In last few weeks and months we are hearing about GST (Goods and Service Tax) quite often. This is one of the biggest changes in tax system ever in Independent India. Previous government though proposed but never had intentions to pass the same since it increases accountability and transparency in the system, along with making Indian economy more organized. But Modi Government passed this revolutionizing tax change which will further boost our economy with many other important steps to make Indian economy fundamentally stronger.
A lot has been shared over internet about GST registration. Today we will discuss about impact of GST on inflation tax evasion and black money. Recently, after the passage of GST through Parliament there have been lot of discussions on these three topics as the Prime Minister says that GST will reduce black money. Finance minister is saying that it will reduce the tax evasion in the system. And RBI is saying that impact of GST on inflation will be minimal but obviously it will depend on the rate of GST which is decided by GST council.
So first we will discuss about the impact of GST on inflation and we will see all the factors, which are leading to higher inflation, and factors which will lead to lower the inflation. Impact of GST on inflation will depend of course on the rates of GST which are from nil to maximum 28% which was speculated to maxed out to 40%. Already, with such competitive tax rates we would see lowering prices of all essential commodities. With major commodities falling in 5% and 12% rates it will boost Indian economy in coming years and efforts of Make In Inda.
However, some areas will be slightly expensive. Lets look at those factors that are going to increase the inflation. Services will become more expensive as the current service tax is around 15% after GST it is going to be between 18 to 20 percent. So the industry like telecom airline insurance software etc will become more expensive due to higher tax, where the service component is around 30 percent in current CPI index which is the most tracked inflation index in the country today. Also there are other industries which currently enjoys lower tax rates and will be taxed more once GST comes. Such as clothing to air and electricity, these factors will increase the inflation in short-term and medium-term.
Now we will talk about the factors which will help in reducing the prices so industries FMCG, automobile, entertainment, cement etc will enjoy lesser tax post GST implementation as their current taxes are between 25 to 30%. So this factor will come with somewhat offset along with the impact of other two factors which we discussed earlier.
Secondly, as we know GST is a value-added tax and is literally a uniform tax across all the states so there will be a significant reduction on over all tax. Which currently exists in the system, which will help in reducing total tax liability.
Third is the efficiency gain due to one tax one nation structure which will help in cost reduction of the goods so these two factors will reduce the inflation in medium-term and long-term so in the long term there wouldn’t be any impact of GST on inflation. But yes in short-term there could be some impact. Like most of the estimates saying that it could be between point 2 to point 3 percent on CPI for 18 percent GST products and services and it could be between 0.3 to 0.7 percent higher inflation for 22% GST product and services. This speculation is because similar experience was felt by few countries, which have recently implemented GST such as Canada Australia and New Zealand.
Now we will discuss about how GST will reduce the circulation of black money as well as reduce the tax evasion. Before moving there, we need to understand how GST which is a value-added tax works in both within the state or intrastate transactions. We will first discuss about how intrastate transaction works here. We have taken the example of Maharashtra. So suppose a manufacturer in Mumbai who manufactures glass sheets has sold the glass sheets for rupees 100 to another manufacturer in Pune who makes crockery. Out of those glass sheets now the manufacturer in buying paid the state GST of eight percent which is rupees eight and central GST at eight percent which is also rupees eight. So he paid or total of 16 rupees tax. Now Pune manufacturer added hundred rupees value to it and sold it at rupees 200 to a trader in Nagpur. So the same tax rates are levied, ie., 8 percent as rupees 16 plus 16 which is a 32 rupees. But since he has only added hundred rupees value and there was already a 16 rupees tax paid by the earlier manufacturer so this 16 rupees will be credited back to Pune manufacturer. So ultimate liability for him will only be 32 minus 16, which is rupees 16.
So this is value added tax. Now let’s discuss the case of interstate GST. Suppose the Pune manufacturer sells to a trader in Bhopal instead of Nagpur. So now what happens is we have two new terms SGST and CGST will get replaced by ID as stated interstate GST of suppose 16 percent and it will be entirely collected by the centre. This amount will be credited back to the Pune manufacturer. So this is how the GST which is a value-added tax works.
Now we will look into how GST impacts black money and tax evasion. So these are the features of GST. There will be a complete trail of all transaction at every level. From manufacturer till the last retailer all the credits as well as all the tax paid. For example, if a retailer has purchased goods from a wholesaler and is not showing that purchase today but after GST, he will not be able to do so because he wants tax credit he needs to maintain the book of sales for which proper bills will be generated. Secondly, the entire process of tax credit will be online through GST network. So if a trader needs a tax credit he needs to get registered on GSTN and then only he will get tax credit.
The third is that there could be a possible ban base registration for all the traders which will help in giving the complete picture for both of his income tax which is his direct taxes as well as indirect taxes and help the tax agencies to compare both the taxes and understand the anomalies. Currently the state and central tax systems work in silos and they are not integrated and do not talk to each other but with GST and GSTN there will be an integration of state and central indirect taxes which will help provide the complete picture. Currently, state monitor their own indirect taxes and centre monitor their own indirect taxes but now with GST there will be a dual monitoring structure where at each stage both state and centre will monitor and it may become difficult for the defaulters to get saved from both.
The last factor we will talk about the three sectors which create maximum black money in India which are alcohol, real estate and precious metal. Alcohol is still kept out of GST which may change in few years though but with real estate and precious metal coming under GST purview there could be a good reduction in black money circulation in India. For example in real estate the uniform tax structure will improve tax compliance by developers, local builders, property dealers, investors and occupiers and the mandatory paper trail that GST will create will go a long way in improving tax compliance.
So all these factors in Prime Ministers and finance ministers words will check leakage. And increase tax base for both Center and States eliminate corruption and cascading effect of tax on tax reduce tax evasion and improve ease of doing business which will ultimately reduce the circulation of black money in India. With policies like Make in India and Startup India Company Registration has become way easier. We are the dawn of a New India with a more transparent and robust economy thanks to Prime Ministers and his team in executing biggest tax reform of Independent India.