July 1, 2017, witnessed the greatest tax modification in independent India. The Goods and Services Tax subsumed multiple state and central taxes resulting in a common national market.
The new tax regime will bring a free flow of goods and services while eliminating the cascading effect on taxes. It is estimated that Gross Domestic Product (GDP) may see an increase of 1.5% to 2% in the new tax regime.
Here are a few things that will help you understand how the new tax works.
1. Destination-based tax
The previous taxes were origin-based; in comparison, GST is a destination-based levy. The new regime adopts multi-stage collection at each stage in the supply chain cycle. However, the availability of the input tax credit (ITC) from the previous stage off sets the tax liability payable at the next stage. This helps in eliminating the cascading tax effect. It improves cash flows and consumers will benefit as overall tax will reduce the prices.
2. Input tax credit
This is one of the biggest indirect tax reforms. Because of the ITC availability, final users will bear only the tax paid at the last stage in the supply chain as previous liabilities are offset. The overall tax incidence on goods and services will, therefore, decrease in the new tax regime.
3. GST rates
The GST rates are classified under four slabs. These include 5%, 12%, 18%, and 28%. Some goods and services are exempt and attract no tax. Precious metals like gold will be taxed at 3%. An additional cess will be applicable on the maximum rate (28%) on specific luxury goods.
4. Different taxes
The new tax is classified as Central GST (CGST), State GST (SGST), and Integrated GST (IGST). CGST revenue will be collected by the Central Government. States are responsible for collecting the SGST. IGST is applicable on the intra-state supply of goods and services and will be collected by the center. Imports will attract IGST and exports will be considered as zero-rated supplies and will attract no tax. Exporters may claim the ITC benefits.
5. Payment liability
Businesses with a turnover exceeding INR 20 lakh will be liable to pay the new tax. A special composition scheme where a flat rate with no ITC benefits is available for companies with turnover up to INR 75 lakh is also available.
6. Transition stocks
For unsold inventories before the implementation of the new tax regime, retailers and manufacturers may carry forward ITC for 90 days. They may claim up to 60% of the ITC for inventories held on June 30, 2017.
7. Anti-profiteering mechanism
To ensure the benefits under the new tax regime are made available to the final consumers, an anti-profiteering mechanism is included. This clause makes it mandatory to pass on the tax benefits of ITC to the final consumers.
8. Decision mechanism
The GST Council recommends tax laws, rates, and all rules and regulations. The decisions are made by a 75% majority. The Centre and at least 20 states are necessary to reach majority.
9. Exempt from GST
Products like aviation turbine fuel, diesel, and petrol are exempt from tax under the new regime. The Council will make a decision on these items at a later date.
All control of almost 90% taxpayers with turnover less than INR 1.5 crore is with the state authorities and 10% will be with the Centre. All control for taxpayers with more than INR 1.5 crore turnover will be equally divided between the Central and State authorities. The states will be compensated for the loss due to the new tax for a period of five years.