Goods and Services Tax (GST) is a comprehensive indirect tax system that was introduced in India on July 1, 2017, replacing a complex web of previous taxes. GST is designed to streamline the taxation process and create a unified tax structure across the country. It is a consumption-based tax levied at multiple stages of the supply chain, from manufacturing to the final sale of goods and services.
GST has several advantages, including the elimination of cascading taxes, increased tax compliance, and the ease of doing business. It simplifies tax filing for businesses and reduces the burden of multiple tax authorities. GST also helps in curbing tax evasion through its transparent and technology-driven system.
However, GST implementation faced initial challenges, including compliance issues and teething problems with the online portal. Nevertheless, the Indian government has continuously worked to improve the system.
WHAT ARE INDIRECT TAXES?
Indirect taxes play a vital role in the financial structure of a government. They are taxes levied on goods and services, and their impact is felt by the end consumers who pay them indirectly through the purchase of products. These taxes are essential for funding government operations and providing public services like infrastructure development, education, and healthcare.
The distinction between direct and indirect taxes lies in their incidence and collection. Direct taxes, such as income tax and property tax, are assessed directly on individuals or entities, and the burden of payment falls directly on them. Indirect taxes, on the other hand, are embedded in the prices of goods and services, making consumers bear the cost indirectly. Common examples of indirect taxes include Value Added Tax (VAT), Goods and Services Tax (GST), excise duties, and customs duties.
Indirect taxes are known for their ability to generate significant revenue for governments while minimizing the perceived tax burden on individual taxpayers. They are an essential tool in balancing government budgets and financing public goods and services. However, they can also affect the cost of living, particularly for lower-income individuals who spend a higher proportion of their income on taxed goods and services. Therefore, the design and implementation of indirect taxes require careful consideration to ensure fairness and economic efficiency.
Before the implementation of Goods and Services Tax (GST) in India on July 1, 2017, the structure of indirect taxes was complex and included various components:
Central Excise Duty: Levied and collected by the Central Government, this tax was imposed on the manufacturing of goods. Manufacturers had to pay this duty on the production of goods.
State Value Added Tax (VAT): State VAT was applied to the sale of goods within a specific state and was collected by individual state governments. It was a significant source of revenue for state governments and varied from state to state.
Central Sales Tax (CST): CST was applicable to inter-state sales of goods, i.e., when goods were sold from one state to another. Although levied by the Central Government, it was collected and retained by the state government where the goods were dispatched from. CST aimed to prevent double taxation of goods during inter-state trade.
Service Tax: The Central Government imposed service tax on various services provided by businesses or professionals. It was a significant source of revenue from the service sector.
Entry Tax: Entry tax was levied on the entry of goods into a state and was collected by the state government. It was intended to protect local industries from competition.
Cesses: In addition to these taxes, there were various cesses imposed on specific goods and services for specific purposes, such as education cess and Swachh Bharat cess.
Constitutional Body: The GST Council is a constitutional body established under Article 279A of the Indian Constitution.
Composition: The Council is chaired by the Union Finance Minister of India, and its members include the finance ministers of all the states and union territories.
Decision-Making: It is responsible for making key decisions related to the implementation and administration of GST in India. Decisions are taken by consensus, and each member has one vote.
Tax Rates: The Council determines GST tax rates for goods and services, including standard rates, special rates for certain goods, and the compensation cess rates.
Tax Exemptions: It decides on exemptions and special provisions for specific goods and services, such as essential commodities.
Threshold Limits: The Council sets the threshold limits for GST registration, which determines the businesses that are required to register for GST.
Compensation Cess: It oversees the compensation cess, which is levied on certain luxury and sin goods to compensate states for potential revenue losses.
Place of Supply Rules: The Council formulates rules for determining the place of supply for goods and services, which is crucial for determining the state in which the tax is payable.
IGST Allocation: It decides the division of Integrated GST (IGST) revenue between the central and state governments for inter-state transactions.
Dispute Resolution: The Council serves as a platform for resolving disputes between states or between states and the central government regarding GST-related issues.
Meetings: The Council meets periodically to discuss and make decisions on GST-related matters. These meetings play a vital role in the functioning of the GST regime in India.
Advisory Body: While it holds significant decision-making power, the Council also serves as an advisory body, providing recommendations and guidance on various GST issues.
COMPOSITION OF GST COUNCIL
The GST (Goods and Services Tax) Council in India is composed of the following members:
Chairperson: The Union Finance Minister of India serves as the Chairperson of the GST Council.
Members: The Council includes the following members:
a. The Union Minister of State in charge of Revenue or Finance.
b. The Minister in charge of Finance or Taxation or any other Minister nominated by each state government.
