This is not a blog in the usual sense! But I thought GST is very important subject in India and it touches our life everyday. In my software business, we have handled GST related changes for our customers hence I know a bit about the subject. So I thought why not write about GST in simplest possible language without using accounting buzzwords.
It’s more than a month after introduction of GST in India. There has always been a question why GST? Modern world has switched over to Goods & Services Tax (GST) over a period of last 15 years or so. I felt that there is a need to explain GST in the format that will make it easy to understand the simplicity as well as complexity of the system.
Before GST there was a plethora of taxes by different names, different authorities, different rates, different procedures, and different forms, making things extremely complex. What GST has done is that it has helped the system to go away from all these taxes. All these various taxes have been merged into two taxes one is under Central Govt (CGST) and other by State Govt (SGST). Central Govt portion takes care of previous excise tax and State Govt portion takes care VAT and Service tax.
Definition of GST
It is very simple. GST is a tax which is based on Supply and it is destination based. This means that whatever you supply Products or Services, there will be only one type of tax, GST! The beauty of this system is that there is same tax percentage for a supply all over India.
CGST/SGST & IGST
When a supply is a made within the state there are two elements of tax, CGST and SGST. If supply is made outside state then there is only one tax element, IGST. If tax percentage is defined at 18% for an item, then IGST is 18% for interstate transaction and intra state tax is 50% of 18%, each for two elements i.e. 9% CGST and 9% SGST.
Why so many tax percentages in GST?
India is a very complex heterogeneous country. Diversity of Income is quite extreme in India. Hence to take care of such issues tax % have been defined from 0% to 28%. This is a compromise that was needed to achieve the social goals as well as fiscal goals of the Govt. World over, taxes have been from 6% to 20 plus % depending on the particular countries requirements. But majority of the countries in the world are as big only as some of our states are or even smaller than them, with reasonably homogeneous population. If we take 28% GST, which is supposed to be on luxury items, in case of cars the prices of most cars did come down post GST. There are some cases where post GST, prices went up and they came down in others.
Input tax credit
At every stage, the seller can take Input Tax Credit of tax charged to him at the buying stage thereby taking care of double taxation. This means that seller charges the tax based on his profit margin and not on the complete price.
Immediate benefit of GST to Govt
Govt is all the time looking to increase the tax base in the country. With GST implementation, a large number of new entities have opted to register under GST, thereby helping in reduction of transactions in parallel economy or so called Black economy. There is an interesting rule. An entity buys something from another entity, which is not registered under GST and does not charge GST for the transaction. The onus of paying GST in this case is on the buyer. The buyer has to raise a self-Invoice for the amount equal to purchase value and charge GST as % defined in the system. He then pays that tax to the Govt. System of “Purchi” will have tough time in future.
Ease of use
For traders who make a large number of sell transactions every day, there is a system that allows them to be under Composition Scheme. They are required to pay GST to Govt every quarter, at a fixed % based on their turnover.
Why people Love to Hate GST?
First and foremost, the reason is ignorance! Second most important aspect is the transactions will come above board requiring the entity to pay correct amount of Income Tax! Hiding Income can become tough over a period because the transactions, and returns of different entities are now going to be entangled with each other.
GST Returns filing
This is another reason for hating the GST. Except for those who have opted for composition scheme, returns need to be filed on a monthly basis. In previous tax system returns were allowed on a quarterly basis. In GST returns, more information is required to be shared with Govt, every month. For example, when returns for July are filed, one has to fill up gross turnover value of that entity between 1st April and 31st July and so on. This will put the limitations of “playing around with figures” at the end of the year! You hate GST, of course many will hate GST!
Entanglement with each other
By a certain date of every month, sales details are to be shared with Govt and these are more detailed than was previously done. This includes names and GSTIN number of customers! This is to be uploaded to Govt site. In next couple of days after this is done, your customers will have visibility of these Invoices and are required to “approve” your Invoice, online. There is dispute resolution mechanism; in case of dispute, two months are allowed to resolve the dispute. There is one more entanglement. To claim set off the customer must “approve” your Invoice. Your customer will finally avail Input Tax Credit during payment of GST, only when you have shared the proof of actual payment of your liability of GST amount on the site! Now, now you hate GST more, you will hate Govt more. But what Govt is trying to do is to bring more discipline in the society and more compliance. The effect of this is even trickier. Everybody’s compliance rating, adhering to discipline will be made available in public domain. This will lead to getting lower business in case compliance rating is down! This is because the lack of compliance indicates indiscipline and financial burden to your customer. You cannot avail tax credit if your vendor has not paid taxes. What do you do in such cases, go to a better compliant vendor! Simple?
I have tried to explain the gist of GST in non-technical way and have tried not to use accounting jargon! Its early days for GST and we will see improvements over a period. This GST system will probably create world’s largest data under one roof and will be a challenge to data analysis experts too! Happy GSTing!