Goods and Services Tax is a reality now. The only decision left in this regards is the roll –out date. It is the biggest tax reform in India since its independence. Once GST rolls out, it would have significant impact on every segment of business entities be it traders, manufacturers, agents etc. The Arvind Subramaniam Committee has proposed the rate of 18% for GST. This is a collective rate which will have two constituents, Central GST (CGST) & State GST (SGST) at 9% respectively.
Out of all the segments of the business entities GST will have far reaching impact on traders and would result in reducing the prices of the goods supplied by such traders. In the pre-GST regime when a trader used to make inter-state purchase of goods he was charged central sales tax(CST) at the rate of 2% which was not allowed as the input credit when he sold those products in his own state. But in post-GST regime he shall be charged Integrated GST (IGST) on his inter-state purchases, the credit of which shall now be available against the tax liability incurred on sale of goods. But the vital point is that any trader having annual turnover of Rs 10 lakhs have to file 3 monthly returns along with one annual return i.e. a total of 37 returns under GST regime which may prove to be heavy compliance cost. Let’s understand the situation of trader under the GST Regime by way of illustration.
Illustration 1: When trader makes an inter-state purchases:
| Description | Pre-GST Regime | Post-GST Regime |
| Amount (in INR) | Amount (in INR) | |
| Manufacturer | 1000.00 | 1000.00 |
| Freight/Transportation | 100.00 | 100.00 |
| Excise Duty | 125.00 | |
| CST/IGST Applicable | 20.00 | 198.00 |
| Service Tax on Freight (15%) | 15.00 | — |
| Total Cost | 1260.00 | 1298.00 |
| Value Addition (say 15%) | 165.00 | 165.00 |
| VAT at 4%
(1425 X 4%) |
57.00 | — |
| CGST @ 9% | — | 113.85 |
| SGST @ 9% | — | 113.85 |
| Less: Input tax Credit | — | 198.00 |
| Net Taxes Paid | (125+20+15+57=217.00) | (198+227.70-198) = 227.70 |
| Total Cost to consumer | 1,482.00 | 1,492.70 |
| Effective Rate | 14.65% | 18.00% |
| Increase in prices (1492.70-1482) = 10.70 | — | 0.73% |
Illustration 2: When trader makes an intra-state (within state) purchases:
| Description | Pre-GST Regime | Post-GST Regime |
| Amount (in INR) | Amount (in INR) | |
| Manufacturer | 1000.00 | 1000.00 |
| Freight/Transportation | 100.00 | 100.00 |
| Excise Duty | 125.00 | |
| GST Applicable | — | 198.00 |
| Service Tax on Freight (15%) | 15.00 | — |
| Total Cost | 1240.00 | 1298.00 |
| Value Addition (say 15%) | 165.00 | 165.00 |
| VAT at 4%
(1405 X 4%) |
56.20 | — |
| CGST @ 9% | — | 113.85 |
| SGST @ 9% | — | 113.85 |
| Less: Input tax Credit | — | 198.00 |
| Net Taxes Paid | (125+15+56.20=196.20) | (198+227.70-198) = 227.70 |
| Total Cost to consumer | 1,461.20 | 1,492.70 |
| Effective Rate | 5.24% | 18.00% |
| Increase in prices (1492.70-1461.20) = 31.50 | — | 3.00% |
From above details it is clear that GST is not in favour of the trader whose effective VAT rate is less than 18%. Only states where the effective rate of VAT is more than the GST rate, there only could be a little sigh of relief for the traders. Also GST Would prove to be a costly affair for the consumer as well as it will result in inflationary effect of 10% to 12%. Since the compliance cost of GST is also very high, it will add on to the cost of the goods/services.
(Author can be reached at +91 9888-090-008 or on mail-Mygst.mytax@gmail.com)
Author Bio
How do we accomodate excise element which gets merged in 18% to make it more interesting and meaning ful to understand the real impact.