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 Value Added Tax (VAT) on purchasing goods
& services. We have to pay ‘Entertainment Tax’ for watching a movie. And
there are Excise duties, Import Duties, Luxury Tax, Central Sales Tax, Service
Tax.. etc…
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 Industries, Business & common man and end
consumer? What are the advantages, disadvantages and challenges?
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.
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.
But
being the last person in the supply chain, the end consumer has to bear this
tax and so, in many respects, GST is like a last-point retail tax. GST is going
to be collected at point of Sale.
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 & Service
What is the applicable GST rate?
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 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.
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