Benefits of GST in India, GST Benefits to Consumers & Businesses

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Benefits of GST in India, GST Benefits to Consumers & Businesses. GST will be a game changing reform for the Indian economy by creating a common Indian market and reducing the cascading effect of tax on the cost of goods and services. It will impact the tax structure, tax incidence, tax computation, tax payment, compliance, credit utilization and reporting, leading to a complete overhaul of the current indirect tax system. Some of the benefits are mentioned hereunder. Now check more details for “Benefits of GST in India, GST Benefits to Consumers, Businesses & Govt” from below….

Benefits of GST in India, GST Benefits to Consumers & Businesses

Benefits of GST in India

GST Benefits to Businesses:

  1. Wider tax base, necessary for lowering tax rates and eliminating classification disputes
  2. Elimination of multiplicity of taxes and their cascading effects
  3. Rationalization of tax structure and simplification of compliance procedures
  4. Harmonization of center and state tax administrations, which would reduce duplication and compliance costs
  5. Automation of compliance procedures to reduce errors and increase efficiency
  6. The GST structure would follow the destination principle. Accordingly, imports would be subject to GST, while exports would be zero-rated. In the case of inter-state transactions within India, State tax would apply in the state of destination as opposed to that of origin.
  7. Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.
  8. The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.

GST Benefits to Central and State Governments:

  1. Simple and easy to administer: Multiple indirect taxes at the Central and State levels are being replaced by GST. Backed with a robust end-to-end IT system, GST would be simpler and easier to administer than all other indirect taxes of the Centre and State levied so far.
  2. Better controls on leakage: GST will result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.
  3. Higher revenue efficiency: GST is expected to decrease the cost of collection of tax revenues of the Government, and will therefore, lead to higher revenue efficiency.

GST Benefits to Consumer:

  1. Because of efficiency gains and prevention of leakages, the overall tax burden on most commodities will come down, which will benefit consumers
  2. The essence of GST is that all goods and services be taxed at moderate rate. So in the long run it is expected that the burden of GST on common man will be reduced.
  3. A common man incurs various expenses on day to day which are charged to indirect taxes. Purchase of goods have a standard excise duty of 12.5% embedded in it and standard VAT of 14% appearing on the face of the invoice. The effective tax rate on goods is around 28% due to ‘tax on tax’ and no input tax credit available to dealer of the excise duty charged by the manufacturer. Service tax is levied at 15% on the services consumed. So optically it seems that goodwill become cheaper like small cars, FMCG products etc. may become cheaper.

Understanding GST Benefits via following Example:

Let’s take an example of Shirt from the manufacturer to the consumer and the effect on the price of the shirt in current regime V/S under GST regime.

Under GST Regime:

Stage 1 – Imagine a manufacturer of, say, shirts. He buys raw material or inputs — cloth, thread, buttons, tailoring equipment — worth Rs 100, a sum that includes a tax of Rs 10. With these raw materials, he manufactures a shirt.
In the process of creating the shirt, the manufacturer adds value to the materials he started out with. Let us take this value added by him to be Rs 30. The gross value of his good would, then, be Rs 100 + 30, or Rs 130.
At a tax rate of 10%, the tax on output (this shirt) will then be Rs 13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs (Rs 10). Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10).

Stage 2 –The next stage is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs 130, and adds on value (which is basically his ‘margin’) of, say, Rs 20. The gross value of the good he sells would then be Rs 130 + 20 — or a total of Rs 150.
A 10% tax on this amount will be Rs 15. But again, under GST, he can set off the tax on his output (Rs 15) against the tax on his purchased good from the manufacturer (Rs 13). Thus, the effective GST incidence on the wholesaler is only Rs 2 (15 – 13).

Stage 3 – In the final stage, a retailer buys the shirt from the wholesaler. To his purchase price of Rs 150, he adds value, or margin, of, say, Rs 10. The gross value of what he sells, therefore, goes up to Rs 150 + 10, or Rs 160. The tax on this, at 10%, will be Rs 16. But by setting off this tax (Rs 16) against the tax on his purchase from the wholesaler (Rs 15), the retailer brings down the effective GST incidence on himself to Re 1 (16 –15).
Thus, the total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs 10 + 3 +2 + 1, or Rs 16

Whereas under current regime:

Thus, if we consider the same example as above, the manufacturer buys raw materials/inputs at Rs 100 after paying tax of Rs 10. The gross value of the shirt (good) he manufacturers would be Rs 130, on which he pays a tax of Rs 13. But since there is no set-off against the Rs 10 he has already paid as tax on raw materials/inputs, the good is sold to the wholesaler at Rs 143 (130 + 13).

With the wholesaler adding value of Rs 20, the gross value of the good sold by him is, then, Rs 163. On this, the tax of Rs 16.30 (at 10%) takes the sale value of the good to Rs 179.30. The wholesaler, again, cannot set off the tax on the sale of his good against the tax paid on his purchase from the manufacturer.

The retailer, thus, buys the good at Rs 179.30, and sells it at a gross value of Rs 208.23, which includes his value addition of Rs 10 and a tax of Rs 18.93 (at 10% of Rs 179.30). Again, there is no mechanism for setting off the tax on the retailer’s sale against the tax paid on his previous purchase.

The total tax on the chain from the raw material/input suppliers to the final retailer in this full no-GST regime will, thus, work out to Rs 10 + 13 + 16.30 + 18.93 = Rs 58.23. For the final consumer, the price of the good would then be Rs 150 + 58.23 = Rs 208.23.

Hereunder a Table to understand the above example more clearly:

Stage Product Under Current Regime Under GST
1 Raw Material For Making a Shirt 10 10
1 Shirt Manufacturer 13 3
3 Wholesaler 16.3 2
4 Retailer 18.93 1
Total 58.23 16
Difference 42.23

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