The Narendra Modi government has embarked on the final lap of ushering in the ambitious goods and services tax (GST) regime in India. This would be the biggest tax reform in the country’s history and is expected to be a game-changer for businesses as well as the economy. The primary aim of introducing the GST is to have a uniform indirect tax structure—India currently has multiple layers of state and central taxes—and to increase compliance rates.
The government is pushing for a nation-wide roll-out starting July 01. The last few important bills related to the Goods and Services Tax Act, 2016, are being tabled in the Rajya Sabha, the upper house of the Indian parliament. While businesses have begun working towards accommodating these changes, such a gigantic exercise raises several questions in the minds of Indians. Quartz picked 15 such basic queries and sought answers from industry experts: Waman Parkhi, partner, indirect tax, KPMG; Pratik Jain, partner and leader, indirect tax, PwC India; Monish Bhalla, an expert on indirect tax and a columnist; and Mahesh Jaising, partner, indirect tax, BMR Advisors.
Here’s are the answers:
Why did the implementation of the GST take this long?
The GST required agreement between states, the centre, and industry groups which took a lot of time. Multiple drafts were floated around and the provisions tweaked after collecting feedback from the public. Finally, the GST council was formed along with the passing of the constitution amendment bill in September 2016, explained KPMG’s Parkhi. Once the council began vetting the law, “there were certain issues that the states, centre, and even industry groups had. That is why it took three months to come to a consensus,” Parkhi added.
What problems did the states have?
States were concerned about the loss of revenue they’d face as key state-level taxes are being done away with. At the state-level, the value added tax, entertainment tax, sales tax, octroi and entry tax, purchase tax, luxury tax, and taxes on lottery and gambling will be subsumed under the GST. It was proposed that the government compensate the states for this revenue loss over the next five years. “The states were arguing about the compensation they should get in lieu of the tax revenue they’d forgo, for instance, when goods move between two states (octroi and entry tax.) For that the government came out with a compensation provision,” Parkhi explained.
How will the GST revenue be shared between the states and the centre?
The actual tax collection (before compensation) will be on a 50-50 basis between the centre and the states, said Bhalla. “If, after the distribution, the states’ share falls short of what was being forecast, the centre will pay them compensation to plug the gap,” he explained.
Will I pay just one tax? What about the current tax components like education cess and value added tax?
There will just be one tax: the GST. For instance, when you go to a restaurant today, there are typically four to five different tax components that are included in the total price. Now, the bill will have two taxes: central goods and services tax (CGST) and state goods and services tax (SGST), PwC’s Jain explained. All other components will go away. The CGST revenue will go to the centre, while the SGST to the states. In some cases, the integrated service tax (IGST) will be levied instead of the other two. “The IGST will only be applied when you do an inter-state purchase. So if you buy something on Flipkart, and the seller is not from your state, then he/she may charge me IGST,” said Parkhi.
So then CGST, SGST, and IGST are still separate taxes. Wasn’t the idea to have one single tax?
It is just one tax, but the CGST and SGST are just components of the GST created to make the administration easier, explained Bhalla. “It is for the revenue share purposes, for example if I am paying Rs100,000 as GST, then Rs50,000 will go towards CGST and SGST each,” Bhalla said. The IGST anyway is for inter-state purchases and will be applied as a whole, he added.
Will different states have different SGSTs?
Currently the provision of differential tax rates for states isn’t in place. But the GST council is empowered to decide a band of rates from which states can choose the final tax rate, explained Jain.
Will different goods and services have separate tax rates or just one common rate?
Goods have tax rate slabs, but services currently don’t. “No slab has been decided for services, and there’s an assumption that all services will be taxed at around 18%,” said Jain.
Parkhi explained: “For goods, we will have different slabs: 0%, 5%, 12%, 18%, and 28%. Additionally there are certain goods like luxury cars, aerated beverages, and tobacco that will have 28% plus a cess.” So the effective tax rate for luxury cars can go up to 43%, while for tobacco it can go up to 75%, according to estimates, Parkhi added.
Will alcohol be taxed more?
No. Alcohol is out of the purview of GST, along with petroleum products, Parkhi said.
Will my restaurant bill be higher?
Currently, it is pretty hard to assess whether restaurant bills will increase, the experts said.
“I wouldn’t say with certainty whether the bills will go up or down. Currently bills attract VAT, service tax, and education cess which effectively is in the vicinity of 18%,” PwC’s Jain said.
There are also tax benefits that business owners would get under GST that they’ll pass on to consumers. “Restaurant business owners will get tax rebates under the new act. So if they pass these to consumers, then the effective tax could reduce. It is difficult to do the calculations now because each business will be eligible for various exemptions,” Parkhi explained.
Will I have to pay more for cigarettes?
Again, it can’t be ascertained right now how the end-consumer will be affected, said Jain.
What about my shopping bills and prices of branded clothes and electronics? Will prices go up?
Essential commodities such as vegetables, fruits and pulses will remain untaxed under the GST. Prices of small-ticket purchases like toothpaste should attract a lower rate of 12% compared to consumer appliances (such as refrigerators and air conditioners), explained Jaising. “The prices of fast-moving consumer goods could actually drop because currently they are being taxed at a higher rate, and companies would also pass the benefits they get from tax credits to the final consumer,” Jaising said.
When will I know about the exact tax rates for all products and services?
The revenue secretary has indicated that the exact rates will only be announced by June, closer to the implementation, according to Jaising. “This is likely for the reason that the GST Council has to finalise various other aspects including rules, procedures before it starts working on the tax rates. Moreover, arriving at the tax rates would be a detailed exercise involving an analysis of total of various indirect levies under present regime on all goods and services,” explained Jaising.
When will the actual change in bills and prices be reflected?
Prices will start changing from July 01, if the government succeeds in implementing it from that date, Parkhi explained.
Will individual states or the central government still be free to impose fresh cess and taxes in future after GST is implemented?
No, it is not possible in the future for the states or the centre to impose any fresh cess or taxes, explained Bhalla. “The constitution now gives the power to the GST council to decide any further taxes. The states or the centre can’t do it,” he said.
Could GST lead to inflation?
Given the current tax rate slabs, experts have said there will be a marginal impact on inflation. The main impact on inflation will be due to the tax on services, but many expect the effect to stabilise after the initial one-time hit.
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