Goods and Services Tax (GST) and Income Tax are two essential components of India’s taxation system, each serving a distinct purpose but often intertwined in their impact on businesses and individuals.
What is GST?
GST is a value-added tax that is levied on the sale of goods and services. It aims to streamline the indirect tax structure in India by replacing multiple taxes like VAT, service tax, and excise duty. GST is collected at every stage of the supply chain, with the final consumer bearing the cost.
What is Income Tax?
Income Tax, on the other hand, is a direct tax levied on the income of individuals and businesses. It is calculated based on the total income earned during a financial year, including salaries, profits, and other earnings. Unlike GST, which is transactional, Income Tax is assessed annually.
How GST Affects Income Tax?
Input Tax Credit (ITC): One of the biggest advantages of GST is the Input Tax Credit. Businesses can claim credit for the tax paid on inputs (raw materials) against their output tax liability. This means that when calculating Income Tax, the business can show lower profits since they can deduct the GST they paid on inputs. For example, if a company earns ₹1,00,000 and pays ₹10,000 in GST for raw materials, its taxable income could effectively reduce, benefiting its Income Tax calculations.
Increase in Compliance: With the introduction of GST, businesses need to maintain detailed records of their sales and purchases. This increased transparency helps in reducing tax evasion, leading to a more accurate assessment of Income Tax. Consequently, the government can collect more revenue, which could potentially lead to lower Income Tax rates in the future.
Tax Structure Changes: Prior to GST, businesses faced a cascading effect of taxes (tax on tax). GST eliminates this issue, often resulting in reduced prices for consumers. When prices drop, consumer spending may rise, potentially increasing a business’s revenue. This can ultimately lead to a higher Income Tax if profits increase.
Example:
Consider a small manufacturing company, ABC Pvt Ltd. They produce furniture and sell it for ₹1,00,000. The applicable GST rate is 18%, so the total sale price becomes ₹1,18,000.
- ABC Pvt Ltd pays ₹10,000 for raw materials, on which they pay ₹1,800 as GST. They can claim this ₹1,800 as input tax credit.
- When filing for Income Tax, their total income from sales is ₹1,00,000. After deducting costs (including the raw material cost of ₹10,000), their taxable profit is ₹90,000.
In this scenario, GST impacts the final pricing, and the input tax credit helps reduce overall costs, ultimately affecting the profits reported for Income Tax.
Conclusion:
In summary, GST is a tax on consumption, while Income Tax is based on income earned. GST has made a significant impact on Income Tax by simplifying processes, encouraging compliance, and potentially increasing profitability for businesses. As the tax landscape continues to evolve, understanding these connections is crucial for both taxpayers and policymakers.
– Ketaki Dandekar (Team Arthology)
Read more about Impact of GST on Income Tax here – https://cleartax.in/s/gst-income