What is GST?
GST stands for Goods and Services Tax. It is a kind of tax imposed on sale, manufacturing and usage of goods and services. Goods and Services Tax is applied on services and goods at a national level with a purpose of achieving overall economic growth. GST is particularly designed to replace the indirect taxes imposed on goods and services by the Centre and States.
Goods and Services Tax Definition:
Goods and Services Tax can be defined as a kind of Value Added Tax imposed by on various goods and services by different countries. The tax charged on goods and services may differ from country to country. Goods and services tax is imposed to collect revenues for the government. This tax is paid by the consumers of goods and services and collected and forwarded to the government by the business entities.
Goods and Services Tax in India:
In India, the Goods and Services Tax Bill was officially introduced in 2014 as The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014. The GST Bill in India proposes the implementation of nationwide Value Added Tax on sale, manufacturing and the use of different goods and services. The Goods and Services Tax act is expected to be operative in India from April, 2016.
Arun Jaitley - the Finance Minister of India announced The Constitution (One Hundred and Twenty-second Amendment) Bill, 2014 or the Goods and Services Tax in Lok Sabha on 19 December 2014. The Parliament passed the bill on 6th May, 2015, after it received 352 votes for and 37 against it.
Current Taxation System:
GST is a kind of indirect tax. Currently, Indian consumers have to pay indirect tax on goods and services such as Value Added Tax, Service Tax, Excise Duty, Customs Duty, etc. Under the current system, each State has a right to levy their own tax on the goods coming into their dominion for sale and consumption, while the Centre levies taxes on manufacture of the goods. All these direct taxes levied on the traders are passed down to the consumer.
The taxes levied by the State and Central Governments is given in the table below:
|Central Government||State Government||Local Administration|
|Income Tax||Sales Tax||Property Tax|
|Excise Duty or Central VAT||Value Added Tax|
|Service Tax||Entertainment Tax|
|Central Sales Tax||Professional Tax|
|Capital Gains Tax|
Of these, excise duty/CENVAT, customs duty, service tax, central and state sales tax, VAT, octroy, entry tax, road toll, luxury tax and entertainment tax are applicable to goods and services.
Let us take an example of a dress manufactured in Surat, Gujarat. At the spot of manufacture, an excise duty/Cenvat has to be paid to the Central Government. If the dyes for the dress are bought from Madhya Pradesh, then the manufacturer has to pay the state taxes applicable for the dyes in Madhya Pradesh while buying it, and also pay Gujarat’s “import duty” on the product. Similarly, if the buttons for the dress are bought from Rajasthan, then another set of taxes are added to the manufacturing cost. At the end of this chain, when the product reaches the market for sale, VAT is added to it. So all the taxes paid for the production of the dress so far gets added to the cost of the dress, which rises considerably from its actual manufacturing cost.
The current system is burdened with multiple taxation on the same object with no way to offset the taxes already paid at each stage of production-retailing-consumption. If Cenvat and service tax are paid at the manufacturing level, these can be offset against future payments, but none of the other taxes paid at any stage can be reclaimed.
How GST Works:
GST proposes to abolish the varying levels of taxation between States, and consider the country as a single whole organism when it comes to taxes on goods and services instead of as a segmented creature. All the sundry taxes will be clubbed into just 2 levels – Central GST and State GST. What a trader will essentially be able to do is claim a refund on the taxes already paid at different stages of value addition. The consumer who buys the product will have to pay only the GST charged by the last dealer in the supply chain, as everyone else would have the opportunity to set-off the taxes paid at the previous stages. If we take the example above under the GST system, the Cenvat on manufacturing the dress and the taxes paid on dyes and buttons can be offset at each level, thereby considerably reducing the total taxes paid.
GST will also prevent the multiple taxation occurring on certain goods, and ensure transparency with regards to the rate of taxation and the total amount that goes to the government as taxes on a product. Currently, a consumer is not aware of the total amount of taxes s/he pays for a product, apart from VAT which is mentioned on the bill.
