The Goods and Services Tax (GST) finally seems to become a reality, now that Rajya Sabha has shown its support for it. Ever since the NDA government brought it to the table again in 2014, the GST bill was synonymous with “roadblock”, until now.
The main aim of the GST would be to bring all current forms of indirect taxes under one head. This would improve tax collection and reduce tax evasion. Now I will take an example to show how it would affect the amount of tax a person would have to pay.
The Pre-GST Scenario:
Imagine that a factory producing kurtas buys cotton from a farmer worth Rs. 100. Also imagine that the indirect tax rate in the economy is 10%. Now if the factory produces a kurta worth Rs. 130, it would have to pay a tax of Rs. 13 on it. This means that the retailer who buys it will have to pay 130+13 = Rs. 143.
Now if the retailer’s margin is Rs. 10, the price of the kurta becomes 143+10 = Rs. 153. Adding the amount the retailer has to pay as tax as Rs. 15.3, the selling cost of the kurta becomes 153+15.3 = Rs. 168.3.
The GST Era Scenario:
Now imagine that the same situation occurs under the GST regime. This time, though, the price setting will undergo some changes.
This time, when the factory produces the kurta worth Rs. 130, it still has to pay a tax of Rs. 13. But this will not be added to the price when the retailer buys it. The retailer, now adding his value of Rs. 10, brings the total value added to 130+10 = Rs. 140.
The tax on the price of the kurta would be Rs. 14 (10% of 140). But under the GST regime, the retailer will only pay the amount from the tax not paid by the factory. This will be 14-13 = Re 1. This brings the final price of the kurta to 140+14 = Rs. 154.
Compare the prices under the 2 situations: Rs 168.3 and Rs 154. Also compare the tax revenue generated in both situations: Rs 28.3 compared to Rs 14 in the GST era.
To avail of the lower tax benefit, the retailer would like to ensure that the factory owners have paid their tax as well. Otherwise, they would not buy their inputs from them. Retaining its customers gives the factory the incentive to pay its taxes. This reduces tax evasion.
The government is banking on the lower tax rate under GST to increase the tax base (the number of people paying taxes). Here are a few other phenomena which are being predicted:
- Over the next 3 years, GST will bring about inflation. Seems odd? A lower tax rate should have reduced prices, right? But many products – which till now were not taxed – will come under the ambit of GST, thus increasing their prices
- Many people might lose their jobs. The GST is supposed to increase the tax base. This would imply that many areas in the informal sector will now come under the new tax regime. The subsequent increase in costs could be accompanied by layoffs to remain profitable
There are upsides to the GST. There are some downsides to it as well. But this is all theory. The world works in random ways. How the GST will affect India’s economic growth will only be certain once it is applied.
That will happen only till 2018 presumably. Till then, we will make do with the theory itself.
(Source: The Indian Express)
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Views presented in the article are those of the author and not of ED.