Goods and Services Tax (GST): Know the details in a simple language

Biggest tax reform:

The Goods and Services Tax (GST) is effective from 1st July 2017 and has been hailed as the biggest tax reform since independence —functioning on the principle of ‘One Nation, One Market, One Tax’.

 

Nature: A tax on Goods and Services alone. Therefore Income Tax, Wealth Tax, Profession Tax, Property Tax, Stamp Duty will continue and are not subsumed or covered under Goods and Services Tax.

 

There will be two components of GST – The Central GST (CGST) and The State GST (SGST). The central government will levy and collect CGST while the state governments will levy and collect SGST on all transactions within the state.

 

Typical GST Bill — Selling Price Rs 100 + Rs 6 CGST + Rs 6 SGST = 112 (Final Price)

Tax only on Value added – This is because credit of input taxes paid at each stage will be available in the subsequent stage of value addition – right from the manufacturer to the consumer.

 

Example:

Supplier: Rs 100+CGST (6%) Rs 6+SGST (6%) Rs6 = Rs 112 to Manufacturer

Manufacturer: Rs. 112+Value Added (20% of 100 cost) Rs. 20+ CGST (6%) Rs. 7.2 +SGST (6%) Rs. 7.2= Rs. 146.40 to the customer

Manufacturer has to pay Output Tax= Rs. 7.2+Rs. 7.2=Rs. 14.4

Manufacturer can set of Input Tax (input Credit) =Rs. 6+Rs. 6=Rs. 12

Net tax to be paid to the Govt: Rs. 14.4-Rs. 12=Rs 2.4 (which is the same as 12% on Value added Rs. 20= Rs. 2.4)

 

Benefits:

Removes multiple taxes levied by both Centre and State viz: Excise, Service Tax, Countervailing and Additional Duties, Surcharges and Cesses, Central Sales Tax,  VAT, Entertainment Tax, Luxury Tax, Tax on Lottery and Betting, Octroi and Entry Tax, Purchase Tax are subsumed into one consolidated tax system.

 

The complexity of indirect taxation resulted in a parallel economy there was an informal parallel set up amongst officials and industry where bribes or facilitation fees were common .This has come to an end with Goods and Services Tax.

 

Free movement of goods and services:

Octroi/Entry Tax which were hot beds of corruption are now being dismantled.

Unification and Harmonization of tax laws, tax rates and procedures across the country

 

Exclusions:

Products/ Services outside ambit: Alcohol , Petroleum products, crude oil and gas , Electricity, Health care services, Education services , burial services, agricultural services, specified insurance schemes

 

Exempted products: Vegetables, fruits , milk, etc are not covered under Goods and Services Tax

Turnover:

Businesses with turnover <Rs 20 lac  (Rs 10 lac North Eastern States)

Businesses with turnover >Rs 20 lac < Rs 75 lac Composition scheme’  (option-simplified procedures and overall nominal taxation rates )

 

Impact:

Household Goods :  According to the Govt, nearly 81 per cent of most household items will fall under ‘below-18 % GST’ rate slabs and only 19 % of the goods will have above 18 cent.

Consumer Durables: Under the proposed GST slab, all home appliances and consumer durables like television, air conditioner, refrigerator and washing machine will attract a 28% tax, which is  higher as it was earlier around 23-28% depending on the state.

 

Vehicles:

Vehicle prices are set to come down after Goods and Services Tax, with major beneficiaries being luxury cars and SUV’s.

Small cars — 28% + 1% cess

Mid Size Cars – 28% + 3% cess

Luxury Cars and SUV’s – 28% + 15% cess

Bikes and Scooters < 350CC – 28% & > 350 CC 28% +3% cess

 

Capital goods:

In a big boost to industry, the GST Council has set the rate for capital goods industrial intermediate items at 18 per cent which were otherwise between 23 and 27%. Coal is to be taxed at 5 per cent against current 11.69 per cent.

 

Real Estate:

Affordable Housing under Pradhan Mantri Awas Yojana will be exempted

 

Renting:

Renting of residential premises is covered under GST

Renting of commercial premises will attract 18% GST

 

Sale of:

 

Under construction homes:

GST rate is 18% with an abatement of 1/3rd for land cost which makes  it effectively 12%.

Although this rate is higher than the existing rate, in the long run GST is, essentially, expected to bring down the project cost for developers due to reduction in the number of taxes and the availability of tax credit on inputs. This would mean homes would, in fact, become cheaper with benefits being passed on to buyers.

 

Ready to move in homes:

No GST is applicable

 

Services:

All services – Banking, Insurance, Financial, Telecom, Consultancy, Maintenance, Repair, etc. would become more expensive immediately since the present Service Tax rate is only 15% which is now raised to 18% in GST.

 

Hospitality:

In case of restaurants and hotels, the issue becomes slightly complicated:

Air-conditioned Restaurants would attract 18% GST while Non Air-conditioned restaurants would be taxed at 12% GST.

Hotel tariffs less than Rs. 1000 do not attract GST, Tariffs between Rs 1000 and Rs 2500 attract 12% GST, Tariffs between Rs 2500 and Rs 7500 attract 18% GST while Tariffs above Rs 7500 would attract tax of 28%

 

Entertainment:

Movie and theatre tickets — 28% for tickets over Rs 100 and 18% for tickets below Rs 100.

 

Transport :

Transport services will be taxed at 5 per cent. This rate will apply to cab aggregators like Ola and Uber.

 

Non-AC train travel will be exempted and 5 per cent will be levied on AC travel tickets.

Travelling on metro, local train and religious travel including Haj yatra will all continue to be exempted.

Economy class air travel will attract 5 per cent GST while business class will be charged 12 cent

 

GST also has an anti-profiteering clause which means that benefits of GST has to be passed onto the customers. With this, GST seems to be a win-win situation for all.