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Goods and Services Tax better known as GST in India, is a new and comprehensive tax to be levied on sales, manufacturing and consumption of services and goods across the nation. Referred to as one of the biggest tax reforms in the country, GST is expected to bring together state economies and improve overall economic growth of the nation.
Goods and Services Tax bill is India's biggest reform in India's indirect tax structure. The purpose of the bill is to introduce one single tax on supply of goods and services, from the manufacturing stage until its delivery to the final consumer.
What is State GST and Central GST?
For transactions within a State, there will be two components of GST - Central GST (CGST) and State GST (SGST) - levied on the value of goods and services. Both the Centre and the States will simultaneously levy GST across the value chain.In the case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST). The IGST would be roughly equal to CGST plus SGST.
What are the key advantages?
1.Reduces paperwork in tax filing and collection.
2.More tax revenue without a direct impact on the industry.
3.Increased Exports.
4.India becomes a single market. This reduces cost and time on the movement of goods.
Who is liable to pay GST?
Businesses and traders with annual sales above Rs20 lakh are liable to pay GST. The threshold for paying GST is Rs10 lakh in the case of northeastern and special category states. GST is applicable on inter-state trade irrespective of this threshold.
The current tax system gives businesses a tough time as it involves multiple taxes, complex compliance procedures, and intervention by several state and central tax divisions. This makes it highly difficult to setup a business in India which already stands at 133rd position when comes to doing business.
By combine a large number of Central and State taxes into a single tax, it would serious cascading or double taxation in a major way and cover the way for a common national market. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated to be around 25%-30%. GST would also make Indian products competitive in the domestic and international markets. Studies show that this would have a boosting impact on economic growth. This tax, because of its transparent and self-policing character, would be easier to administer.
GST is supposed to bring in uniformity which is currently missing in our existing indirect tax structure. To explain to a layman, in the current structure we have multiple taxes levied by centre (excise, service tax etc), by state (VAT, CST, entry tax etc) and then also by local municipal bodies (octroi, LBT etc)
And there are multiple tax rates under each of these tax laws. This creates a lot of complexity. Further there is lot of restriction of tax credit. VAT paid cannot be credit against Exise or service tax and vice versa. Octroi, LBT and CST are always a cost. So there is a lot of tax cost that sits in your P/L
GST aims to rectify this. We now have only CGST and SGST or IGST applicable and the number of different tax rates are limited - should not exceed more than 10 as of now.
Under GST, There is a lot of credit fungibility, ensuring maximum credit and lower tax costs
Also there is lot of focus on technology enabled compliances with an aim to reduce non-compliances. If it works, this is going to be s first in the world. For eg: No other country has the matching principle that GST has proposed.
While yes, having one tax with one rate was the ideal situation, the fact that India is a federal state and our current structure makes it impossible to implement one nation one tax one rate.
The reason for introducing the GST regime in India is due to the following reasons:
1.Multiple taxes and tax cascading
1.In the current indirect tax structure, up to 20 taxes are levied by the state and the central government before a product reaches the end consumer.
2.At each stage of a supply chain, taxes are applied on the total value of the product, even though it has already been taxed at the previous level. This process of taxing already taxed goods is referred to as tax cascading. This happens when the government fails to provide credit for input tax (the tax that was paid at the previous stage) to the consumer who buys the product in the next stage.
3.This heavy tax cascading increases the amount of tax involved in the making of a product, which often is included as part of the manufacturing cost. This shifts the entire tax burden on the end consumer, who will pay upwards of 30-35% in taxes by the time they buy a product.
2.Interstate movement of goods is difficult
When goods are moved from one state to another, a Central Sales Tax (CST) of 2% is collected on the total value of the goods at the state border. For example, if you have a textile showroom in Chennai and buy garments from Surat , the truck carrying the consignment will be charged a CST of 2% for each state border it crosses. This amount gets added to the cost of the garments that you buy from the manufacturer. On top of all that, the constant taxing of interstate goods delays their arrival, as time is wasted at tax checkpoints at each state border.
Currently, the Indian tax structure is divided into two - Direct and Indirect Taxes. Direct Taxes are levies where the liability cannot be passed on to someone else. An example of this is Income Tax where you earn the income and you alone are liable to pay the tax on it.
By combine a large number of Central and State taxes into a single tax, it would serious cascading or double taxation in a major way and cover the way for a common national market. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated to be around 25%-30%. GST would also make Indian products competitive in the domestic and international markets. Studies show that this would have a boosting impact on economic growth. This tax, because of its transparent and self-policing character, would be easier to administer.
