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This Article has been written by Ayushi yadav, a fourth year law student from Banasthali Vidyapith, Rajasthan. She has discussed about the impact of GST(Goods & Services tax) rates over the Income taxes.

 

 

Introduction

The Central Government and State Government collects taxes from the people for the development and economic growth. The net tax collection by the government is approx 16 lakh crore rupees, where direct tax collection has crossed 10 lakh crore rupees and indirect tax collection is approx 6 lakh crore rupees. All the funds are received from the people and they have burden to pay different taxes from their income, where Income Tax and GST (Goods & Services Tax) are the major taxes. So to give relief to the general public can it be possible to abolish income tax by increasing GST rates?

What is the link between income tax and GST?

Tax is a kind of fee which is paid by an individual or an organization to the Central or State government for the economic growth of the country and it is mandatory to pay the taxes.

Basically taxes are of two types, i.e.

  1. Direct taxes – these are the taxes which are directly paid to the government by the taxpayer himself which are levied on the income or profit of the individual or organization. Taxes like- income tax, property tax, transfer tax, entitlement tax etc.
  2. Indirect taxes – indirect taxes are those which are levied on goods and services and paid by a third party, In indirect taxes, taxpayers  do not directly pay the taxes to the government Like- GST(Goods & Services tax).

Income tax and GST both comes under a different category, but the government has made some provisions in connection of these taxes, so it will be helpful for both the departments for sharing their information.

After implementation of GST, the Central Board of Direct Taxes, in the exercise of the powers conferred by the section 44AB read with section 295, made the rules for further amendments in Income Tax Rules, 1962, where there were some amendments related to GST, like-

  • In form no. 3CD of Appendix II of Income tax rules, 1962
  • In serial no. 4
  • After the words ‘sales Tax’, the words ‘goods & services tax’ shall be inserted.
  • After the words ‘registration no. or’, the words ‘GST no. or’ shall be inserted.

https://www.incometaxindia.gov.in/communications/notification/notification-33-2018.pdf

The purpose of inserting GST no. is to share the data of GST with income tax department and the data of income tax with GST department. The data which will be shared to the department of income tax and GST by the taxpayer, shall not be mismatched i.e., the data which is provided to both the departments shall not vary. Both the departments can exchange data spontaneously or automatically. To register GST no., people need to be attached their PAN card issued by income tax department.

This helped in curb the black money, as before GST some retailers who saved their Excise duty, VAT, Entry tax etc. by not reporting each and every transactions, can not be able to do now. Now, Income tax department can track all the transactions by sharing data with GST department and vice-versa.

So we can see there is no direct link between GST and income tax, but somehow, they are connected to each other. This is for those who have GST no., so they have to provide the correct information to both the departments.

What was the Purpose of introducing GST?

GST is a one nation one tax system, it is an indirect tax, which was introduced on 1st july, 2017. GST replaced other major indirect taxes in india like value added tax, service tax and excise duty. The purpose of implementation of GST was to abolish cascading tax effect i.e., tax on tax for which consumers had to suffer with high prices of goods & services.

Before the era of GST, indirect taxes which were paid to Central Government and State Government were as follows:

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Central Government

State Government

1. Excise Duty.- which were imposed on the manufacturing of the good.

1. Value Added Tax.- imposed on the sales within the state.

2.   Service Tax.- these taxes were charged on the services.

2. Entertainment Tax.- imposed on the     different forms of entertainment like movies or entertainment shows. Every state has different rate of taxes.

3. CST.- these taxes were charged when goods sale from one state to another

3. Luxury Tax.- it imposed on the luxury items which the government have decided.

4. Custom Duty.- it imposed on the imports and exports of the good.

4. Entry Tax.- some state government imposed taxes on the entry of the goods in the state.

 

So all these indirect taxes merged into a single tax which is Goods & Services Tax.

GST which replaced indirect taxes imposed by the Central Government and State Government, is divided into three categories as per intra-state and inter-state supplies:

  1. CGST- CGST is a  Central Goods & Services tax, which is levied by central government on the intra-state supplies of the goods & services.
  2. SGST- this is State Goods & Services tax, also imposed on the intra-state supplies by the state government.
  3. IGST- IGST is an Integrated Goods & services tax this is imposed on the inter-state supplies of the goods & services i.e., sale to another state, where exporter is exempted from paying tax. And the IGST will go to the Central government.

How GST is beneficial over the other indirect taxes

This we will discussed here by an illustration-

Before GST

Lets say, a manufacturer manufactures the goods at the cost of rs.500 and sells it to the seller @ 12%  i.e., rs.560. When seller sells his good to the consumer, he imposed additional tax which is VAT @ 12.5% which will cost rs.622.50. This additional tax is a burden on the consumer which is known as cascading effect.

After GST

A manufacturer manufactures the goods at the cost of rs. 500 on which tax levied by the government is 12%, so the net price of the product will be rs. 560 and no additional charges will be imposed, and it is called an input tax credit.

This is how GST abolished the cascading effect and give advantages to the consumers and also good for the economic growth of the country. For this purpose government divides GST rates in four slabs i.e., 5%, 12%, 18% and 28%, where tax on the essentials items are 0%.

What are the impacts of increasing GST rates?

