"[N]othingcan be said to becertain, exceptdeath and taxes."—Benjamin Franklin
Let's face it—taxes are among our biggest expenses over a lifetime. And this includes indirect taxes. We pay excise duty for manufacturing of goods, VAT on purchases, service tax on availing the taxable services, entertainment tax on movies, luxury tax, entry tax and the list goes on. Today, GST is labelled as the biggest indirect taxation revolution since Independence, and it is important to know how it will impact the bank balance of the common citizen. Will our wallets become lighter or heavier?
The seamless input tax credit across the value chain will eliminate a cascading effect. This is expected to result in a reduction of prices of products...
To begin with the basics, GST is a tax on goods and services, with a comprehensive and continuous chain of input credit set-off from the manufacturer to distributor to retailer till it reaches the end customer. It is essentially a tax only on the value addition at each stage. Through the input tax credit mechanism, a supplier at each stage is permitted to set-off the GST paid on the purchase of goods and services against the GST to be paid on the supply of goods and services.
The seamless input tax credit across the value chain will eliminate a cascading effect .This is expected to result in a reduction of prices of products—as the adage goes, "A penny saved is a penny earned!"
Let us discuss the other factors that will help you in saving the extra pennies under GST.
1. Elimination of double taxation
In the realm of indirect taxes, double taxation has long been a challenge in India. This is because a single transaction is considered as a sale as well as a provision of service. Consider an example of a restaurant with AC. The restaurant bill will have service tax and VAT. Wondering why VAT and service tax? The food and beverages are considered to be commodities and other additional services such as air conditioning and seating are considered as services. Hence, you pay VAT on 100% of the value of food and 40% of the value of the bill, and service tax may be levied at 15%. For example, a bill of ₹1000 will attract service tax of ₹60 and VAT@ 14.5% of ₹154.
Under GST, supply being a single taxable event, which is either classified as supply of goods or services, the concept of double taxation will be eliminated. This will contribute to reduction in price.
2. The concept of "furtherance of business"
Today, a VAT dealer who pays excise duty and service tax on her purchases is not eligible to claim input tax as she is not registered under those statutes. In GST, the concept of input tax credit is broadened to include any input or input services "used or intended to be used in the course of or for furtherance of businesses." This will have a bearing on price and subsequently result in reduction of the price of the product.
3. Reduction of tax rate
Today, excise duty is levied on manufacture and VAT on sale of goods. Let us consider a case of purchase where these taxes are levied. The standard rate of excise duty prevalent in most states is at 12.5% and VAT around 14.5%. On an average, you pay around 27-28% of product value as taxes. The four-tier GST structure as finalised stands at 0%, 5%, 12%, 18% and 28%. Thus you can expect an overall reduction in rate of taxes and thus a lessening of your financial load.
4. Anti-profiteering measure
In order to ensure that the benefit of input tax credit by businesses and subsequent reduction of tax rate is passed on to the final consumer, an anti-profiteering clause has been proposed. This stipulates the business to pass the benefit by way of reduction in product price. To examine this, an authority will be set up by government on recommendations of the GST council.
5. A more competitive market
The existing geographical trade barriers will be removed under GST and India will be one common market. With the expansion of the market beyond state boundaries, new players will emerge and the marketplace is expected to be more competitive. This would impact pricing strategy and, of course, any reduction in price will benefit the end consumer.