GST: The New Dimension in Indian Tax System

The author in this article discusses Goods and Services tax a new concept that is being introduced in Indian Tax system. The article also discusses the advantages and disadvantages of the same for the various sections of the society.

What is the goods and services tax (GST)?

Goods and Services Tax (GST) is a proposed system of indirect taxation in the Indian tax system, merging most of the existing taxes into a single system of taxation. It was introduced by The Constitution (One Hundred and First Amendment) Act 2016. The chairman of GST bill is union finance minister which is currently Nirmala Sitaraman.

GST would be a comprehensive indirect tax on manufacture, sale, and consumption of goods and services throughout the Indian tax system, to replace taxes levied by the central and state governments. Goods and Services Tax would be levied and collected at each stage of sale or purchase of goods or services based on the input tax credit method. This method allows GST-registered businesses to claim the tax credit to the value of GST they paid on the purchase of goods or services as part of their normal commercial activity. Taxable goods and services are not distinguished from one another and are taxed at a single rate in a supply chain until the goods or services reach the consumer. Administrative responsibility would generally rest with a single authority to levy the tax on goods and services. Exports would be zero-rated and imports would be levied the same taxes as domestic goods and services adhering to the destination principle.

The introduction of Goods and Services Tax (GST) in the Indian tax system would be a significant step in the reform of indirect taxation in India. Amalgamating several Central and State taxes into a single tax would mitigate cascading or double taxation, facilitating a common national market. The simplicity of the tax should lead to easier administration and enforcement. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%,[1]free movement of goods from one state to another without stopping at state borders for hours for payment of state tax or entry tax and reduction in paperwork to a large extent.

What changes there would be if India launches GST- “The tax rate under GST may be nominal or zero-rated for the time being. It has been proposed to insulate the revenues of the States from the impact of GST, with the expectation that in due course, GST will be levied on petroleum and petroleum products.”[2] The central government has assured states of compensation for any revenue losses incurred by them from the date of introduction of GST for a period of five years.

Meaning of GST

GST is a simplified tax structure applied to both goods and services. It is a value-added tax levied at all points in the supply chain with credit allowed for any tax paid on input acquired for use in making the supply. It would be applicable to the supply of goods or services as against the prevailing system of tax on the manufacture of goods or on the sale of goods or on the provision of services. It would be a destination-based tax as against the existing system of origin-based tax.GST is levied on indirect taxes only and not on direct taxes. Direct Taxes are levied on Incomes, Property and Wealth whereas indirect taxes include Customs Duties, Excise Duties, Service Tax, and, Sales Tax/Value-added Tax (VAT).
In order to maintain the federal structure, the nation is going to have dual GST, Central GST (CGST) and the State GST (SGST). This means that there will be the common tax base for both the Centre and the States. There will also be Integrated GST (IGST). It would be levied on an inter-State supply of goods or services. This would be collected by the Centre so that the credit chain is not disrupted. Import of goods or services would be treated as inter-State supplies and would be subject to IGST in addition to the applicable customs duties.

Merits and Demerits of GST

Merits

Advantages to the Government.

  • GST will help to create a unified common national market for India, giving a boost to foreign investment and the “Make in India” campaign.
  • It will prevent cascading of taxes as Input Tax Credit will be available across goods and services at every stage of supply.
  • It will harmonize the laws, procedures, and rates of tax.
  • It will improve the environment of compliance as all returns to be filed online, input credits to be verified online, encouraging more paper trail of transactions.
  • Common procedures for registration of taxpayers, a refund of taxes, uniform formats of the tax return, common tax base, a common system of classification of goods and services will lend greater certainty to the taxation system.
  • Greater use of IT will reduce the human interface between the taxpayer and the tax administration, which will go a long way in reducing corruption.
  • It will boost export and manufacturing activity, generate more employment and thus increase GDP with gainful employment leading to substantive economic growth.
  • It will help in poverty eradication by generating more employment and more financial resources.

 Advantages to Business and Industries

  • A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all taxpayer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.
  • GST will ensure that Indirect Tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.
  • A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce the hidden costs of doing business.
  • Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.

