VAT in India: What you need to know about the Goods and Services Tax (GST)
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The Goods and Services Tax (GST) is the Indian version of VAT. Everyone who does business in India will eventually have to deal with it. In 2017, GST was introduced to make the complex existing tax system in the country more transparent. Although it has made doing business in India a lot easier, the GST tax can still be a challenge for international companies that are starting their activities in India. In this article, we will explain how the tax works and what you will encounter as a foreign company.
The old Indian tax system before the GST consisted of a series of indirect taxes, excise duties and surcharges levied not only at the national level, but also at the state level and even at the city level. A major tax collected by the Indian states was the Value Added Tax (VAT), but there was no fixed national rate for this.
The states independently determined the VAT to be charged on a product, which resulted in a lot of administrative hassle for businesses. In addition, a Central State Tax (CST) had to be paid to the national government for sales from state to state, which only further underlined the fragmentation of the old tax system.
All these different taxes from the different Indian governments created a cascading effect and made tax evasion and corruption relatively easy. The Indian tax authorities lost a lot of revenue as a result, so change was urgently needed.
One centralised sales tax
With the new Goods and Services Tax, a single centralised sales tax was introduced for the whole of India in 2017. All taxes per product type are united here and are levied at the national level in New Delhi.
There are five rates, ranging from 0% to 28%, under which 1211 categories of goods and services are divided. Under the GST system, tax is levied at every point in time when value is added to the product and a sale takes place. This continues until the final sale to the customer. To clarify this, a simplified example:
The tax is levied only on the value added at each stage and not on the total value of the product. In the case of biscuits, it would look like this:
In addition, GST is a destination-based tax. This means that if a product is manufactured in the state of Andhra Pradesh but sold in Karnataka, the tax goes to Karnataka in its entirety. A big improvement from the previous system where tax had to be paid to a different government body at each step.
The benefits of Goods and Services Tax (GST)
The list of benefits of a centralised sales tax is long:
- First of all, the GST simplifies the cumbersome Indian tax system enormously.
- In addition, the GST makes it possible to turn India into a truly internal market in which free movement of goods between states becomes a reality. This allows companies to organise their distribution from a central warehouse – and they do not have to set this up in each state separately.
- Furthermore, tax evasion will become more difficult, increasing revenues for the Indian treasury.
- The above-mentioned benefits lead to positive macroeconomic effects: doing business in India becomes easier, (foreign) investments increase, the Indian government can invest more itself and the Indian economy will grow faster.
But the GST in India also has disadvantages
The GST is far from perfect, because it still does not bring taxes under one roof. There are 38 different ones:
- a separate GST for all 29 states (SGST),
- a GST for 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 thus reduce the price of products, certain products have actually become considerably more expensive. Since the introduction of the new tax, products such as shampoo and deodorant, for example, suddenly fall into a higher tax rate.
What does the GST mean for you as an international company in India?
All international 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 be able to pay this tax, you need a PAN number and you must register with the GST portal where you will receive your unique GSTIN code. A tax form must be submitted and paid via this portal every month.
Foreign companies that only export to India hardly have to deal with the taxes. However, it is important to understand how GST taxes the Indian distributor or importer you work with.
GST is one of India’s most important taxes, along with Corporate Tax and all sorts of other taxes, such as Minimum Alternate Tax (MAT), Dividend Distribution Tax (DDT), Custom Duty and Excise Duty. We give you insight into how these taxes work in our free guide for CFOs in India.
