India's new Goods and Services Tax is a mixed blessing.India’s biggest tax reform since independence, 70 years ago, was ushered into effect at midnight on June 30. The Goods and Services Tax (GST) is an indirect tax throughout the country designed to replace the old tax system that was viewed by many as burdensome on businesses and consumers.

The goal of the GST is to have a more easily administered single consolidated, nationwide, indirect tax on goods and services. In addition, it will create a level playing field for businesses to compete in, place India on par with foreign countries that have more structured systems of taxation and enable consumers to purchase goods and services at lower prices

The most significant benefits of the GST will be improved collection of taxes and the creation of a seamless nationwide market to power up the national economy via implementation of a uniform tax rate and the removal of indirect tax barriers between states. It is estimated that GST’s effect on GDP will be a positive 1.2 percent-to-2 percent over time.

Under the old tax system, a Value-Added Tax (VAT) was added at each point of sale in the manufacturing process. This inevitably drove prices upward. For example: Assume a dress manufacturer purchases cotton to make a dress. In doing so, he increases the value of the cotton once it’s made into a dress. The manufacturer then sells the dress to a wholesaler who attaches labels and tags to the item, thereby adding further value to the dress. The wholesaler will in turn sell the dress to a retailer who finally sells it to a consumer. At each stage the value, and the price, of the dress increase leading the end consumer to pay a higher price for the final sale.

To better understand the effect of added taxes and the increased price of the dress under the old system of taxation, let’s use some numbers. Although this example applies to any product, for our purposes, we’ll stick with the dress being manufactured and sold through various stages to an end consumer:

Step 1: A manufacturer pays Rs. 100 to purchase raw materials to make a dress. If the tax rate is 10%, then his final cost to manufacture the dress is now Rs. 110.

Step 2: The wholesaler purchases the dress from the manufacturer for Rs. 110 and increases its value by adding a label to it. If the cost to add a label to the dress is Rs. 40, his cost for the dress is now Rs. 150. Add in the 10 percent VAT tax and the final cost is now Rs. 165 (110 + 40 = 150 + 10% tax = 165).

Step 3: The wholesaler then sells the dress to a retailer for Rs. 165. At a cost of Rs. 30, the retailer adds further value to the dress by packaging it for resale to a consumer. Add in the 10% tax and the retailer will now sell the dress to a consumer for Rs. 214.5. (Cost = 165 + 30 + 10% tax = Rs. 214.5)

Step 4: For Rs. 214.5, a consumer purchases from the retailer a dress that cost only Rs. 170 to produce (Rs. 110 + 40 + 30). The tax liability for the dress was passed on at every transaction point resulting in the consumer paying a higher price for the product.

The GST does away with the cascading effect of taxes by allowing an individual to claim credit for taxes paid in acquiring input — the individual who has paid a tax already can claim credit for the tax when submitting his own taxes. Again, it’s more clear with numbers:

In the second step of our example, the wholesaler purchases the dress from the manufacturer for Rs. 110 (100 =10% tax) and adds a value of Rs. 40 by adding a label to the dress. This brings his cost for the dress, minus the 10 percent tax he paid to the manufacturer, up to Rs. 140. The wholesaler’s tax liability is Rs. 14 (10% of 140).

Under the new GST the wholesaler is permitted to subtract the amount of tax he has already paid for his purchase, Rs. 10, leaving him with a tax of just Rs. 4.

The wholesaler then passes his tax liability to the retailer who pays Rs. 154 (140 + 14) for the dress. The retailer adds Rs. 30 value to the dress by packaging it for final sale to a customer. The retailer’s final cost for the dress is Rs. 170. His tax on the dress would normally be Rs. 17 (10% of 170). The retailer would normally pas on the tax (Rs. 17) to the end consumer, but since he has already paid Rs. 14 to the wholesaler as the latter’s tax, his tax liability to the government is reduced to Rs. 3 (17-14). The retailer can then sell the dress to a consumer for Rs. 187, a savings of Rs. 27.5 over the old tax system.

India's new Goods and Services Tax is a mixed blessing.In theory, the GST looks like a real plus for the country, but there are concerns. Critics claim the government is simply “rebranding” the old taxation system and that, due to exemptions on basic daily items, like food and gas, the GST fails to reduce the costs to consumers and that over time it will have an adverse impact on the middle, lower middle and poorer classes of Indians.

In fact, the GST does increase the costs of most consumer goods and services in India including food, hotel charges and insurance. Perhaps the sharpest increase is in movie tickets — a whopping 28 percent for tickets costing more than Rs. 100, a price hike that will impact regional-language movies particularly hard.

Gadget-aficionados will feel GTS’ sting of higher prices for electronics, software, mobile fees, internet and Wi-fi access as well as Direct-to-Home television services. GST will also have a negative impact on the Make in India initiative, particularly when it comes to phones. Prior to GST, phones manufactured in India were significantly less expensive than imported phones. This will change as the import duty on foreign made phones drops to 12 percent from a previous 17-to-27 percent. Critics of the GST are pushing hard for continued government incentives to shore up the domestic manufacturing of phones.