Goods and Services Tax (GST) – What and Why?

The Goods and Services Tax (GST) is a value added tax that will replace all indirect taxes levied on goods and services by the Government, both Central and States, once it is implemented. It is all set to consolidate all State economies. This will be one of the biggest taxation reforms that will take place in India once the Bill gets officially the green signal to implement. The basic idea is to create a single, cooperative and undivided Indian market to make the economy stronger and powerful. It will see a significant breakthrough towards an all-inclusive indirect tax reform in the country.

In the year 2000, for the first time the idea of initiating the GST was made by the then BJP Government under the leadership of Atal Behari Vajpayee. An empowered committee was also formed for that, headed by Asim Dasgupta (the then Finance Minister of the West Bengal Government). The committee was formed to design the model of the GST and at the same time inspect the preparation of the IT department for its rollout. In 2011, the previous United Progressive Alliance (UPA) Government also introduced a Constitution Amendment Bill to facilitate the introduction of the GST in the Lok Sabha but it was rejected by many States.

What is GST?

The GST is basically an indirect tax that brings most of the taxes imposed on most goods and services, on manufacture, sale and consumption of goods and services, under a single domain at the national level. In the present system, taxes are levied separately on goods and services. It is a consolidated tax based on a uniform rate of tax fixed for both goods and services and it is payable at the final point of consumption. At each stage of sale or purchase in the supply chain, this tax is collected on value-added goods and services, through a tax credit mechanism.

The proposed model of GST and the rate
A dual GST system is planned to be implemented in India as proposed by the Empowered Committee under which it will be divided into two parts:

  • State Goods and Services Tax (SGST)
  • Central Goods and Services Tax (CGST)

Both SGST and CGST will be levied on the taxable value of a transaction. All goods and services, leaving aside a few, will be brought into the GST and there will be no difference between goods and services. The GST system will combine Central excise duty, additional excise duty, services tax, State VAT entertainment tax etc. under one banner.
The GST rate is expected to be around 14-16 per cent. After the combined GST rate is fixed, the States and the Centre will decide on the SGST and CGST rates. At present, 10 per cent is levied on services and the indirect taxes on most goods is around 20 per cent.

Advantages of GST Bill

Introduction of a GST is very much essential in the emerging environment of the Indian economy.

  • There is no doubt that in production and distribution of goods, services are increasingly used or consumed and vice versa. Separate taxes for goods and services, which is the present taxation system, requires division of transaction values into value of goods and services for taxation, leading to greater complications, administration, including compliances costs. In the GST system, when all the taxes are integrated, it would make possible the taxation burden to be split equitably between manufacturing and services.
  • GST will be levied only at the final destination of consumption based on VAT principle and not at various points (from manufacturing to retail outlets). This will help in removing economic distortions and bring about development of a common national market.
  • It will also help to build a transparent and corruption-free tax administration. Presently, a tax is levied on when a finished product moves out from a factory, which is paid by the manufacturer, and it is again levied at the retail outlet when sold.

Benefits of GST Bill

For the Centre and the States

According to experts, by implementing the GST, India will gain $15 billion a year. This is because, it will promote more exports, create more employment opportunities and boost growth. It will divide the burden of tax between manufacturing and services.

For individuals and companies

In the GST system, taxes for both Centre and State will be collected at the point of sale. Both will be charged on the manufacturing cost. Individuals will be benefited by this as prices are likely to come down and lower prices mean more consumption, and more consumption means more production, thereby helping in the growth of the companies.

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CA Harshit Shah
Author is a Charterd Accountant, an Expert is Start-up consultation and compliances. He conducts various lectures and seminars at Start-up groups in Mumbai