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What is GST?

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August 8, 2017 in Economics

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In this post, we will discus on the reform of the Indian tax, GST (Goods and Services Tax), which was passed Aug. 3, 2016 and will revolutionize the Indian economy to make the most efficient in the world. This reform is an amendment of the Indian Constitution which was described by the Minister of Finance Arun Jaitley of “most important tax reform since independence”

What is GST? and What is the benefit of the GST?

India is a federation of 2 territories and 29 states, driven by regional parliaments. To date, there are about twenty different taxation systems that affect territories, goods and various services with multiple features exemption and partial subjection.

A large disparity between the territories and a good produced in an Indian State A, transformed into an Indian state B and marketed in a C state is taxed more than the imported product.

What will look like the new GST?

A single rate for goods and services, a centralized, single tax for 29 states. There is a talk of a rate close to 18%, with a strong base of subject goods and services, except a few exceptions such as fuel, alcohol, and tobacco.

GST will work as a real VAT, with a justification of the deductible portion with the purchase invoices.

What is the difference between VAT and GST?

VAT is already long in India, then, is that the GST will replace it?
Currently the big difference is that VAT is only for the services, while the GST also applies to goods.

Moreover, the states set freely to date rates, and subjection to the methods of VAT. Now there is an inter-state competition to attract investment that results in dumping of VAT between states and causes a loss of revenue overall.

Here is a simplified example to illustrate this effect:

A vendor sells raw material to a manufacturer who sells the finished product to a wholesaler. An excise duty of 12% is levied on the raw material. This wholesaler in turn sells the product to a retailer who sells it to the consumer.
For example, we consider that the rate of GST is 10%.

GST will be managed centrally by the federal state and totally replace the VAT in its present form.

Who are the winners of the new GST?

To be finally passed, the constitutional amendment must be ratified by a majority of 29 regional parliaments.
A race against time is involved because the new tax will come into force in April, when will commence the next fiscal year. To date, seven parliaments have already approved (Assam, Bihar, Jharkhand, Gujarat, Delhi, Nagaland, Maharashtra).

The central government will compensate for 5 years financial losses caused by this reform for disadvantaged states.

It is hoped that Indian firms are true winners of this reform.
Instead of the superposition of at least 3 tax authorities (state, city and federation) as regards tax ad valorem , only one fee will be charged.
Reportedly this “Global” tax would replace not only VAT but also certain excise duties, customs duties, license fees and other awards. The effect of “tax cascade” resulting from the purchase and sale transactions will be canceled, ended the “tax on tax”.

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