Development of GST was considered to be a positive and it also helped in increasing economic growth of the country. Number of indirect and direct taxpayers increased under GST regime.

But if we check new statics of GDP growth from January- march 2019, the growth has been declined to approx 6.6% which was expected to be around 7%.

https://economictimes.indiatimes.com/img/69606249/Master.jpg

In this graph, we can see that, GDP of India has been declined since GST has come in the scenario.

This is the graph of inflation where we can see the changes in inflation in the year of 2018-2019.

This graph represent sales tax rate, where we can see the lowest sales tax rate is 12.36% and it increased in year 2016 and now the highest sales tax rate is 18%.

So, as we can see from above statics GDP growth has been declined, inflation which is slightly higher in year 2019 but compared to the previous year it has been declined, and obviously there is a great inclination in sales tax rate. So GST have positive and negative impact both.

Performance of the company will improve.- When GST rate will decrease, and volume of the product will increase, so companies and consumers both can avail the benefit. By this, performance of company will improve.

The demand of the product depends on its cost after applying GST. We can simply say that if tax will decline that will be profitable for consumers as well as company too.

We can say that GST have a good impact on the people and economic growth of the country, but as we know coin has two sides too, likewise GST have also its negative points. GST abolished the cascading effect, the cost of the product reduced, but is it really beneficial for us?

Problem for common people

As we know, GST is divided in four slabs and items were added in those slabs according to the requirements of the people. But middle class people have not felt a major relief, as rich people can afford the high taxes on some items like luxury hotels etc., even government have increased the GST rates on mobile bills and in present time it is also one of the basic requirements. This is how in some cases some people does not get relief from GST.

Now, in this situation if we increased the GST rates, it mainly affect the poor and middle class people but it will also affect the suppliers and companies. As we discussed about the demands of the product, now, if we increased the GST rates people will try to avoid purchasing that product, by which the demand of that product will decrease, and it will negatively affect companies and suppliers and there will change in inflation then it will affect the economy and condition will be worse.

How does it affect income tax?

If GST rates will increase, it will not directly affect the income tax, because we have discussed it earlier that GST is an indirect tax and income tax is a direct tax, both are different. Government made some amendments for exchanging the information of GST department and income tax department but it is for those people who have GST no. other than this, there is no direct link between GST and income tax.

But if we purchase goods from supplier than the cost on that product will increase because of GST rates then income margin per goods will increase. As a result there will be a slight reduction in income of the person, then it will be a pressure on the people, that can cause a rise in inflation

We can not consider high GST rates and income tax on the same track. Either direct tax should be reduced or income tax should be abolished, so people can spend their income where they want to.

Let’s take an example

A middle class person whose salary is approx 3 lakh per annum, on which government imposed a 5% tax on his income, now the rest of the money he will use on his necessary items, if the government will increase GST rates like items which have a 12% tax will come under 18% tax then it will not be easy for that person to purchase such costly items, somehow it will affect the economy.

What can be the Consequences of abolishing income tax?

All the funds government received, is from the direct and indirect taxes which they imposed on the people. And in direct taxes income tax is one of the major taxes which helps in the development and growth of the country and industrial sector too.

As we discussed, the government has collected approx 10 lakh crore rupees from direct taxes and approx 4.5% of the population pay taxes. GST collected by a government is approx 6 lakh crore where there is no. of taxpayers increased by 50%. If government will abolish the income tax then there will reduction in the economy.

But what will happen if we abolished the income tax?

As we know, if we abolished the income tax then there will some other methods by which the government will collect taxes. Like high GST rates, but after abolishing income tax what can be the consequences, let’s discuss here:

  1. Legal responsibilities.- As we know the person who earn, have to pay the income tax from the amount which he/she earned for which he has to file an income tax return in the income tax department and many more laws which is governed by the Income Tax Act, 1961. After abolishing the income tax, that responsibility will be over on the public.
  2. Lack of Funds.- To abolish income tax will not be easy, because the government will not be able to achieve the targets due to lack of funds. If we increase the GST rates and abolish the  income tax, still government may not be able to collect that much tax or fund. It can also affect the economic growth of the country, because from indirect tax government does not collect as much fund.
  3. Demand of the product.- it can be a positive aspect of abolishing income tax that purchasing power of the people will increase by which demand of the product will increase which will be profitable for companies and suppliers.
  4. Exploitation.- when the demand of the product increases then companies will increase the cost of the products and can exploit customers by which there will change in inflation in markets.
  5. Negatively affect poor and common person.- if income tax is abolished then to maintain the economy government will charge taxes from those people too who are exempted from paying taxes at present time and it will positively affect rich people because they have to pay high taxes from their income so they will exempt from that.

Conclusion

From all the discussions, we can see that there is no direct link between GST and income tax. So increasing in GST rates can not abolish income tax, and if we consider the statics then to abolish income tax will not be a great idea. If it is done, then government has to make some major changes, if one law will be abolished then new law will be introduced to maintain the economy and development of the nation. And if government will abolish income tax then to achieve the targets they have to increase the rates of other taxes. Increasing rate of GST will help in GDP of india but it can also cause inflation. Whatever the situation but it will definitely affect the economy of the country.

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