Are you planning to start your business online? Do you know the formalities required to start a company or a business? We have already explained about various kinds of business entities in the previous article. But that is not enough to kick start your business. In a country like India where tax system is very complex, most startups get tangled in the complex web of various direct and indirect taxes. There are over seventeen types of taxes that a business has to pay to run smoothly. That makes a big portion of your money and consumes a lot of energy and time.
Nevertheless, it seems things will soon change with the biggest tax reform in Indian finance history. We are expecting a major change in how we pay our taxes as soon as Goods and Services Tax (GST) will be applied. The new tax is a complex medley of approx 17 taxes including Value Added Tax (VAT), service tax, central sales tax and entry tax to name a few.
Before we dig deep into GST, let us understand the need of it with an example. You have planned to start a business and your manufacturing unit is in Delhi. You have imported the raw material from China because it is much cost effective. For this you need to pay custom duty over shipping charges and then your material will travel through various states via road before reaching to your factory, and you have to pay individual road tax in every state. By the time your material will reach you, its cost has already increased more than 30% of what you have actually paid for it.
And now when your final product will be ready, you would have to pay approx 10 different taxes to Central and State Governments. Moreover, at certain points, you will find that you have paid a tax over a taxed amount.
If you are feared of taking up a new business, then you will be relieved to find that Goods and Services Tax (GST) will make the taxation process exceptionally easy.
There are many speculations about GST and many of the aspiring business people have been asking the AMZ Blast team about how it will affect their online business. So we have decided to put together the complete information about the new tax, its benefits and after effects.
What is GST?
The Goods and Service Tax (GST) is a ‘destination-based tax’ that will blanket most of the indirect taxes imposed by Central and State Governments. This means the tax will be charged where the goods are consumed instead of where the goods are produced. The tax will likely to be at 18 percent and covers multiple indirect state and federal taxes such as Central Excise Duty, Service Tax, Countervailing Duty, Special Countervailing Duty, Value Added Tax (VAT), Central Sales Tax (CST), Octroi, Entry Tax, Purchase Tax, Entertainment Tax, Luxury Tax, Advertisement Taxes and taxes applicable on lotteries.
Presently, each state is considered a different market and moving good from one to another state with differential taxes becomes very difficult and costly. With GST implementation, it will be possible to create a unified market and finish this demarcation.
Features of GST
- It is expected to be a dual-tax structure where central and state GST will each be of 10%. However, many experts say the rates could settle anywhere between 20 and 24%.
- There will be a four-tier tax structure under GST with slabs of 5%, 12%, 18% and 28%. This will make various goods under the tax will be cheaper while many others will become expensive.
- Sourcing, distribution and warehousing of goods will be easier between the states.
- The companies will be out of the danger of double-taxation.
- It is considered that the GST will fuel inflation for some time. For instance, rise in price is expected from restaurants, movies and other entertainment modes as the GST rate starts at 5% and 18%.
- The new taxation doesn’t include petroleum and liquor which are the two major revenue sources for the government.
- To avoid overlapping between Central and State over revenue collection from GST, every taxable asset has been divided in two parts. One is where the Central has the power and the other is where the state has the power to collect taxes. In third case that is Integrated GST, the union will collect the taxes over the movement of goods. However, this will be later transferred to states.
- According to experts items like entry-level cars, two-wheelers, SUVs, car batteries, paint, cement, movie tickets, electronic items such as fans, water heaters, air coolers etc. will get cheaper while cigarette, commercial vehicles, mobile phone calls, textile and branded jewelry may get costlier.
Benefits of Goods and Services Tax (GST)
- Life will be simplified as approx 17 different types of tax levies will be replaced. This means a fall in compliance cost.
- Currently, the market is fragmented along state lines. That means the cost is 20-30% higher. GST will provide a common market.
- Under the GST national market, the current 2% inter-state levy will be dispersed. This means less developed states will get a lift as more production opportunities could be created.
- As there will be no tax over moving from one state to other, the logistics cost will get lower. Indirectly, it will affect the production cost and manufactured goods could become cheaper.
- According to HSBC, there will an 80 basis point rise in GDP growth over 3 to 5 years.
- As the GST will address multiple growth factors such as cascading of tax, inter-state tax, fragmented market and high logistics, it could make manufacturing more competitive. Moreover, the new tax levy provides for appropriate countervailing duty, it will increase protection from imports.
- As of now, there is no input tax credit for many capital goods. However, with the GST, a drop of 12 to 14% in the cost of capital goods is expected. The market can also expect a rise of 6% in capital goods investment.
- With the new ax implementation, we can also expect a rise in ecommerce business. For now, many sellers do not ship to particular states because of the state restrictions and levies. But with the GST, this will improve.
There are numerous questions about the GST. Why goods like petroleum, tobacco and alcohol are exempted? Won’t the high tax rate stoke inflation? How the Central and State Governments will manage together to generate revenue? Most of these questions could only be answered only when it is implemented. However, one thing is clear that companies and tax collectors have to be well prepared for major changes in business processes to make way for the historical tax change.
While this was an overview of the new tax plan, as an online business trainer, AMZ Blast has to dig up how the GST will affect e-commerce. So stay with us for more highlights on the impact of Goods and Services Tax on online business.