Goods and Services Tax (GST) is an indirect tax, which has replaced many other indirect taxes in India, such as excise duty, VAT, services tax, etc.
On the 29th of March 2017, the motion to apply GST got passed in the Parliament. On 1st July 2017, the tax came into effect.
GST is a destination-based consumption tax that is imposed on various stages of production and distribution of goods and services. It is a comprehensive, multi-stage, destination-based tax that is imposed on every value addition. GST is paid by the customer. The sellers add GST to their products. The consumer while paying the sales tax pays the original sales price plus the GST. The GST portion is then paid to the government. In some countries, it is known as the Value-Added Tax (VAT).
The main objective of bringing GST into the Indian tax structure was to eliminate the tax on tax, or double taxation. The tax is imposed on every point of the sale. In the case of within the state sales, central-GST, and state-GST are charged.
GST in India. A brief history and its struggles
During a meeting between Prime Minister Atal Bihari Vajpayee and his economic advisory panel, a single common goods and services tax was proposed and was given a green light to be developed. The panel that proposed the tax consisted of three former RBI governors IG Patel, Bimal Jalan, and C Rangarajan. Subsequently, a committee headed by the Finance Minister of West Bengal, Asim Dasgupta was set up to design a GST model.
Vajpayee, later in 2002 formed a task force headed by Vijay Kelkar, who recommended the introduction of GST by the 12th finance commission.
After the 2004 Lok Sabha election, which put an end to the reign of the Vajpayee government and elected Congress-led UPA, the new finance minister P. Chidambaram started working on GST. They proposed that GST would be introduced in the Indian tax structure by 1 April 2010.
After the West Bengal elections of 2011, which threw the CPI(M) out of power, Asim Dasgupta resigned as the head of the GST committee by commenting that 80% of work had been done.
In the 115th Constitutional Amendment on 22nd March 2011, UPA introduced GST which ran into different objections from the opposing parties.
After several setbacks, indefinite postponements, objections, and government change the tax was finally approved and introduced in 2017. The launch was highlighted by the historic midnight session of both houses of the Parliament. Several businessmen attended the event as a guest. The launch program was boycotted by the opposition party, Indian National Congress. It is one of the few midnight sessions that the Parliament held. Some other notable sessions are the declaration of independence of India in 1947 and its silver and golden jubilee celebrations.
Advantages of GST
- Remove double taxation or tax-on-tax.
- Benefits for SMEs and startups.
- Reducing the overall cost of the product to make it more competitive in the global market.
- Increase in taxpayer registration.
Components of GST
CGST: the tax that the central government collects in an intrastate sale of a product.
SGST: the tax that the state government collects on an intrastate sale.
IGST: a tax that the central government collects on an interstate sale.
Sale within a state – CGST+SGST (Central and state will distribute the revenue equally between themselves)
Sale to another state – IGST (the only center will be paid. Then the center will share the IGST revenue based on the destination of the goods)
Example: A dealer from West Bengal sells a material worth Rs. 50,000 to a consumer from Bihar. The IGST rate on the transaction will be 18% (Rs. 9000). This Rs. 9000 will be paid to the central government.
If the same dealer was to sell his material to a consumer from his state, the GST rate would be 12% (Rs. 6000). Of the 12% GST, 6% (Rs. 3000) would be charged arms SGST. This Rs. 3000 would go to the West Bengal government as the sale happens within the border of the state.
Tax structure before GST
Before the introduction of GST, there were many indirect taxes imposed on the goods. The states collected the Value Added Tax (VAT). Every state had its own rules and regulations making transactions harder. GST brought all the taxes under the same common umbrella making it easier to the device.
Before GST, CST (Center State Tax) was imposed during the interstate sale of goods. Indirect taxes such as entertainment tax, octroi, and local tax were all imposed together by the state and the union government. This often led to double taxation on a single material.
Example: the government (union) charged excise duty on goods manufactured and sold. The state also charged VAT over the excise duty. This led to a cascading tax effect which also drove up the prices of the goods.
Indirect taxes before GST:
- Central Excise Duty
- Duties of Excise
- Additional Duties of Excise
- Additional Duties of Customs
- Special Additional Duty of Customs
- Cess
- State VAT
- Central Sales Tax
- Purchase Tax
- Luxury Tax
- Entertainment Tax
- Entry Tax
- Taxes on advertisements
- Taxes on lotteries, betting, and gambling
How has GST helped in price reduction:
GST reduces the price of a product by eliminating the cascading effect of taxation. However, if we look back, in 2005 the Value Added Tax was introduced in the Indian tax structure to overcome the same problem.
ia is a growing sector. The online provision of GST makes it easier for freelancers to file their taxes.