In the case of Indirect Taxes, the liability of the tax can be passed on to someone else. This means that when the shopkeeper must pay VAT on his sale, he can pass on the liability to the customer. So, in effect, the customer pays the price of the item as well as the VAT on it so the shopkeeper can deposit the VAT to the government. This means that the customer must pay not just the price of the product, but he also pays the tax liability, and therefore, he has a higher outlay when he buys an item.
This happens because the shopkeeper has paid a tax when he bought the item from the wholesaler. To recover that amount, as well as to make up for the VAT he must pay to the government, he passes the liability to the customer who has to pay the additional amount. There is currently no other way for the shopkeeper to recover whatever he pays from his own pocket during transactions and therefore, he has no choice but to pass on the liability to the customer.
Goods and Services Tax will address this issue after it is implemented. It has a system of Input Tax Credit which will allow sellers to claim the tax already paid, so that the final liability on the end consumer is decreased.
From July 2017, India will take after the double GST display which is comprised of the accompanying segments:
SGST - where the revenue will be collected by the central government
CGST - where the revenue will be collected by the state governments for intra-state sales
IGST - where the revenue will be collected by the central government for inter-state sales
In most cases, the tax structure under the new regime will be as follows:
1)Transaction
2)New Regime
3)Old Regime
4)Comments
5)Sale within the state
6)CGST + SGST
7)VAT + Central Excise/Service tax
8)Revenue will now be shared between the Centre and the State
9)Sale to another State
10)IGST
11)Central Sales Tax + Excise/Service Tax
12)There will only be one type of tax (central) now in case of inter-state sales.
Instead of applying taxes on the total value of the product at each stage, the GST only imposes tax on value addition. Because it provides credit for the input tax paid at each previous stage of a supply chain, this method considerably reduces the overall manufacturing cost.
| Transaction | New Regime | Old Regime | Comments |
|---|---|---|---|
| Sale within the state | CGST + SGST | VAT + Central Excise/Service tax | Revenue will now be shared between the Centre and the State |
| Sale to another State | IGST | Central Sales Tax + Excise/Service Tax | There will only be one type of tax (central) now in case of inter-state sales. |
If the movement of goods occur between two different states i.e. an interstate transaction, a combined tax called the IGST or the Integrated GST (SGST + CGST) will be collected by the central government. The IGST will supplant the right now demanded Central Sales Tax (CST) of 2%. The expense sum gathered as IGST will later be disseminated to particular state governments
For better understanding, let's take a look at the following scenarios:
Scenario 1: Levy of SGST and CGST
Let us assume that you're a distributor in Chennai and you buy goods from a manufacturer in Tirupur , Tamilnadu. Since the sale and movement of goods happen within the state, SGST and CGST will be levied on the sale. Also, the distributor gets tax credit on the input SGST and CGST.
Scenario 2: Levy of IGST
Let us assume that you're a distributor in Belgaum and you buy goods from a manufacturer in Tirupur . Here, the sale and movement of goods happen between two different states, IGST will be levied on the sale.
The four-tier tax structure contains four separate rates: a zero rate, a lower rate, a standard rate, and a higher rate.
Zero rate:
Zero rated supply means any of the following taxable supply of goods and/or services. There won't be any tax on almost 50 % of items in the Consumer Price Index basket, including grains used by the common man.
Including zero rate as part of the GST structure will keep the prices of basic items in check, regardless of whether the government decides to increase tax rates in the future.
Lower rate (5% Tax slab):
This is applicable on items of mass consumption used by common people. A lower rate of 5% will be applied on the rest of the items in the CPI basket and other items of mass consumption. This, along with the zero rate tax, will help prevent inflation from having much of an impact on zero rate and lower rate items, keeping the prices of all essential items in check.
Standard rate (12% and 18%)
There are two standard rates that have been finalized by the GST Council: 12% and 18%. All taxable services that are currently charged at 15% will now be moved to the 18% bracket. This could increase the price of a majority of services that are currently offered.
Higher rate (28% GST rate)
All the items (especially luxury items) which are now taxed at around 30% will fall under 28% GST rate slab.Previously, the tax on white goods was around 27% (including an excise of 12.5% and VAT of 14.5%), but the cascading effect elevated the tax as high as 30-31%. This will be minimized by the new higher rate of 28%.
Additional cess
The additional cess , which had been a topic of debate since the proposal of the GST rates, is now finalized.