Goods and Services Tax - An Introduction

Goods and Services Tax - An Introduction

 UPSC GENERAL STUDIES PAPER III: Mobilization of Resources; Government Budgeting

(Note: This is the first part of a two part series on GST.) 

Table of Content

What is GST?

Why do we need GST?

GST and Centre-State Financial Relations

GST Bill

GST Council

Advantages of GST

• ·         For Business and Industry
• ·         For Central and State Governments
• ·         For the Consumer

Implementation of GST

What is GST?

• GST stands for "Goods and Services Tax", and is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at the national level.

• GST is a value-added tax levied at all points in the supply chain with credit allowed for any tax paid on input acquired for use in making the supply.

• It will replace all indirect taxes levied on goods and services by the Indian Central and State governments.

• GST will lead to 'One Nation, One Tax', empower States and increase their revenues.

Owing to its capacity to raise revenue in a most transparent and neutral manner, 150 countries have adopted the GST.

Why do we need GST?

• 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.

• 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?

• There are separate laws for separate levy. For e.g. Central Excise Act, 1944, respective State VAT laws. Tax compliance is complex because of multiplicity of laws and their provisions to be followed.

• GST REGIME: There will be only one such law because GST shall subsume various taxes as specified above. In GST tax compliance would be easier as only one law subsuming other taxes need to be followed.

• There are separate rates. For e.g. Excise 12.36 % and Service Tax 14%.

• GST REGIME: There will be one CGST rate and a uniform rate of SGST across all states.

• Under present scenario, tax burden on tax payer is high.

• GST REGIME: Under GST, tax burden is expected to reduce since all taxes are integrated which make it possible the burden to be split equitably between manufacturing and service.

• Current Scenario – Taxable at the place of Manufacture/Sale of goods, Rendering of services

• GST REGIME – Taxable at the place of Consumption, a destination based tax

An illustration of how GST will result in final prices coming down:

	Raw Material	Manufacturer	Wholesaler	Retailer
Non GST (Price to customer= 208.23)	100 (10%tax=10)	100+30(VA)=130 (10% tax =    13) Total Cost=  143	143+20=163 (10%tax=16.3) Total Cost=179.3	179.3+10=189.3 (10%tax=18.93) Total Cost=208.23
GST Price to customer=160+3+2+1= 166)	100 (10%tax=10)	100+30(VA)=130 (10% tax   =13-10*=3) Total Cost=130	130+20=150 (10%tax =15-13*=2) Total Cost=150	150+10=160 (10% tax= 16-15*=1) Total Cost=160

Note: https://youtu.be/MmCuowi9BA4 (For further understanding of how we arrived at the above table, you may follow the above link.)

GST and Centre-State Financial Relations

Arrangement at Present

• Currently, fiscal powers between the Centre and the States are clearly demarcated in the Constitution with almost no overlap between the respective domains. 

• The Centre has the powers to levy tax on the manufacture of goods (except alcoholic liquor for human consumption, opium, narcotics etc.) while the States have the powers to levy tax on the sale of goods.

• In the case of inter State sales, the Centre has the power to levy a tax (the Central Sales Tax) but, the tax is collected and retained entirely by the originating States.

• As for services, it is the Centre alone that is empowered to levy service tax.

• Since the States are not empowered to levy any tax on the sale or purchase of goods in the course of their importation into or exportation from India, the Centre levies and collects this tax as additional duties of customs, which is in addition to the Basic Customs Duty. This additional duty of customs counterbalances excise duties, sales tax, State VAT and other taxes levied on the like domestic product.

• Introduction of the GST would require amendments in the Constitution so as to concurrently empower the Centre and the States to levy and collect GST.

GST Bill

• The power to make laws in respect of supplies in the course of inter-state trade or commerce will be vested only in the Union Government. States will have the right to levy GST on intra-state transactions, including on services.
• The Centre will levy IGST on inter-state supply of goods and services. Import of goods will be subject to basic customs duty and IGST.
• Central taxes such as Central Excise duty, Additional Excise duty, Service tax, Additional Custom duty and Special Additional duty as well as state-level taxes such as VAT or sales tax, Central Sales tax, Entertainment tax, Entry tax, Purchase tax, Luxury tax and Octroi will subsume in GST.
• Petroleum and petroleum products, i.e., crude, high speed diesel, motor spirit, aviation turbine fuel and natural gas, shall be subject to GST - date to be notified by the GST Council.
• Provision will be made for removing imposition of entry tax /Octroi across India.
• Entertainment tax, imposed by states on movie, theatre, etc., will be subsumed in GST, but taxes on entertainment at panchayat, municipality or district level will continue.
• GST may be levied on the sale of newspapers and advertisements. This would mean substantial incremental revenues for the Government.
• Stamp duties, typically imposed on legal agreements by states, will continue to be levied.
• Administration of GST will be the responsibility of the GST Council. 

A GST Council

• GST Council will be the apex policy making body for GST consisting of representatives from the Centre as well as State will be formed within 60 days of the enactment of the Bill.
• The Council will make recommendations to the Union and the States on model Goods & Service tax laws, rates including floor rates with bands of goods & service tax, Place of Supply rules and any other matter relating to GST as the Council may decide.

Advantages of GST

The introduction of Goods and Services Tax (GST) would be a very significant step in the field of indirect tax reforms in India.

GST has been envisaged as an efficient tax system, neutral in its application and distributionally attractive. The advantages of GST are:

For Business and Industry

Easy compliance: A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all tax payer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.

Uniformity of tax rates and structures: GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty an ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.

Removal of cascading: A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business.

Improved competitiveness: Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.

Gain to manufacturers and exporters: The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services.

This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.

For Central and State Governments

Simple and easy to administer: Multiple indirect taxes at the Central and State levels are being replaced by GST. Backed with a robust end-to-end IT system, GST would be simpler and easier to administer than all indirect taxes of the Centre and State levied so far.

Better controls on leakage: GST will result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage built mechanism in the design of GST that would incentivize tax compliance by traders.

Higher revenue efficiency: GST is expected to decrease the cost of collection of tax revenues of the Government, and will therefore, lead to higher revenue efficiency.

For the Consumer

Single and transparent tax proportionate to the value goods and services: Due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today are laden with many hidden taxes.

Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.

Relief in overall tax burden: Because of efficiency gains and prevention of leakages, the overall tax burden on most commodities will come down, which will benefit

Implementation of GST 

For the implementation of GST in the country, the Central and State Governments have jointly registered Goods and Services Tax Network (GSTN) as a not-for-profit, non-Government Company to provide shared IT infrastructure and services to Central and State Governments, tax payers and other stakeholders.

(Note: In the next part we will be focusing on the challenges that governments in India are going to face in implementing the GST, and what measures can be taken to smoothen the process.)