India since independence in 1947 , has been a federal structure . As a result , there are subjects which fall under the provincial governments or state governments and there other subjects which fall under the central government . Also , there are items which are on the list of subjects of both state and central governments , this is called the concurrent list . Indirect Tax is such a subject which is a subject under concurrent list . Thus, there are indirect taxes which fall under the state government and few fall under central government . This formed the anomaly where goods and services were taxed more than once . So logically some items which were in the concurrent list were taxed twice . There were areas where goods and services were taxed on a value which included taxes of previous transactions . So essentially , the final indirect tax the consumer or customer used to pay had layers of taxes included into the price of any given product . So , it was a flawed system which had a tax on tax . This historic legislation of Goods and Services Tax is trying to eradicate the ills of the erstwhile system . With effect from 1st July , 2017 and India has leapfrogged into a One Country One Tax Regime and it is called Goods and Services Tax or GST .
GST is an indirect tax applicable all over India . GST is a consumption based tax levied on goods and services , at an All India Level . This new tax has replaced all the indirect taxes like Value Added Tax, Excise Duty, State Govt. Local Taxes etc. The most important part here is that the cascading effect of taxes would no longer be applicable. The cascading effect means Tax over Tax. Under GST the goods and services are taxed under the slabs of 0 % ( exempt goods ) , 5 % , 12 % , 18 % and 28 % . Exports and taxes like Income Tax & Corporate Tax , which are referred to as direct taxes would not be affected by GST . Although , GST will not apply to crude petroleum, petrol, motor spirit, diesel, aviation fuel, turbine fuel & natural gas .
It was felt by one and all in the society that the system of cascading tax should be made better in such a way that there are no tax on tax on any goods and no goods or services were taxed more than once . And even worse , no goods had a selling price which had taxes included into its cost price out of the items or components of the final product . Let us take an example to understand the GST clearly – Goods A and Goods B are used in the production process. Goods A was the input goods in the production of the final product Goods B .
In the erstwhile tax regime: Goods A was Rs 1000 and it was sold at 10% VAT . So, the input price of Goods A in the production of Goods B becomes Rs 1100 ( 1000 + 10% ) . So , if we add Rs 400 as processing charges , and another 600 for profit . The Central Sales Tax on the final product being again 10% . So the final cost before 1st July 2017 , would have been : Rs 1100 + 400 + 600 = Rs 2100 . Now the CST of 10% would be Rs 210 ( 10% of Rs 2100 ) .
Under GST Tax System: Same Goods A & Goods B . The GST Rate is 10% on input as well as final product . So the cost of input will be same Rs 1100 ( Goods A is Rs 1000 + 10% GST ) . The same process is applied on the goods for Rs 400 & the profit is also Rs 600 . Here is where GST will be levied on Rs 2100 @ 10% . Now the input Tax will have to be deducted from the final GST , by availing input credit . Thus , the price of the final product Goods B , under GST will be : Rs 1100 + 400 + 600 = Rs 2100 . Now the GST of 10% would be Rs 210 ( 10% of Rs 2100) minus GST already paid earlier or Rs 100 . Thus the final price will be Rs 2210 . Here is the benefit of GST , to the end consumer or customer , with the end product’s price being adjusted with the GST already paid on the raw materials .
International Remittance is a service which the beneficiary takes benefit of , when his family member sends money from abroad . In India , the remittances can be received as Cash or Credit to Account . While receiving the remittance service in cash , the beneficiary has to call on the distribution agency and while receiving the remittance direct into the bank account , the same is directly deposited into the bank account of the beneficiary . These two sub-services have been dealt in the same way under GST , but the point of levy and passing on the burden to the end customer has differences in the same . Under a bank deposit , the process followed as per regulation is that the remitting company or money transfer organization ( originator of money ) , has to relay the funds to a correspondent bank and this correspondent bank relays it forward to the bank account of the beneficiary . And since this is in the last leg treated as a domestic payments activity , no GST is attracted separately on the same . So, to an end customer there is no liability of GST . The correspondent bank invoices the money transfer organization with GST at 18 % , every month end or periodically , as agreed between the two . In the cash remittance model , the agent pays the beneficiary and then invoices the remitting company or Money Transfer Organization . This invoice falls under the purview of GST . These agents are non banking financial institutions and are regulated by not as strict laws like banks . Also there is a Money Transfer & Money Changing Association in India , which is governed by and comprises of the cash payout agents . Since the regulation is very clear that there can be no deduction from the Foreign Inward remittance amount paid to the beneficiary , the payout agents were undecided . Since earlier the service tax was at 15.50 % and now the GST is at 18 % . They have decided amongst themselves to invoice the beneficiary Rs 20 as GST and invoice it separately .
The larger perspective here is not how much the remittance will be costlier , but what all goods and services the foreign inward remittances can buy . If goods become costlier in India with the GST in place , the expat will have to send more money and if it is the reverse , then that much more for the remittance dependent families , which also means excess savings . This is a mixed bag , because as said earlier, there are 4 slab rates of GST . Plus, there are some goods that have been exempt . These are milk , cereals , meat , some farm produce , bread , school children books and drawing materials , books , salt , flour etc. A large number of goods have been moved from lower to higher slabs, and some have been moved from higher slabs to lower slabs. The full impact of GST is yet to be seen . A lot of consumer related business are still in the upgrade process of their systems . Weather GST is in favor of the consumer or in adverse to them is yet to be seen . May be this melee will take a while to settle down . At the end , GST is a step in the correct direction and will be beneficial to India’s economy in the long term .