GST #1: What and Why?

GST. Goods and Service Tax. It replaced all indirect taxes imposed by state and center in 2017. Simply put, GST is a form of value-added tax (VAT). What does that mean? An example helps. Take a company that buys steel to make and sell pressure cookers. The idea of VAT is that each layer (mining, steel maker, pressure cooker maker) pays tax only on the value addition it did (mining, making steel, making pressure cooker), not for the entire chain of activities preceding it. This makes sense by considering the alternative to VAT – (1) if each layer pays tax for the entire chain, well, we’re collecting tax multiple times for the same lower-level activities, (2) which raises the cost and thus sale price of the product, (3) in turn, making Indian goods expensive and thus uncompetitive in the global market.

 

Other advantages flow from a single tax system. If simplified enough, it makes compliance and comprehension easier. A corollary of that is greater transparency. Since taxes are paid once, other overheads like paying state level taxes during inter-state movement can be eliminated. In turn, all that can lead to more foreign investment which can help create more jobs.

 

Its disadvantages? Companies need to learn the new tax regime and associated software. That can be a significant overhead for smaller businesses. The paper trail to prove compliance is yet another additional overhead for businesses to maintain. The number of tax rates are 5 – which, as per many analysts, is too many and complicates tax calculation and opens the door for (mis)interpretation and thus claims and counter-claims.

 

A couple of other impacts of GST are not due to GST per-se, but they affect people nevertheless. Like the reduction in minimum annual revenue that made a company eligible for taxation from ₹1.5 crore to ₹20 lakhs. This brought many more small businesses into the tax net. The overheads mentioned earlier are even more costly for tinier businesses. The system has made tax evasion harder, at least for smaller businesses, which is a good thing because it made the economy more formal. The downside of coming into the tax radar was that the price of many goods made by such tiny companies went up, which then had a cascading effect on the price of, say, the real estate market. But again, the points in this para are not due to GST itself, but yes, they are still some of the reasons why a part of the population criticizes GST.

 

This blog then was about the idea and the thought process behind GST. In the next blog, I will go into the devil – the details, and the execution.