Benefits of GST essentially flow from the effects of a simplified tax structure, seamless tax credit facility, and technology-driven easy tax compliances systems. Here are the major benefits:

One: GST ends an era of multiple taxes levied at central, State and local levels. It replaces eight central and 9 State taxes such as Central Excise Duty, Service Tax, CST, State VAT and Entry Tax with just one tax. The uniform GST rates across States would reduce the tax burden and compliance cost.

Two: GST would reduce the cascading effect of taxes by integrating the tax systems of central and State governments. Both will simultaneously levy GST on a uniform base. Also, GST is to be paid only on the value addition and not on the value that includes the taxes paid earlier.

This input tax credit mechanism allows set off of taxes paid across the value chain. This almost eliminates the incidence of tax on tax or cascading effect of taxes, and results in lower net tax liability.

Three: GST mandates only electronic filing of information relating to all compliances, starting from registration to filing of returns to paying taxes. Automation of compliance procedures would reduce errors, increase efficiency. These will also eliminate human interface between the tax payer and tax administrator. Firms do not have to step out of their home or offices or file numerous forms or hire a middleman to make a run to many tax offices of central and state governments.

Also, harmonization of center and State tax administrations would reduce duplication and compliance costs. The invoice-level matching enables correct payment of taxes and leaves no scope for fraudulent claims.

Four: Earlier, firms were required to use many forms to obtain exemptions from payment of taxes. For example, while making stock transfers to a branch located in another state, firms used Form F to get an exemption from the Central Sales Tax and obtain input credit on VAT.

Merchant exporters get exemptions from payment of VAT/CST through Forms C, Form F and Form H. Similarly they buy goods from an excise registered unit under forms CT1 and ARE 1 to export duty-free. GST does away with such forms making the system simple and transparent.

Five: GST would lead to lower transportation and distribution costs. The main reason for the high cost is the expense incurred on branches and warehouses that exist not on business but for tax-saving considerations. For example, firms open branches in multiple States just to avoid paying CST. CST is chargeable on sale to other States but is exempt if goods are transferred to a branch of the same firm located in other States. GST abolishes such tax arbitrage.

The above provisions are expected to increase the overall productivity of manufacturing, services and trading operations leading to a reduction in prices and a general increase in the economic activity and higher growth rate of the economy.

Low taxes, ease of doing business and electronic compliance will also make India a more attractive place for doing business compared to other emerging economies and create ground for more domestic and global investment in Make in India projects.

The writer is from the Indian Trade Service. The views are personal. Adapted from his book, The GST Nation: A Guide for Business Transformation

(This is the last in a series to introduce readers to GST’s intricacies. The previous part appeared on June 28.)