Goods and Services Tax (GST) is a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India to replace taxes levied by the central and state governments. It was introduced as The Constitution (One Hundred and First Amendment) Act 2016, following the passage of Constitution 122nd Amendment Bill. The GST is governed by GST Council and its Chairman is Union Finance Minister of India – Arun Jaitley.

There are three components of GST

  1. Central GST (CGST) – it will be levied by Centre
  2. State GST  (SGST) – It will be levied by State
  3. Integrated GST (IGST) – It will be levied by Central Government on Intestate supply of Good and Services

France was the first country to introduce GST in 1954. Worldwide, Almost 150 countries have introduced GST in one or the other form since now. Most of the countries have a unified GST system. Brazil and Canada follow a dual system vis-à-vis India is going to introduce. In China, GST applies only to goods and the provision of repairs, replacement and processing services.

Objectives of GST

One of the main objective of Goods & Service Tax(GST) would be to eliminate the doubly taxation i.e. cascading effects of taxes on production and distribution cost of goods and services. The exclusion of cascading effects i.e. tax on tax till the level of final consumers will significantly improve the competitiveness of original goods and services in market which leads to beneficial impact to the GDP growth of the country. Introduction of a GST to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative. Integration of various taxes into a GST system would make it possible to give full credit for inputs taxes collected. GST, being a destination-based consumption tax based on VAT principle.

Tax Task

The Goods and Services Tax (GST), the biggest reform in India’s indirect tax structure since the economy began to be opened up 25 years ago, at last looks set to become reality. The Constitution (122nd) Amendment Bill comes up in Rajya Sabha today, on the back of a broad political consensus and boosted by the ‘good wishes’ of the Congress, which holds the crucial cards on its passage. Here’s how GST differs from the current regimes, how it will work, and what will happen if Parliament clears the Bill.

Stage 1
Imagine a manufacturer of, say, shirts. He buys raw material or inputs — cloth, thread, buttons, tailoring equipment — worth Rs 100, a sum that includes a tax of Rs 10. With these raw materials, he manufactures a shirt.

In the process of creating the shirt, the manufacturer adds value to the materials he started out with. Let us take this value added by him to be Rs 30. The gross value of his good would, then, be Rs 100 + 30, or Rs 130.

At a tax rate of 10%, the tax on output (this shirt) will then be Rs 13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs (Rs 10). Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10).

Stage 2
The next stage is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs 130, and adds on value (which is basically his ‘margin’) of, say, Rs 20. The gross value of the good he sells would then be Rs 130 + 20 — or a total of Rs 150.

A 10% tax on this amount will be Rs 15. But again, under GST, he can set off the tax on his output (Rs 15) against the tax on his purchased good from the manufacturer (Rs 13). Thus, the effective GST incidence on the wholesaler is only Rs 2 (15 – 13).

Stage 3
In the final stage, a retailer buys the shirt from the wholesaler. To his purchase price of Rs 150, he adds value, or margin, of, say, Rs 10. The gross value of what he sells, therefore, goes up to Rs 150 + 10, or Rs 160. The tax on this, at 10%, will be Rs 16. But by setting off this tax (Rs 16) against the tax on his purchase from the wholesaler (Rs 15), the retailer brings down the effective GST incidence on himself to Re 1 (16 –15).

Thus, the total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs 10 + 3 +2 + 1, or Rs 16.

Common Tax

Central taxes
 The GST will replace
# Central Excise Duty
# Duties of Excise (medicinal and toilet preparations)
# Additional Duties of Excise (goodsof special importance)
# Additional Duties of Excise (textiles and textile products)
# Additional Duties of Customs (commonly known as CVD)
# Special Additional Duty of Customs (SAD)
# Service Tax
# Cesses and surcharges in so far as they relate to supply of goods or services

State taxes
The GST will subsume
# State VAT
# Central Sales Tax
# Purchase Tax
# Luxury Tax
# Entry Tax (all forms)
# Entertainment Tax (not levied by local bodies)
# Taxes on advertisements
# Taxes on lotteries, betting and gambling
# State cesses and surcharges

The following taxes will be bound together by the GST:

  • Central Excise Duty
  • Service Tax
  • Countervailing Duty
  • Special Countervailing Duty
  • Value Added Tax (VAT)
  • Central Sales Tax (CST)
  • Octroi
  • Entertainment Tax
  • Entry Tax
  • Purchase Tax
  • Luxury Tax
  • Advertisement taxes
  • Taxes applicable on lotteries

Advantages and disadvantages of GST Bill

(according to Pradhan Mantri Yojana)

Introduction of GST will bring following benefits –

  • Multiple Taxation is removed
  • Goods and Services are taxed at same rate
  • Taxes on the Manufacturers are reduced
  • It helps in the seamless flow of credit in the country

In single line we can say that GST will simplify administration, improve compliance, remove distortions in production, trade and consumption

Although there are noticeable benefits of GST, it doesn’t mean that it is perfect. There are some disadvantages too, which can’t be ignored:

  • The tax on services would go from 14 to 20% after the implementation of GST
  • The Tax on retails will almost get doubled
  • The tax on imported Goods will be around 6%
  • There will be control on every system by the Central and State Governments

Highlights of the GST Bill

1. The Bill amends the Constitution to introduce the goods and services tax (GST).
2. Parliament and state legislatures will have concurrent powers to make laws on GST. Only the centre may levy an integrated GST (IGST) on the interstate supply of goods and services, and imports.
3. Alcohol for human consumption has been exempted from the purview of GST. GST will apply to five petroleum products at a later date.
4. The GST Council will recommend rates of tax, period of levy of additional tax, principles of supply, special provisions to certain states etc. The GST Council will consist of the Union Finance Minister, Union Minister of State for Revenue, and state Finance Ministers.
5. The Bill empowers the centre to impose an additional tax of up to 1%, on the inter-state supply of goods for two years or more. This tax will accrue to states from where the supply originates.
6. Parliament may, by law, provide compensation to states for any loss of revenue from the introduction of GST, up to a five year period.

Key Issues

1. An ideal GST regime intends to create a harmonised system of taxation by subsuming all indirect taxes under one tax. It seeks to address challenges with the current indirect tax regime by broadening the tax base, eliminating cascading of taxes, increasing compliance, and reducing economic distortions caused by inter-state variations in taxes.

2. The provisions of this Bill do not fully conform to an ideal GST regime. Deferring the levy of GST on five petroleum products could lead to cascading of taxes.

3. The additional 1% tax levied on goods that are transported across states dilutes the objective of creating a harmonised national market for goods and services. Inter-state trade of a good would be more expensive than intra-state trade, with the burden being borne by retail consumers. Further, cascading of taxes will continue.

4. The Bill permits the centre to levy and collect GST in the course of inter-state trade and commerce. Instead, some experts have recommended a modified bank model for inter-state transactions to ease tax compliance and administrative burden.

Text credit: The Indian Express, Pradhan Mantri Yojana, GST India, PRS Legislative Research, Financial Express, Money Control

Comments