On the 1st of July 2017, the country awoke to the implementation of the Goods & Service Tax (aka GST). Despite a lot of confusion about its principles and impact, we aligned our economic point of views towards it. Words such as ‘inflation’, ‘GDP’, ‘economic sector’, etc. were thrown around in polls, interviews and even memes. GST implementation mattered because it was expected to lower down the prices of essential commodities. GST was fixed for both goods and services with the idea to unify different tax rates. It brought in a huge development in India’s tax reforms. It impacted our standard of living, choices involving purchase of assets and financial planning.
GST enveloped a number of indirect taxes which included, VAT in states, Service tax, luxury tax, and taxes on Central Excise Duty. With so much attention and coverage on GST, the Budget 2018 will play second fiddle to the GST of 2017. Despite this, the Budget 2018 did throw in some key highlights. Today we not just take a look back on GST and its benefits, but we also link it to the 2 days old Budget 2018.
What is GST?
GST is an indirect tax that was implemented throughout India from 1st July 2017. Following the passage of the Constitution’s 122nd Amendment Bill, GST replaced the then separate taxes that were levied by the Central and State governments. GST was applicable to close to 1211 items. These items were taxed under a 4-tier tax structure (5, 12, 18 & 28%). The following levied taxes were unified under GST:
- Entertainment Tax
- Entry Tax
- Advertisement Tax
- Tax on lottery
- Central Excise Duty
- Service Tax
- Countervailing Duty
- Special Countervailing Duty
- Value Added Tax (VAT)
- Central Sales Tax (CST)
- Luxury Tax
- Purchase Tax
GST is essentially a tax only on value addition at each stage from manufacturer to the consumer. The consumer will hence bear only the GST charged by the last dealer in the Supply Chain. Lowest rates are assigned for essential items and highest for luxury items. Demerit goods such as cigarettes are being levied with additional cess (tax over another tax). The collection of this cess would go into the creation of a revenue pool which would compensate states for any loss of revenue during the first 5 years of the implementation of GST.
GST is levied on all transactions related to purchase, lease, sale, barter, import of goods or services, etc. The GST implemented in India is dual in nature, i.e. Union & State Government. Transactions made within the state are levied with Central GST (CGST) and State GST (SGST). For transactions between two states or between countries, Integrated GST is being levied, only by the Centre.
We will not focus on the initial GST structure. More on that on our next blog post. We will however look at the benefits that GST offer.
Benefits of GST
For the consumer
- A single tax proportional to the value of goods and services is being paid by the final member of the supply chain, i.e. Consumer.
- Overall reduction in tax burden can be led by efficiency in gains and prevention of leakages in the supply chain.
For industry and businesses
- A robust system creation; as various services such as payments, returns, registrations, etc. are being done online.
- Abolition of hidden costs is possible thanks to seamless tax-credits all along the supply chain.
- Reduction in transaction costs will lead to players competing and innovating on more than just costs
- Costs of locally manufactured goods will reduce. Uniform procedures and tax rates will reduce compliance cost, as well.
For the government
- With one tax replacing multiple ones, GST has made it simpler to administer for central and state, both.
- Higher revenue is estimated with GST decreasing the cost of collection of tax revenues.
- Automating compliance procedures will reduce errors and increase efficiency
Key Highlights of Budget 2018
With a major portion of indirect taxes being covered under GST, the expectations with the Budget 2018 is relatively low. The Budget did have many issues to address on the direct tax front. Every budget brought with it a bang or a bold heading, but this year there was a lukewarm response thanks to the implementation of GST. Many believed that Budget 2018 would act like a culmination of discussions being held by the GST council. Since the implementation of GST, many have suggested changes. Budget 2018 acted as the perfect platform to address those changes and implement newer ones. A key factor that makes GST hover over Budget 2018 was the lessons learnt post the GST implementation. Presenting the Budget on February 1 2018 instead of the 28th gives the government and tax authorities in states the time for amendments on SGST in March 2018.
Finance Minister Arun Jaitley reintroduced standard deduction for salaried employees and spread a cheer among the senior citizens. On the flipside, medical and travel allowances of salaried individuals was receded. Cess on income tax was also hiked. Let’s look at 5 key highlights from the recently presented Budget 2018.
A standard deduction of Rs. 40000/- will be subtracted from the salary income before the calculation of taxable income. The same deduction was withdrawn by Former Finance Minister P. Chidambaram.
Unchanged income tax slabs
No change was made to the income tax slabs.
Cess hiked to 4%
The cess on income tax will be hiked from 3% to 4% which will in turn increase the tax payable on all categories of tax payers. Due to this, the tax liability for the highest slab of tax payer i.e. Rs.15 lakh of income per year, goes up by Rs.2625. The ones earning between Rs. 5-10 lakhs will see an increase of Rs.1125. The lowest tax bracket i.e. Rs.2.5-5 lakhs will see an increase of tax liability by Rs.125.
Removal of Medical/Transport
The Budget 2018 proposed to remove the existing annual transport allowance of Rs.19,200 and Rs.15,000 of medical reimbursement. The tax saved for each employee on this income will depend on his/her respective tax slab of income.
EPF contribution of new women workers
First time women workers will contribute only 8% instead of the 12% for the first three years of employment. This will increase their take home pay package. New employees under EPFO will be provided with a 12% contribution from the government.
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