The Goods and Services Tax (GST) law has gone a step further to see implementation by July 1, 2017 deadline. Indian Parliament approved four supplementary pieces of legislation for the historic tax law.
What is double taxation or cascading effect?
Double taxation is the levying of tax by two or more jurisdictions on the same declared income, asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). The term “double taxation” can also refer to the double taxation of some income or activity.
For example, in some jurisdictions, corporate profits are taxed twice, once when earned by the corporation and again when the profits are distributed to shareholders as a dividend or other distribution. The term can also refer to the taxation of the same entity by different levels of government, such as by Centre, state and local authorities.
In this respect, merging various Central as well as State taxes into one single tax will mitigate cascading or double taxation, thus, it will help in facilitating one common national market and enable a comprehensive and integrated national market as a seamless whole.
Will the GST add to the simplicity of the tax structure?
It is expected the simplicity of the GST tax structure will lead to better and efficient enforcement and administration. From the point of view of consumers, there could be the advantage of reduction of overall tax burden on goods, which is estimated at 25–30 percent. The administrative responsibility will be with a single authority that will levy tax.
“Today you have tax on tax, you have cascading effect. When all of that is removed, goods will become slightly cheaper,” says India’s Finance Minister Arun Jaitley, talking about the impact of GST on prices. He adds, the introduction of GST will be a step towards reforms in indirect taxation in the country.
Will GST be advantageous for startups, SMEs and small players?
“Under the existing regime, big corporates “stock transfer” goods to other states as they have the logistics and infrastructure, thus escape paying tax on interstate movement, so they are able to escape paying one tier of taxes.
But, owing to lack of infrastructure, SMEs and startups are unable to do that and get goods through inter-state sales (instead of stock transfers) and end up paying Central sales tax on them. In this respect, what the GST has done is to bring startups and SMEs level with big corporate houses by levying taxes on stock transfers as well.
“A single tax may have other advantages too. After the plethora of Central and State taxes get subsumed, the overall cost of ensuring tax compliance for enterprises would go down substantially. Over time, Central sales taxes too could get phased out,” said Shashank Dixit, CEO, Deskera, a global cloud provider of accounting software.
Moreover, taxation has always been a bone of contention between the Centre and the states, leading to intermittent turf wars, sometimes precipitating into slow transit times, red tape and general vitiation of the business climate.
This would go down, as the states will be left with little authority to levy taxes. All said and done, right now we can just wait for the eventual rollout of the GST. After all, the proof of the pudding is in the eating.