Here’s a list of taxes that the GST will likely replace:
- Service Tax
- Cesses and surcharges related to supply of goods or services
- Central Excise Duty
- Excise Duties on medicinal and toilet preparations
- Additional Excise Duties on textiles and textile products
- Additional Excise Duties on goods of special importance
- Additional Customs Duties (CVD)
- Special Additional Duty of Customs (SAD)
These are the taxes that could be absorbed into the GST regime:
- Central Sales Tax
- State VAT
- Entry Tax
- Purchase Tax
- Entertainment Tax (not levied by local bodies)
- Luxury Tax
- Taxes on advertisements
- State cesses and surcharges
- Taxes on lotteries, betting and gambling
The exact rates of GST have not been decided yet. This will be done only after repeated consultations on the reports made by the GST Council. The rates being discussed as of now hover around 18%, which may be higher than the current system for certain goods and services, and lower for the others.
Advantages of GST:
- This is a federal law, which means that the states will no longer have the right to make new laws on taxation towards goods and services.
- It simplifies the tax system and makes it easier to understand as well as cheaper to implement at various levels.
- Tax evasion at various stages will be eliminated as tax offsets can be collected only if taxes have been paid originally. You will also be able to buy raw materials or constituent materials for production only from those who have paid taxes, in order to claim benefits.
- It will be cheaper to buy input goods and services for production from other states.
- The current supply and distribution chain may undergo a change with a change in taxation system that does away with excise and customs duties.
- The consumer will get the end-product at cheaper rates because of elimination of multiple taxes and the tax cascade.
- As of now, petroleum and petroleum products have been kept out of the GST regime until further notice.
- Sale of newspapers and advertisements are also likely to fall under the GST regime, allowing the government to increase its revenue considerably.
- While there will be central GST and state GST, the tax applicable on goods and services being exported and imported between states in India would fall under an Integrated GST (GST) system in order to avoid conflict of dominion.
Disadvantages of GST:
- GST is not good news for all sectors, though. In the current system, many products are exempted from taxation. The GST proposes to have minimal exemption list. Currently, higher taxes are levied on fewer items, but with GST, lower taxes will be levied on almost all items.
- GST is not applicable on liquor for human consumption. So alcohol rates will not get any advantage of GST.
- Stamp duty will not fall under the GST regime and will continue to be imposed by states.
GST Bill Approval Process:
The Constitution Amendment Bill for Goods and Services Tax (GST) was cleared by the Rajya Sabha on August 3, 2016. This Bill sanctions a modification in the Constitution to allow both the Centre and the States to levy goods and services tax.
The Bill was first introduced in the Lok Sabha in March 2011 and reports were submitted around it regularly. However, in 2014, the Bill lapsed as the Lok Sabha’s ongoing term ended. The Bill was passed by the Lok Sabha on May 6, 2015, and further reports were commissioned and presented.
After Rajya Sabha’s clearance of the Bill, the Lok Sabha will ratify the Bill again. At least 15 other states also have to support the Bill to go forward with its implementation as an Act. Once the ratifications are received, the President will constitute a GST Council comprising the Finance Minister, Minister of State in charge of Revenue, Minister in charge of Finance/Taxation, and other ministers nominated by states. This Council will make recommendations on the taxes to be absorbed and done away with, exemptions to GST and their threshold, laws governing the GST levies, actual GST rates and discounts, etc. A draft of the Bill is already available in the public domain. Once the changes are made and the final draft it ready it will be put up in public again and comments sought.
Once the GST Bill is fleshed out in detail, and the President approves it, the Parliament will pass a legislation on central GST and integrated GST, and all the states and union territories will pass legislations on the state GST. Once all legislations have been passed as Acts, a synchronised implementation of the Acts will be negotiated among the states and centre, and Goods and Services Tax will be officially active.
