The Biggest Tax Reform

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GST may be a mixed bag for MSMEs, but will not have negative impact

Goods and Services Tax, or GST, is an indirect tax that experts unanimously claim will revive the fortunes of the Indian economy. It has been described as the biggest tax reform in India since Independence.

Internationally too, GST is a globally accepted indirect tax system with more than 140 countries having adopted it.

Here are few things you should know about GST just before its anticipated rollout:

GST is a value-added tax and will replace all indirect taxes levied on goods and services by the Indian Central and State governments. It is aimed at being comprehensive for most goods and services.

Exports will be zero-rated and imports will be levied the same taxes as domestic goods and services adhering to the destination principle. There would be a single tax policy across the country that will allow free movement of goods and services to each and every state of India.

The cost of the product throughout the country would be almost the same and customers will have more money in their pocket to spend. This will likely boost India’s GDP by 1 to 1.5 percent, according to experts.

Since GST will cut down a large number of taxes imposed by the central government, this will lead to the creation of a unified market, which would facilitate seamless movement of goods across states and reduce the transaction cost of businesses.

The commodities that are exempted from GDP are potable alcohol, aviation turbine fuel, high-speed diesel, and petroleum. Production and distribution of goods and services are increasingly used or consumed and vice versa. Benefit people as prices will come down which in turn will help companies as consumption will increase.

GST will not be a cost to registered retailers, so there will be no hidden taxes and the cost of doing business will be lower.

It will also help to build a transparent and corruption-free tax administration. Presently, a tax is levied when a finished product moves out from a factory, which is paid by the manufacturer, and it is again levied at the retail outlet when sold. GST will be good for export-oriented businesses, because it is not applied for goods/services which are exported.

PIA on GST

Explaining his take on GST vis-a-vis micro and small enterprises in Peenya Industrial Area, Sri R. Krishnamurthy, President, PIA, acknowledged that the Micro, Small and Medium Enterprises (MSMEs) were in confusion about the implementation of GST as the rules and regulations are yet to be clarified. Stating that there could be a general perception that GST may negatively impact SMEs as aspects like excise exemption will disappear when GST rolls out, he averred that this would not be the case after it was implemented and there would be no negative impact on SMEs. The Government’s intention behind GST is to expand the taxpayers’ base and not to enhance tax burden on business/individual tax payers.

He however cautioned that irrespective of the bright side of upcoming GST, SMEs must be mindful of its accompanying challenges such as increase in compliance costs and alignment of IT systems with new processes. Thus, for the SMEs, GST could be a mixed bag of opportunities and challenges.

In another perspective, indirect tax experts say that the model GST law seeks to bring each person with an aggregate turnover of above INR 10 lakhs within the umbrella of GST. This should create a level playing field for organized and unorganized sector by curbing scope of various tax evasion practices such as creation of multiple entities to enjoy high exemption thresholds.

Another view is that GST could vitiate the existing protectionism provided by the government to SMEs which necessitates them to get out of their comfort zone as far as indirect tax costs and benefits are concerned.

The flip side is, SME manufacturers presently exempt (if annual taxable turnover is up to INR 1.5 Crores) from paying excise duty would be liable to pay full rate of GST. This may bring their products up for stiff competition with those of industry leaders in terms of tax costs involved.

Further, small scale service sector is also likely to face an increase in tax rate under GST as against the present effective rate of 15 percent. However, better availability of input tax credits should leave the increased tax incidence on services to only marginal. Trading entities, on the other hand, should largely welcome GST as it creates a single uniform market for them across the country with improved ease of doing business.

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