The present structure of Indirect Taxes is very complex in India. There are so many types of taxes that are levied by the Central and State Governments on Goods & Services.
We have to pay ‘Entertainment Tax’ for watching a movie. We have to pay Value Added Tax (VAT) on purchasing goods & services. And there are Excise duties, Import Duties, Luxury Tax, Central Sales Tax, Service Tax….hhmmm..
As of today some of these taxes are levied by the Central Government and some are by the State governments. How nice will it be if there is only one unified tax rate instead of all these taxes?
In this post, let us understand – what is Goods and Services Tax and its importance. What are the benefits of GST Bill to Corporates, common man and end consumer? What are the advantages, disadvantages and challenges?
What is GST?
It has been long pending issue to streamline all the different types of indirect taxes and implement a “single taxation” system. This system is called as GST ( GST is the abbreviated form of Goods & Services Tax). The main expectation from this system is to abolish all indirect taxes and only GST would be levied. As the name suggests, the GST will be levied both on Goods and Services.
GST was first introduced during 2007-08 budget session. On 17th December 2014, the current Union Cabinet ministry approved the proposal for introduction GST Constitutional Amendment Bill. On 19th of December 2014, the bill was presented on GST in Loksabha. The Bill will be tabled and taken up for discussion during the coming Budget session. The current central government is very determined to implement GST Constitutional Amendment Bill.
GST is a tax that we need to pay on supply of goods & services. Any person, who is providing or supplying goods and services is liable to charge GST.
How is GST applied?
GST is a consumption based tax/levy. It is based on the “Destination principle.” GST is applied on goods and services at the place where final/actual consumption happens.
GST is collected on value-added goods and services at each stage of sale or purchase in the supply chain. GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services.The manufacturer or wholesaler or retailer will pay the applicable GST rate but will claim back through tax credit mechanism.
The GST is an indirect tax which means that the tax is passed on till the last stage wherein it is the customer of the goods and services who bears the tax. This is the case even today for all indirect taxes but the difference under the GST is that with streamlining of the multiple taxes the final cost to the customer will come out to be lower on the elimination of double charging in the system.
The current tax structure does not allow a business person to take tax credits. There are lot of chances that double taxation takes place at every step of supply chain. This may set to change with the implementation of GST.
Indian Government is opting for Dual System GST. This system will have two components which will be known as
- Central Goods and Service Tax (CGST) and
- State Goods and Service Tax (SGST).
The current taxes like Excise duties, service tax, custom duty etc will be merged under CGST. The taxes like sales tax, entertainment tax, VAT and other state taxes will be included in SGST.
So, how is GST Levied? GST will be levied on the place of consumption of Goods and services. It can be levied on :
- Intra-state supply and consumption of goods & services
- Inter-state movement of goods
- Import of Goods & Services
The rate (percentage) of GST is not yet decided. As mentioned in the above table, there might be CGST, SGST and Integrated GST rates. It is also widely believed that there will be 2 or 3 rates based on the importance of goods. Like, the rates can be lower for essential goods and could be high for precious/luxury items.
Benefits of GST Bill implementation
- The tax structure will be made lean and simple
- The entire Indian market will be a unified market which may translate into lower business costs. It can facilitate seamless movement of goods across states and reduce the transaction costs of businesses.
- It is good for export oriented businesses. Because it is not applied for goods/services which are exported out of India.
- In the long run, the lower tax burden could translate into lower prices on goods for consumers.
- The Suppliers, manufacturers, wholesalers and retailers are able to recover GST incurred on input costs as tax credits. This reduces the cost of doing business, thus enabling fairer prices for consumers.
- It can bring more transparency and better compliance.
- Number of departments (tax departments) will reduce which in turn may lead to less corruption
- More business entities will come under the tax system thus widening the tax base. This may lead to better and more tax revenue collections.
- Companies which are under unorganized sector will come under tax regime.
Challenges for implementing Goods & Services Tax system
- The bill is yet to be tabled and passed in the Parliament
- To implement the bill (if cleared by the Parliament) there has to be lot changes at administration level, Information Technology integration has to happen, sound IT infrastructure is needed, the state governments has to be compensated for the loss of revenues (if any) and many more..
- GST, being a consumption-based tax, states with higher consumption of goods and services will have better revenues. So, the co-operation from state governments would be one of the key factors for the successful implementation of GST
Since GST replaces many cascading taxes, the common man may benefit after implementing it. But it all depends on ‘what rate the GST is going to be fixed at?’ Also, Small Traders (based on Annual Business turnover) may be exempted from it.
France was the first country to introduce this system in 1954. Nearly 140 countries are following this tax system. GST could be the next biggest tax reform in India. This reform could be a continuing process until it is fully evolved. We need to wait few more months for more details on Goods & Services Tax system.
Latest update (06-Apr-2017) : Rajyasabha passes GST bill. Now, the state assemblies would consider and pass their respective State GST (SGST) law.
Latest news on GST (30-Mar-2017) : GST Bill has been passed in Loksabha.
Latest update on GST Bill implementation date (28-Feb-2017) : All States now agree to roll out GST by July 2017.
Latest update on GST Rate Structure (03-Nov-2016) : A four-tier GST tax slabs have been decided by the Finance ministry. Below are the details;
- Zero Tax rate : There won’t be any tax on almost 50 % of items in the Consumer Price Index basket, including grains used by the common man.
- 5% Tax slab : This is applicable on items of mass consumption used by common people.
- There would be two standard rates of 12% and 18% under the GST regime.
- All the items (especially luxury items) which are now taxed at around 30% will fall under 28% GST rate slab.
- An additional cess would also be levied on luxury cars, tobacco products & aerated drinks besides the highest tax rate (28%).
- The tax rate proposal will now be placed in Parliament for its approval.
Latest News on GST Bill (08-Sep-2016) – GST Bill gets President’s (Shri Pranab Mukherjee) nod. The enactment of the bill will now pave the way for the setting up of the GST council.
Latest News on GST Bill 2016 (03-August-2016) – Rajya Sabha passes GST Bill. What next? – The passage of the GST constitutional bill will lead to the setup of the GST council. The council will then deliberate upon the exact GST rate, which will be ratified by the States. The final and actual GST Bill will likely be taken up in Winter Session of the Parliament.
Latest news (14-June-2016) : Ministry of Finance releases Draft GST Bill. Click here to download GST Draft Bill 2016 PDF.
Latest News (24-Apr-2015) : Finance Minister, Arun Jaitely has tabled the GST Bill in Lok Sabha.
Do you think GST Bill is going to be the game changer for Indian economy? Do share your views and thoughts.
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net)
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