Good morning GST

After coming back from my weeklong travel for work, I resumed morning walk at our condominium’s park in Gurgaon. Fully grown magnolia trees with white waxy flowers, flat trimmed bushes, green grass that had recently undergone horticulture maintenance, bird chirping, cool morning breeze from the Aravallis, mild fog and park fountains were making the entire environment astounding.

As I was about to complete half-kilometer long round, I noticed Kapoor uncle heading towards me with long and quick steps to join me on the track. He was owner of a famous showroom in a nearby mall and many ladies in the complex including my wife, Rani, were his regular customers.

 

After exchanging a quick good morning, he uttered my name in a Punjabi way “Gajinder,” and said, “I think GST will come now”, while I was still thinking about the fog and forthcoming flight delays due to that. Probably he had read the news reports on Congress party’s willingness to support the Constitutional Amendment bill on GST before stepping out of his house. 

Avoiding a heavy conversation on legal and administrative challenges involved in bringing GST, I simply nodded my two and half times in response to his leading question.

But that was not good enough for settling his GST curiosity, he continued, “I keep reading that India’s GDP will grow if GST is introduced” and raised a concern, “but I wonder how business community will gain by GST?”

Although I was a born Marwari, but it was his business mind that was fully functional in the morning.  I summarily replied, “Uncle, GST is good for all the businessmen including traders like you and manufacturers”.  No sooner I finished the sentence, looking straight into my eyes he questioned, “how come?”

Feeling challenged, I asked a counter question, “Uncle you must be paying lot of service tax on the shop rent and other services such as telephone, auditor fee, courier charges etc., right?   “Yes” he said and added, “such expenses are big costs for his business and many retail shops have closed down because they couldn’t bear huge rentals”.

“If I tell you that in the GST regime the taxes you pay on rent and other services will not be a cost, will you be happy?” I asked. 

“Certainly”, he said, “but how is that possible” and there was a sudden increase in his walking speed.

I explained, “Uncle in the GST regime, both Value Added Tax (VAT) applicable on the goods you sell and Service Tax will be merged.  This means that you will charge GST from your customers and at the same time take input tax credit for all the taxes paid, including the GST paid on services.  For example, you will collect 16% GST from your customers, but out of this you will only deposit the balance amount to the Government after retaining GST already paid on goods purchased and services availed including renting”.

Kapoor uncle quickly understood this, but to reconfirm he mentioned, “Ooh, like VAT credit on goods, it will also be possible for me to set-off taxes paid on services, so GST paid by me on goods as well as services will not be a cost for me in future, that’s what you mean?”

I said a small “yes” and to make Kapoor uncle more aware I added, “not just this, GST will also replace Central Sales Tax (CST), so you will also get be able to take credit of GST paid on goods purchased from other States, whereas CST paid on such purchases is currently a cost for you.”

“That’s good! It means India will become one single market once GST is introduced” he concluded and I realized that with his sharp mind he ought to be a successful businessman.

By that time we had finished one more round and started another; I was feeling a charge in my body due to the walking and Kapoor uncle in his mind due to the conversation.

He quickly weighed other pros and cons of GST in his mind and with a sheepish smile said, “but you know, Rani won’t be happy with GST as she will be have to pay 16% GST on salwar suits.”

Even a remote imagination of increase in wife’s shopping outlay is frightening for husbands; with this sentence the morning admirations went out of my head and lawyer mind got activated.  I said, “Uncle, that’s not correct because in the GST regime tax costs will go down right from manufacturing level, which will cause overall reduction in the prices”.

Without letting him interrupt me, I continued, “for example, today if you buy an AC you pay VAT as well as excise duty that is embedded in the price.  Suppose, factory sale price of AC is Rs 10,000, the manufacturer would charge 12.36% excise duty on the sale price, and at least 12.5% VAT on the sale price plus excise.  Aggregate of such taxes is over 26% of the sale price, whereas in the new regime only 16% GST would be charged in the long run, as excise duty will also get merged into GST”.

Kapoor uncle admitted this in a soft tone, “Yes, you are right, by reduction in the raw material, conversion and administrative costs due to reduced tax costs, overall price of finished goods should come down”.

Bingo, was the feeling.   I got happy in anticipation of aachay din ahead due to notional saving in shopping bills, so as Kapoor uncle by realizing that less cost would mean more margins!!

 

“Good day”, we said to each other and split our ways….

 

Gajendra Maheshwari

(The author is Managing Partner of Reina Legal, Advocates, a law firm based out of Delhi/NCR)

 

Published in Taxation
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