The real estate sector helps in employment generation and is one of the most economical sectors of the Indian market. This tax rule will bring transparency and accountability into the sector which was much needed. The full evasion of the effect of the law is yet to be
Difference between GST and VAT
VAT eliminated the cascading effect on the state indirect taxes while leaving behind other indirect taxes. Whereas GST allows a seamless flow of tax credit which in turn eliminates the cascading effect of all indirect taxes.
To understand this better you need to follow an example to know how the previous tax structure created the tax-on-tax effect:
Let C be a car manufacturer that has existed both in the pre and post GST era.
Pre-GST era:
C sold cars to car dealers in West Bengal. The taxes imposed on the transaction are:
1) The central government imposed Central Excise Duty on the manufacture of cars
2) The state government imposed VAT/CST
3) The state government also imposed octroi on the entry of goods into the state.
The manufacturer sells to the dealer:
Cost of car: Rs. 500000
Excise duty of 10%: Rs. 50,000
VAT of 12%: Rs. 66,000
The dealer has to pay for the car to the manufacturer: Rs. 6,16,000
Note: the dealer already paid the VAT and excise duty to the manufacturer. The manufacturer sent the central excise duty to the central government and the state government was paid the VAT.
Dealer sells the car to end consumer:
Cost of the car of the car dealer = Rs. 5,50,000 (Cost of the Car + Excise Duty)
Dealer’s Margin of 10% = Rs. 55,000
VAT of 12% = Rs. 72,000 [5,50,000 + 55,000] * 12%
Invoice = Rs. 6,77,600
Post-GST era:
The manufacturer sells to the dealer:
Cost of the car Rs. 5,00,000
Then, Central GST of 11% = Rs. 55,000
State GST of 11% = Rs. 55,000 and
Dealer Invoice = Rs. 6,10,000.
The dealer sells the car to end consumer:
Dealer Cost = Rs 5,00,000
Then, Dealer’s Margin @10% = Rs 50,000
Sales Price = Rs. 5,50,000
CGST of 11% = Rs. 60,500
SGST of 11% = Rs. 60,500
Invoice = Rs. 6,71,000
The total price difference of Rs. 6,600
Impact of GST:
GST helped in boosting the confidence and performance of the Indian manufacturing sector. For decades, India faced a severe problem of declining exports. Due to multiple indirect taxes, administrative costs also increased. The introduction of GST has eased the burden and is letting the sector grow better.
Due to GST, businesses that previously were not under tax bracket also comes under the tax system letting lesser tax evasion.
Analysis of GST impact in different sectors:
The logistics sector is the backbone of the country. A well organized and matured logistics sector will be helpful to drive India forward. It can also take Make in India leap into where the government desired it to be.
E-commerce has been a growing sector in India for the past few years. Though most e-commerce companies are not happy with Tax Collection at Source (TCS) law that GST brings with it, GST has the potential to affect the sector in a good way. The current TCS is at 1% and the long term effect in this particular sector is yet to be seen.
The tax has benefitted the pharmaceutical sector in a lot of positive ways. It created an equal competitive field for all drug makers and simplified the tax structure. The only concern remains in the pricing of the drugs. The pharmaceutical companies are hoping for a tax recession that will help them to produce affordable health care facilities.
The telecommunications industry will see a lot of profit from the introduction of the tax. The handset manufacturers find it easier to sell the devices in reduces prices as now being “one tax one nation” no state-specific tax structure needs to be set up. Decreased logistics costs will also benefit them.
A huge proportion of skilled and unskilled workers seek jobs from the textile sector. 10% of all goods that are exported come from the textile sector. This is likely increasing in the coming years with the help of GST.
In India, the agricultural sector contributes most to the GDP (around 16%). The sector is mostly affected by the transport costs of the products across the state borderlines. This will be resolved by the GST.
By reducing logistics and distribution costs and abolishing the need for multiple sales depots, GST is also helping the FMCG sector.
Most automobile sectors benefitted the most from the introduction of GST. The buyer had to previously pay a large number of taxes like excise, VAT, sales tax, road tax, motor vehicle tax, registration duty before GST which have been replaced by GST.
Although being a respectively smaller market, freelancing in Ind seen.
GST has been already a lot helpful for the upcoming startups. It has put an end to confusing laws that different states had. GST, Being a pan-India presence had helped the sector in ways such as increased limits for registration, a DIY compliance model, tax credit on purchases, and a free flow of goods and services. The e-commerce reforms that came bundled with GST were also beneficial for many companies.