Goods and Services Tax Bill:
The Goods and Services Tax Bill is officially known as The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 which is formulated to create a pan-India tax system and end the number of multiple taxes charged by the Centre and the States on various goods and services. The key points of the GST bill are given below:
It is an indirect, uniform tax that is levied on the goods and services throughout a particular country. Several developed countries add tax on sale, manufacture and consumption using single comprehensive tax.
Surcharge on supply of goods, cesses, special ad-on duty of customs, add-on duties of customs and excise and central excise duty would be replaced by Central Taxes GST.
Entertainment tax, entry tax, purchase tax, central sales tax, VAT, etc. would be replaced by State Tax GST.
The primary objectives of GST is eliminating the excessive taxation.
The 2014 bill deleted the 2011 bill provision that imposed certain restrictions on the states on taxation of the products that are important for inter-state commerce and trade.
Goods and Services Tax Act:
Goods and Services Tax act is one of the most remarkable tax reforms that has taken place in India so far. The GST act, which is also known as The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, mainly focuses on changing the Constitution of India to simplify the process taxation on goods and services in India. The act bestows power on the Parliament and the State legislatures to make laws for imposing taxes on goods and services at the national level.
Key Features of Goods and Services Tax:
Listed below are the main features of the Goods and Services tax in India:
- The Goods and Services Tax will include Central Indirect taxes such as Excise Duty, Service Tax, Special Additional Duty of Customs, Countervailing Duty , Central Surcharges and Cesses as long as they are related to the supply and consumption of goods and services.
- It will also include State Value Added Tax or Sales Tax, Entertainment Tax, (excluding the tax charged by the local bodies), Entry and Octroi tax, Central Sales Tax (taxed by the Centre and collected by the State Government) , Purchase Tax, Luxury tax, Taxes on betting, lottery and State cesses and surcharges involved in the supply and consumption of services and goods.
- Inclusion of the concept of ‘declared goods of special importance’ as per the Indian Constitution.
- Will levy integrated Goods and Services Tax on inter-State transactions of goods and services.
- Will levy additional tax of 1% on supply of goods in inter-State trade which will be collected by the Government of India for a period of two years and will be allocated to the states from where the supply comes.
- Petroleum and petroleum products and alcohol have been kept out of the reach of GST.
- The act will have two constituents - Central GST charged by the Centre and State GST charged by the states. But, in case of inter-state trade or commerce, only the Centre will levy tax and collect Goods and Services Tax, and the tax collected would be divided between the Centre and the State as per the provision made in the parliament.
- Also an additional tax of 1% on inter-state trade in goods and services will be imposed and collected by the Centre and provided to the states for two years to compensate the loss ( of any) faced by the states for implementing the GST.
- A Goods and Services Tax Council will be created to address the issues relating to goods and services tax and give recommendations to the Union and the States on areas such as rates, exemption list and threshold limits. The GST Council will constitute of the Union Finance Minister as chairman followed by the Minister –in-charge of Finance or Taxation or any other Minister nominated by each State Government. The GST Council will function under the Chairmanship of the Union Finance Minister and it will be a joint forum of the Centre and the States.
It is expected that the creation of the Goods and Services Tax act and its implementation will have a great impact on various aspects of business in India by changing the traditional pattern of pricing the products and services.
The Goods and Services Act will also have a great impact on the tax system in India by reducing the unfavorable effect of tax on the cost of goods and services. GST is expected to change the whole indirect tax system by impacting the tax structure, tax computation, credit utilization and tax frequency. It will also help in supply chain optimization.
As per the government notification, the Goods and Services Tax will be effective in India from April, 2016. The originators of the Goods and Services Tax believe that the implementation of this act would make the tax procedure more transparent, fair and efficient.
Thus, the introduction of Goods and Services Tax or The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 is a significant move taken the Indian Government to reform taxation in India. It will help in creating a single national market by merging several Central and State taxes under a one single tax procedure. No doubt, the implementation of GST will take time, but it is likely to create more employment opportunities and economic inclusion.
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