The Goods and Services Tax (GST) is a value-added tax imposed on most goods and services sold for domestic consumption. While consumers pay the GST, it is the responsibility of businesses selling the goods and services to remit it to the government.
Main Features of GST
- Applicable On Supply Side: GST is applicable to the “supply” of goods or services, replacing the old concept of taxing the manufacture or sale of goods or the provision of services.
- Destination-Based Taxation: GST follows the principle of destination-based consumption taxation, unlike the current origin-based taxation system.
- Dual GST: GST is a dual tax system where both the Centre and States levy taxes on a common base. The Centre’s GST is called Central GST (CGST), while the States’ GST is known as State GST (SGST).
- Treatment of Imports: Import of goods or services is considered inter-state supplies and is subject to Integrated Goods & Services Tax (IGST) in addition to applicable customs duties.
- Mutually Decided GST Rates: CGST, SGST & IGST rates are determined through mutual agreement between the Centre and the States, based on recommendations from the GST Council.
- Multiple Rates: Initially, GST was levied at four rates: 5%, 12%, 16%, and 28%. The GST council determines the items falling under these multiple tax slabs.
History of GST
The inception of GST in India traces back to the year 2000 when former Prime Minister Atal Bihari Vajpayee initially proposed the idea. Subsequently, in 2003, the Kelkar Task Force on indirect taxes, led by Vijay Kelkar, put forward a recommendation for the introduction of Goods and Services Tax (GST) with the aim of streamlining the intricate indirect tax system and enhancing tax compliance. This report served as the foundation for subsequent deliberations and negotiations.
Nevertheless, it wasn’t until 2014, during the tenure of Prime Minister Narendra Modi’s newly elected government, that a committee was constituted to draft the GST Bill. Following multiple rounds of discussions and consultations involving various stakeholders, the GST Bill was eventually approved by the Indian Parliament in 2016, and it came into effect on July 1, 2017.
Taxes incorporated in GST
| At the Central level | At the State Level |
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Legislative Basis Of GST
In India, the GST Bill was first introduced in 2014 as The Constitution (122nd Amendment) Bill. It received approval in 2016 and was renumbered as The Constitution (101st Amendment) Act, 2016 by Rajya Sabha. Its provisions include:
- Central GST covering Excise duty, Service tax, etc.
- State GST covering VAT, luxury tax, etc.
- Integrated GST for inter-state trade coordination.
GST Council
The GST Council is formed by the President under Article 279A to administer and govern GST. The Union Finance Minister of India serves as its Chairman, with members nominated by state governments.
The council operates with 1/3rd voting power for the Centre and 2/3rd for the states, and decisions are taken by a 3/4th majority.
The GST Council carries out the following functions:
- Recommending Tax Rates: The Council proposes tax rates for goods and services, considering revenue implications and the interests of various stakeholders.
- Deciding on Exemptions and Thresholds: The Council makes decisions regarding exemptions, thresholds, and other GST-related matters.
- Resolving Disputes: The Council resolves disputes arising between the central and state governments or among different states concerning GST implementation or revenue sharing.
- Reviewing Tax Revenue: The Council assesses the tax revenue position and provides suggestions to enhance revenue collection.
- Monitoring Implementation: Council oversees the implementation of GST and proposes measures to enhance its effectiveness.
- Recommending Changes: The Council suggests changes to the GST Act, rules, and procedures as deemed necessary.
Reforms Brought About by GST
- Creation of a common national market.
- Mitigation of cascading effect or double taxation.
- Reduction in the overall tax burden on goods.
- Improved competitiveness of Indian products in domestic and international markets.
- Ease of administration due to transparency and self-policing.
Advantages of GST
For the Government
- Creation of a unified common market, encouraging foreign investment and a “Make in India” campaign.
- Streamlined taxation through harmonization of laws and procedures.
- Increased tax compliance and reduced tax evasion.
For Overall Economy
- Certainty in the taxation system through common procedures and formats.
- Reduced corruption due to increased use of IT.
- Boost in export, manufacturing activity, employment, and GDP.
- Potential for poverty eradication through increased employment and financial resources.
For the Trade and Industry
- Simpler tax regime with fewer exemptions.
- Increased ease of doing business and reduction in multiplicity of taxes.
- Elimination of double taxation in certain sectors and efficient neutralization of taxes, especially for exports.
For Consumers
- Transparent prices due to seamless flow of input tax credit.
- Potential reduction in prices of goods due to the decreased cascading impact of taxation.
- Contribution to poverty eradication through increased employment and financial resources.
For the States
- Expansion of the tax base, enabling taxation across the supply chain.
- Enhanced revenue and economic empowerment through the taxation of services.
- Improved investment climate, benefiting the overall development of states.
- Increased compliance due to uniform tax rates.
Exemptions under GST
- Custom duty is still collected along with IGST on imported goods.
- Petroleum and tobacco products are currently exempted.
- Excise duty on liquor, stamp duty, and electricity taxes are also exempted.
Challenges Of GST
- Inability to cross-utilize SCGT and CGST input credit.
- Loss of revenue for manufacturing states.
- High tax rates to compensate for revenue previously collected through multiple taxes.
- Reduction in fiscal autonomy of the States.
- Concerns raised by banks and insurance companies over multiple GST registrations.
- Levying of additional cess.
- Uncertain capacity of State tax authorities to handle services taxation.
Conclusion
GST represents a significant stride in transforming the Indian economy from the informal to the formal sector. To overcome the upcoming challenges, it is crucial to draw upon the experiences of other global economies that have already implemented GST.
