and puts the Indian economy in same footing with those countries which have successfully implemented Goods and services taxand have achieved great goals with the help of the same. At the same time, the rollout of Goods and services taxhas definitely brought turbulences in the functioning of the economy. In addition, the requirement of filing returns by companies on a regular basis will cause a lot of problems in an economy which largely consists of cash transactions. The results of the consequences that is accompanied with the implementation of Goods and services taxcan be analysed to be successful or a failure only after one full financial year is completed. Goods and services taxis one of the major game changers in the history of Indian economy. The implementation of Goods and services taxwill go down in the history which will be gloriously remembered for ages to come.

CONCLUSION

The success of Goods and services taxwill depend on its well-articulated implementation in the economy. The success of any scheme can be understood only after the completion of a reasonable amount of time. The participants in the economy should be made aware about the features, effects, consequences and all the related aspects of this scheme. Only then the economy can prosper and India can achieve international standards. The benefits of Goods and services tax should be accessible to all regardless of their economic or social status. Goods and services taxshould aim at reducing the economic gap between the rich and poor in the country and the implementation of this scheme can help the country to ultimately achieve developmental goals.

[1]http://www.investopedia.com/terms/i/indirecttax.asp

[2]https://cleartax.in/s/Goods and Services Tax-law-goods-and-services-tax

[3]http://www.Goods and Services Taxindia.com/about/

[4]https://cleartax.in/s/Goods and Services Tax-law-goods-and-services-tax

[5]http://www.Goods and Services Taxindia.com/about/

[6] The New Indian Express, July 1, 2017.

[7] The Week, July 2, 2017

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