This is what happened before GST regime.
State government charged VAT on sale of goods, but VAT rates were not uniform throughout India. A laptop bag might attract 12% VAT in one state and 18% VAT in another.
This provided scope for “Rate Arbitrage” i.e. buying from another state for profiteering, even if same item available in home state. Then State government will have to deploy more officials at the check posts, leading to bribery, harassment, inspector-raj.
Suppose, a mobile is manufactured at Rs. 10,000/- & is subject to 9% Excise duty and 9% VAT. Then,
- 9% Union Excise duty = 900. (calculated on base of 10,000)
- 9% State-VAT = 981 (calculated on base of 10,900 after including excise duty).
This is what happens now after introduction of GST
GST provides input credits in more efficient and comprehensive manner therefore, instead of trying to become Jack of all trades, company will pursue Ancillarisation, Subcontracting and Outsourcing to procure from MSME industry and freelance professionals, providing more jobs.
SGST/UTGST rates are uniform throughout India, so there is no scope of rate arbitrage. Whether you buy a laptop from Chennai or Mumbai the GST% tax rate will be same.
Both CGST and SGST are computed on the same base (Rs. 10,000), therefore tax burden on final consumer is less in GST regime, than in Excise-VAT regime. Thus, GST will reduce overall impact of tax on end-customer, so his purchasing power will improve, leading to more demand, more sales, more business expansion and GDP growth & jobs.
Zero Rated Exports
- When company buys raw material or intermediate goods it will have to pay GST but if final product is exported outside India (or sent to Special Economic Zone/SEZ in India), it’ll be subjected to 0% IGST.
- So, whatever GST the company had paid on the inputs, all of that will become its Input Tax Credit (ITC) and company can use this ITC to pay for taxes on the purchase of raw material and intermediate goods in the next time), thus reducing its cost of production.
- This will improve price competitiveness of Indian products in foreign markets.
- Australia and Other GST Countries also follow similar “zero rated export” regime.
- GST covers both goods and services, with standard rates, minimal number of cess/surcharges.
- GST online portal and e-way bill system reduces the interface between tax-officials and the assesses, thereby reducing the scope of harassment, bribery and Inspector Raj. (promoting Ease of doing business).
- GST provides input credits to suppliers thereby incentivising them to sell with invoice at every stage. Thus, GST will expand our tax base and improve tax collection, and deter tax evasion.
- GST Input credit system reduces the cascading effect of taxes, decreases cost of manufacturing & selling, while its anti profiteering authority ensures that such benefits are passed on to the customers in the form of reduced MRP.
- Federal nations such as Canada and Australia shifted from VAT to GST regime. It helped boosting their revenue, GDP and exports.
Thus, GST will help to create a unified common national market for India, & catalyse Made in India initiative by Indian Government.