The Goods and Services Tax (GST) is the Indian version of VAT. Every entrepreneur has to deal with it. The purpose of introducing GST in 2017 was to make the complex, existing tax system in the country more transparent. It is one of the most important reforms that the Modi government brought in its first term in India.
India’s old GST tax system was an accumulation of indirect taxes, duties and surcharges. This was applicable not only at the national level but also at the state and even city level. A major part of tax collection by Indian states was the Value Added Tax (VAT). There was no single nationwide rate for it. The states separately took the decision of what VAT was applicable for a product, resulting in a lot of red tape for businesses. In addition, a Central State Tax (CST) had to be paid to the national government for state-to-state sales, which further to under-performance and fragmentation of the old tax system. All these different taxes from the various Indian governments had a waterfall effect. It made tax evasion and corruption relatively easier. As a result, the Indian tax authorities lost a lot of revenue, so change has to be done.
From VAT to GST
With the new Goods and Services Tax, there will be centralization of sales tax for the whole of India in 2017. All taxes per product type are brought together in this and will be applicable on a national level in New Delhi. There are five rates, ranging from 0% to 28%. These rates are applicable to around 1211 goods and services under different categories. Under the GST system, taxes are applicable whenever there is a value addition to the product and a sale takes place. This amounts to the final sale to the customer. To clarify this, take this simple example:
In addition, GST is a destination tax. This means that if a product manufacturing is done in the state of Andhra Pradesh, but sold in Karnataka, the entire tax goes to Karnataka. A great improvement on the previous system where tax was paid to a different government body at each step.
The Advantages of Goods And Services Tax
There are many advantages to centralizing the sales tax mechanism. First of all, the GST greatly simplifies India’s cumbersome tax system. In addition, the GST makes it possible to turn India into a true internal market. With GST, the free movement of goods between states becomes a reality. This will make it easier for small businesses, in particular, to grow outside the borders of their state. Now they all can apply the same tax rate. This allows companies to organize their distribution from a central national storage point. They don’t have to set it up separately in each state. It also makes tax evasion more difficult, increasing revenues for the Indian treasury. These benefits in turn lead to positive macro-economic effects: doing business in India will become easier and (foreign) investment will increase. Furthermore, the Indian government can invest more and the Indian economy will grow faster.
But GST Also Has Disadvantages
The GST is far from perfect because it still does not bring the loads together under one roof. Indeed, there are 38 different: a separate GST for all 29 states (SGST) and the seven union territories (UTGST), a federal GST (CGST) and an integrated GST (IGST) for supplies of products and services between states. Despite the fact that the GST system should eliminate the waterfall effect and thereby reduce the price of products, certain products have become considerably more expensive. For example, since the introduction of the new tax, products such as shampoo and deodorant have suddenly been subject to a higher tax rate.
What Does The GST Mean For You As A European Entrepreneur In India?
All european companies that want to start their own branch, a joint venture or another type of sales organization in India will have to deal with this tax. In order to pay this tax, you need a PAN number. Also, you need to register at the GST portal where you get your unique GSTIN code. Through this portal you have to submit tax form and pay every month. Here you can find how to calculate the GST for your company. European companies that only export to India hardly have to deal with the taxes. However, it is important to understand how the GST taxes the Indian distributor or importer you are working with.
GST is one of India’s most important taxes, besides of course Corporate Tax and all kinds of other taxes like Minimum Alternate Tax (MAT), Dividend Distribution Tax (DDT), Custom Duty and Excise Duty. Don’t feel like delving into this? We can take care of the entire administration for you, including tax administration, so you can be sure that everything is in place and you can fully focus on your core business in India.