Decision-Making: Each member, whether from the central government or a state government, has one vote in decision-making processes, regardless of the size or population of the state they represent
STRUCTURE OF GOODS AND SERVICES TAX
GST Implementation: GST, effective from July 1, 2017 (August 8, 2017, for Jammu and Kashmir), applies to the supply of goods or services or both within India, including an area up to 200 nautical miles inside the sea.
Intra-State Supplies: CGST: Payable to the Central Government.
SGST/UTGST: Payable to the respective State or Union Territory Government.
Area up to 12 nautical miles within the sea is considered part of the nearest State or Union Territory.
IGST: Payable to the Central Government.
Applies to supplies beyond 12 nautical miles but up to 200 nautical miles within the sea.
GST Compensation Cess: Applicable to specific items like tobacco products, pan masala, coal, aerated waters, motor cars, etc.
Customs Duty on Imports: Basic customs duty, Education Cess of customs, Secondary and Higher Education Cess of Customs, IGST, and GST Compensation Cess (where applicable) are payable on imported goods.
Elimination of Goods vs. Services Distinction: GST reduces the distinction between goods and services, addressing dual taxation challenges faced by industries.
Input Tax Credit: GST allows input tax credit for tax paid on inputs, input services, and capital goods, which can be used to offset output tax liabilities.
Consumption-Based Tax: GST is a consumption-based tax, meaning it’s paid in the state where goods or services are ultimately consumed.
Tax Rates: GST rates include Nil, 0.1%, 0.25%, 3%, 5%, 12%, 18%, and 28%. In intra-state supplies, CGST and SGST/UTGST are 50% each of the IGST rates.
Control and Administration: Control is exercised either by State/UT Authorities or Central Government Authorities to avoid dual control and disputes.
Exclusions: Petroleum products (crude, diesel, petrol, natural gas, aviation fuel) are currently excluded from GST and may be brought under its purview in the future. Alcoholic liquor remains subject to state duties and is not under GST.
GST Council: The GST Council is the apex constitutional body responsible for determining GST policies and related matters.
Advantages of GST (Goods and Services Tax):
Simplification of Taxation: GST replaces a complex system of multiple indirect taxes with a single, unified tax structure, reducing compliance and administrative burdens for businesses.
Elimination of Cascading Taxes: GST allows for the seamless flow of input tax credit across the supply chain, eliminating the tax-on-tax effect (cascading effect) and reducing the overall tax burden on goods and services.
Uniform Tax Rates: It creates a uniform tax rate structure across the country, promoting ease of doing business and a single market economy.
Reduced Tax Evasion: With increased transparency and the use of technology, GST helps reduce tax evasion and increases tax compliance, as transactions are tracked digitally.
Boost to Manufacturing and Exports: Input tax credit benefits make manufacturing more competitive, and GST reduces the cost of exports, making Indian products more competitive in international markets.
Removal of State Barriers: GST promotes free movement of goods across state borders by eliminating entry taxes and octroi, making inter-state trade more efficient.
Simplified Returns: GST introduces simplified and online tax return filing, reducing paperwork and compliance hassles.
Consumer Benefits: It is expected that GST will lead to lower prices for consumers as businesses pass on the benefits of reduced tax rates and input tax credit.
Transparency: GST introduces greater transparency in taxation through electronic invoicing and the online matching of credits, reducing the scope for tax fraud.
Disadvantages of GST:
Initial Implementation Challenges: The transition to GST initially faced challenges, including technical glitches in the online portal, which caused disruptions for businesses.
Complexity: GST, while simplifying many aspects of taxation, can be complex, especially for small and medium-sized enterprises (SMEs), which may struggle with compliance and understanding the system.
Multiple Rates: The existence of multiple tax rates (e.g., 5%, 12%, 18%, and 28%) can be confusing and administratively burdensome, leading to classification disputes.
Increased Compliance Costs: SMEs and smaller businesses may face higher compliance costs as they adapt to the new tax system, invest in technology, and hire professionals for tax compliance.
Inter-State Transactions: While GST aims to streamline inter-state transactions, some complexities and compliance requirements remain, particularly for e-commerce companies.
Impact on Services Sector: Some services may face higher tax rates under GST, impacting their cost structure and potentially affecting service providers and consumers.
Classification and Valuation Disputes: Determining the correct classification and valuation of goods and services can lead to disputes and litigations between businesses and tax authorities.
Transitional Issues: Some businesses faced challenges in claiming transitional credits during the initial implementation of GST, leading to financial strain.
Possibility of Inflation: While GST is expected to lower prices, there is a possibility of temporary inflationary pressures during the initial phase of implementation.