How will GST affect Indian Businesses?


The Goods and Service Tax Bill passed recently by the Rajya Sabha and the Lok Sabha has been getting a lot of attention lately. Mainly because it is ‘The Next Big Thing’ after the Financial Reforms of 1991 in the history of India’s economy. We all know that the multiplicities of indirect taxes have driven up the prices of goods and services. Moreover, they make taxation complicated. Further, these taxes are different in each state and businesses end up paying tax on taxes.

So basically, GST rationalises this whole bucket of indirect taxes and attempts to unify most of them to make for a destination base tax, thereby making India a unified market. It is estimated that the GDP of the country will rise by 1 – 2 %. Let’s have a look at the GST impact on business in the country.

How will GST benefit Startups and SMEs?

1. Easy to Run a Business across all States Uniformly
GST would replace VAT all over India. This means that a business wouldn’t have to worry about keeping up with VAT compliances that are different in every state. Carrying out business activities will become comparatively easy as they do not have to deal with different kinds of VATs levied in different states.

2. Fewer Tax Compliances
Central GST would replace – Service Tax, Central Excise Duty, Duties of Excise, Cesses and Surcharges and Customs Duty
State GST would replace – State VAT, State Cesses and Surcharges, Central Sales Tax, Tax on Advertisements, Lottery, Gambling, Purchase Tax, Luxury Tax and Entertainment Tax.

This will further ensure improvement in the implementation of the tax system while cutting down on compliance rates whereby further ensuring a reduction in tax related disputes.

3. Faster Transportation of Goods
It will be of immense help to the logistics sector and will also result in the faster transportation of goods as there will be no hour long waits at the Sales Tax check posts across borders due to the elimination of several indirect taxes.

4. Indirect Benefit to Startups
Startups are required to register for VAT if their turnover is more than 5 lakhs, and in some states 10 lakhs. With the coming of GST, businesses with an annual turnover of over 10 lakhs (uniform across all states in India) are required to register for GST. Additionally, businesses with an annual turnover between 10 – 50 lakhs will be taxed at a lower rate.

5. Increase in Foreign Investment
The goods manufactured within India will become more competitive in the international markets due to reduced costs which will, in turn, foster the growth of Indian exports.

6. Sectors that will apparently reap the most benefits:
Cement, Building materials, Automobiles, Metal, Consumer Durables, Entertainment, Fast moving consumer goods and Logistics.

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What is the Negative Impact of GST?

1. Proposed GST Rate Is Higher Than VAT
The rate of GST is proposed to be higher than the current VAT rate in India, which although reducing the price in the longer run, will be of no help in cutting down prices of commodities.

2. Dual Control
A business will be indirectly controlled by both the Centre and the State in all tax related matters. The State will lose autonomy to change the tax rate which will be regulated by the GST Council.

3. Certain Sectors Will Face a Negative Impact
Sectors that are currently enjoying no excise duty or have enjoyed a lot of tax benefits will have to bear the brunt of a higher tax. These include Textile, Dairy Products, Media, Pharma, IT/ITeS, and Telecom. The same goes for products. It is supposed that the prices of the following commodities will increase – credit cards, mobile phones, and jewellery.

4. Loss Incurred By the Manufacturing States
Since GST is mostly related to the manufacturing segment, most manufacturing states may incur losses. But the government has proposed to compensate for those losses for a period of 5 years.

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