The Goods and Service Tax (GST) was implemented by India on 01 July, in line with a One Nation One Tax Model. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Historically the taxation of goods and services in India followed its federal structure, with various state regimes co-existing with the central tax rules. One of the key advantages of this unified tax model is to ensure businesses could have tax neutrality wherever they do business in the country. Such a big revamp doesn’t happen without its challenges, however the benefits are immense.
GST is a mechanism of seamless tax-credits throughout the value-chain, and across boundaries of States. This doesn’t mean that there wouldn’t be a state tax. There will be two components of GST – Central GST (CGST) and State GST (SGST). Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State. The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output.
At the heart of the GST implementation is a state of the art IT infrastructure. The tax-payer gets a single GST portal and can manage all their GST related reporting. The system supports connecting through mobile, tablets or even through API integration. The system also provides end to end automation for tax authorities, with capabilities such as reporting and analytics.
In the past, businesses could tell their auditors the amount of tax they wanted to pay for the year, and the books were prepared accordingly. That is no longer possible. For every transaction reported by a business, there would be need to be a matching transaction from a supplier or a buyer. However, this also removes the bureaucracy and the complexities for businesses that constantly have to do inter-state transactions.
For an SME that is looking to VAT register across multiple states, GST allows a simple central process of registering itself. They don’t have to navigate through the complexities of different state tax regimes anymore.
GST also extends the basic exemption limit to pay VAT from a previous Rs.5 Lakh per annum to Rs.20 Lakhs per annum. These rules are slightly different in some states where the exemption is at Rs.10 Lakhs.
GST views goods and services components as one and the same, which means there is no confusion around what is a good vs service. This not only simplifies the process massively for the tax payers, but will also stop instances where accountants used the ambiguity between the two (Goods and Services) to evade taxes.
However, more importantly in my view, start-ups/SMEs can expand operations across multiple states without the burden of tax on interstate sales. With GST, tax credits would be transferred irrespective of where the transaction happened in the country. This is a whole new landscape that businesses would exploit.
Arunkumar Krishnakumar is a Fintech thought-leader and an investor.
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