The Goods and Services Tax will bring several changes in almost every industry in India. However, the manufacturers and traders will be affected by it the most.
The following are some of the most important changes that the traders will need to wrap their head’s around with:
Goods vs Services
One of the biggest reasons why the current tax regime is so complicated is because there are frequent disputes on certain transactions as to whether they should be categorized as goods or services. Creating invoices is also difficult for the traders for the same reason as two separate rates are charged for goods and services. However, since GST will consider both of these equally and levy the same charge on both, it will make doing business a lot simpler and easier.
At present, goods are mostly sold within the state to prevent the CST and entry tax. However, once GST is implemented, traders will be able to sell their products to the farthest corners of the country without worrying about taxes, as there will be no entry tax or CST.
The business industry has to deal with great losses in the current system because the trucks responsible for goods transportation waste a lot of time at the check-posts. In fact, it has been found that long-distance trucks are parked 60% of the time.
Since GST aims at eliminating the practice of tax collection at the borders, it will benefit the businesses in two ways:
- They will save money on the border tax.
- They will be able to deliver goods to their customers faster and thus improve business efficiency and also minimize transportation costs.
Rate of Tax
The GST regime will follow a four-tier tax structure of 5%, 12%, 18% and 28%, with lower rates for the essential goods and higher rates for the luxury goods. In fact, for the essential items such as food, a zero rate will be levied. On the other hand, luxury items such as tobacco and aerated drinks will be levied an additional cess apart from the base rate itself.
To extend relief to small traders, the Goods and Services Council has also settled for the rates 2%, 1% and 5% for small manufacturers, small traders, and small restaurants, respectively. These entities will come under the new Composition scheme, the eligibility criteria for which is an annual turnover of less than Rs.50 lakhs.
Input Tax Credit
One of the most anticipated reforms of GST is Input Tax Credit which allows the traders to claim the repeat tax paid by them. However, there are a few challenges to this system. For instance, if a trader has paid a repeat tax to their supplier then they can claim a refund (credit) only if the supplier paid the tax themselves. Since there is a chain of vendors, manufacturers, and traders in the process, they all have to comply with the GST law and pay taxes so that the eligible taxpayers can claim input credit.
GST will make invoicing, filing of returns, and registration electronic, and the traders will have to deal with these by entering information through their accounts via the Internet. Although some of the traders and small business owners might not be happy with the implementation of digitization in terms of the same, replacing the traditional way, it’s in their best interest to adapt accordingly.