The Indian government in its latest Union Budget announced a roadmap for the Goods and Services Tax (GST). The GST regime is likely to be implemented by April 2012. This regime is likely to bring down the prices of goods that we buy. Consequently, the retailing companies are expected to benefit out of increased consumption. Let us understand how.
What is GST?
Goods and Services Tax is a comprehensive tax levy on manufacture, sale and consumption of goods and services at the central level (CGST) and at the state level (SGST). This tax is collected on the value added to goods and services at each stage of purchase and sale in the supply chain (refer to the table below). This means that GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services. Consumer who is the end user of the good or service ultimately bears this tax.
Will GST be an additional tax burden?
No, it certainly will not be additive in nature. In fact, introduction of GST will result in abolition of a number of taxes like octroi, central sales tax, state level sales tax, stamp duty, turnover tax, etc. It will be an all inclusive tax and subsume all taxes that are currently being paid on goods and services in India.
Why are some states opposing?
Implementing of GST will require a major revamp in the IT systems and administrative infrastructure. Many states are not yet ready with such a support system. Also, at present different tax rates prevail in the Indian states. The states fear that the uniform SGST which is decided might be lower than their existing rates thereby leading to losses. What needs to be noted is that currently, states do not charge separate service tax. They enjoy a share in the Central Sales Tax kitty, but once GST comes into being, this anomaly will stop to exist. Since there will be no distinction between goods and services under the GST regime, the sates might benefit out of increased revenue on account of services.
Impact on Retail
Rentals are one of the main costs of retailing industry and it attracts service tax at 10%. Currently, the retailers cannot set off these costs like the other industries. This they feel is an additional cost of operating in this industry which is unfair to them. Under GST, taxes on services would be available for set off against taxes on goods. Thus, the retailers would be positively impacted.
The lack of uniformity in state VAT laws as well as in compliance measures; result in additional burden on retailers. It is expected that these issues will be addressed under the uniform SGST (State Goods and Services Tax).
Let us try and see how this happens.
The goods that we buy from shopping outlets go through a number of stages till they reach the shelves. And at every stage tax has to be paid thereby increasing the price of the goods. With GST, this tax burden will come down. The following table will help us understand this better.
|Stage of supply chain
||Purchase value of Input
||Value at next stage
||Rate of GST
||GST on output
||Input Tax credit
||Net GST= GST on output -
Input tax credit
||13-10 = 3
||15-13 = 2
||16-15 = 1
Thus, the retailers will pass on the benefit of the reduced tax incidence to their consumers thereby reducing the prices of goods sold.
In the recent past, Indian consumers have always witnessed hikes in the prices. Reduction in the prices will be a welcome new phenomenon for them. With GST coming into effect, their purchases will cost them less and hence they will be willing to shop more. More shopping would mean more revenue for retailers.