Goods and Services Tax

Understanding GST- Goods and Services Tax

 

GST- Goods and Services Tax will transform Asia’s third largest economy (India) into a single market for the first time. Once implemented, it will subsume various taxes including excise duty, service tax and other levies and proceeds shared by central and state governments.

 

A significant step in reforming indirect taxation

  • It was introduced as the Constitution Act 2016.
  • The currently followed Byzantine taxation system and inconsistent collections pushes up costs and deprives the government of revenue.
  • Goods will be taxed only at the point of consumption (not multiple times with different rates).
  • Once passed, it will merge most of the existing taxes into a single one.

 

The Journey

  • Constitution (One hundred and twenty second Amendment) Bill, 2014 proposes National VAT, subsumed taxes- Central excise duty, services tax, additional customs duty, surcharges and state level VAT.
  • A constitutional amendment bill was issued by the UPA govt. in 2011, which was then lapsed since it couldn’t be passed. After BJP came into power, it was issued by NDA in 2014.
  • On August 8, 2016, Parliament approved GST bill after it was passed in Lok Sabha with Rajya Sabha amendments.
  • By September 1, 2016, GST bill was ratified by 16 states, thus clearing the 50% ratification required by the states and was ready to go for Presidential assent.
  • Cabinet on 20th March 2017 cleared four legislations –

(1) The Central Goods and Services Tax Bill 2017 (CGST bill)

(2) Integrated Goods and Services Tax Bill 2017 (IGST Bill)

(3) The Goods and Services Tax (Compensation to the States) Bill

(4) Union Territory Goods and Services Tax Bill 2017 (UG-GST Bill)

  • The GST is scheduled to roll out on July 1, 2017

 

The need for GST

The current taxation system is inefficient as the consumer has to pay double tax i.e. tax on tax and thus a lot of people evade from paying taxes. Eventually it deprives the government of revenue and collection becomes inconsistent.

A recent World Bank survey on ease of doing business in 189 countries ranked India 158th for paying taxes. RBI said in the report on Trend and Progress of Banking in India 2015-16 (RTP) and 14th Issue of Financial Stability Report(FSR) that nationwide GST could potentially transform the domestic economy.

 

How GST operates?

  • Same state – CGST and SGST are applicable in this condition. The collection goes to Central and State govt. Upon sale and resale, input tax credit comes from the same government to whom output tax goes, so there is no question of credit transfer within two state governments.
  • Interstate – IGST is levied in this condition whole of which goes to the Central government. Against IGST, both the input taxes are taken as credit but the amount of SGST doesn’t go to the State government.

Advantages of GST

  • It will put an end to the double taxation problem.
  • It will bring a reduction in prices because tax is not a part of the cost of production.
  • It will reduce the compliance and procedural cost. For example there won’t be frequent stops for regulatory checks.
  • Tax will not be a factor in investment location decisions.
  • This will prevent tax evasion unlike the current situation when a trader purchases and he pays VAT and excise duty but when he sells, he can only charge VAT leading to evasion of taxes (as the cost of purchase of goods or service goes up).
  • Expected rise in tax collection by the government.
  • This will certainly make Indian products competitive in domestic and international markets, thereby boosting the economic growth of the nation.

 

Concerns

Price adjustment from the application of GST could add to generalised inflation in the economy. Regarding this, the government has put the everyday use goods and services in the Consumer Price Index (CPI) basket to regularly check their prices in order to tackle inflation. Although the number of taxes on an individual will come down, but the actual tax burden will depend in the tax rate. Moreover, there are concerns over its effective implementation throughout the country.

Check out this video which shows the current tax slabs and how these slabs will change and have impact on various sectors:

 

We hope you liked this article on GST. For regular updates, subscribe us via email and we will deliver our next article, right in your mailbox!