 Advantages to Common Man

  • At present the Consumer pay service tax and VAT both on eating. Under GST regime, it would be a single tax and eating could be cheaper.
  • Television could get cheaper, as part of the “Make in India” initiative, the GST is expected to be lower.
  • Buying bags, shoes, electronics goods online will be getting more expensive as the e-commerce industry comes into a tax net and will have to pay tax deducted at source for every purchase from its sellers. So, e-commerce companies which will see a shrinking of profit margins and increase tax compliance net could slash discounts and freebies that they offer.

Demerits of GST

No doubt there are lots of benefits by introducing GST, but there are also some demerits of GST. Firstly, the Service Tax in the Indian tax system is now 15% but the proposed GST is about 18-20%. All the services will be Costlier and this is one of the Disadvantages of GST Bill on Common Person.
Secondly, some Economist says that CGST (Central GST), SGST (State GST) are nothing but new names for Central Excise/Service Tax, VAT, and CST.

VAT and GST are used inter-changeably as the latter denotes comprehensiveness of VAT by coverage of goods and services. These terms can be interchangeable, but in literal sense they differ from each other. The structure of GST and other previous tax structures are different. “Under the old taxation system, the central taxes applicable were custom duty/central excise duty, central sales tax on commodities and services, surcharge and cesses.

The state taxes included state VAT, WCT, entertainment tax, luxury tax, tax on gambling, betting and lottery, sales tax deducted at source, and surcharge and cesses. Under GST, all the central and state taxes will be subsumed and a single tax will be levied on all commodities and services apart from motor spirit, petroleum, natural gas, and high-speed diesel.”[3] Apart from the structure there are many more differences. Thirdly, some Economist says that GST in the Indian tax system would impact negatively on the real estate market. It would add up to 8 percent to the cost of new homes and reduce demand by about 12 percent. “GST is a mystifying term where double tax is charged in the name of a single tax. Most of the dealers don’t pay the central excise tax and cheat the government by simply giving the VAT. But all of those dealers would now be forced to pay GST.”[4]
Fourthly, the amount of compensation for States under GST will not be fixed which causes a hue and cry among the States.
Lastly, the GST will be non-applicable to the tax on petroleum products, electricity, alcoholic liquors, and stamp duty on immovable property. Thus, the concerned State can impose taxes on these items to fulfill its revenue deficit caused due to GST.

Conclusion

Through imposing the GST on the goods and services in the Indian tax system, the Indian Government is aiming to boost the economy by removing the cascading tax mechanism and streamlining the business process in India. GST has proposed to make life simpler in every way possible and to support the people and economy of India. GST has marked a new era in the Indian taxation system being the greatest reform since independence. With the due implementation and the necessary corrective measures needed, if any, GST is set to achieve its purpose. “The GST bill was introduced to implement one country one tax but resulted into a pitfall as the price of basic goods and services had gone upward, in spite of government demand for a positive change in the economy with a GDP growth rate of 6.3% in Q2 of 2017-18 as against 7.5% in the second quarter of last year. It is clear that the economy is slowing down due to unplanned implementation of GST thus the disruptions may have accelerated the decline. The only possible remedy for this disruption is to make the transition to GST simpler.”[5]

Also read CAG Report: An eye-opener for GST


[1]disa experts, the economics compendium for csat paper 1, state pcs, cds, nda & other competitive exams (2019).

[2]‘States on Board, GST Launch fromApril’16’- The New Indian Express, https://www.newindianexpress.com/business/2014/dec/10/States-on-Board-GST-Launch-from-April-16-692571.html (last visited Jul 9, 2020).

[3] Differences between GST and Previous Tax Structure, https://www.bankbazaar.com/tax/differences-between-gst-and-previous-tax-structure.html (last visited Jul 9, 2020).

[4]Brokerzip India, Positive and negative impact of GST on real estate market, RENT/BUY/SELL WITHOUT BROKERAGE AT BROKERZIP.COM,http://brokerzip-blogcom.over-blog.com/2017/06/positive-and-negative-impact-of-gst-on-real-estate-market.html (last visited Jul 9, 2020).

[5]SubhamoyBanik&Arundhuti Das, GST in India: Impact and challenges, 19 (2017).