Everything you wanted to know about GST (Goods and Services Tax)
Everything you wanted to know about GST (Goods and Services Tax)
Goods and Services Tax (GST) is a form of Value Added Tax, whose implementation is a cause of national debate in India. Before moving ahead, let's look at what is a Value Added Tax and how it differs from its counterpart, the sales tax. Both, Value Added Tax and sales tax are essentially consumption tax, so we'll begin from there.
What is a Consumption Tax?
A consumption tax is a tax levied by the government on the money used for spending on goods and services. This allows the government to generate revenue. Naturally, an efficient collection of tax would mean higher revenue for the government, and thus lower deficits. Also, the charging of taxes should be fair and equitable and shouldn't over-burden weaker sections. For this purpose, the Value Added Tax was implemented in over 120 countries because it is supposed to be a more efficient form of tax collection than sales tax.
This is so, because a sales tax is levied only at the point of sale, whereas a Value Added Tax is levied at each stage of production of goods. In a value added tax, tax is collected at each stage of production on only the value added at that stage and not the previous stages, thereby rescuing us from the cascading effect (“tax on tax”) of sales tax.
How does a Value Added Tax work?
Suppose, there are no taxes, and the manufacturer sells a product to a retailer at 1000/-. Further, that retailer sells the product to the final consumer at 4,000/-. In this scenario, let's assume a VAT of 10%. Now, the manufacturer will sell the product to the retailer at 1,100/- (VAT of 10% added,) and give 100/- as taxes to the government. Now, the retailer will charge 4,400/- to the final consumer, and will pay 300/- as VAT to the government (an output tax of 400/- minus the 100/- which was the tax charged on its inputs supplied by the manufacturer).
This ensures that even if the retailer evades his tax, the government still gets tax from the manufacturer, and if the manufacturer fails to pay the tax, the government still gets the tax from the retailer, and so on. Such system is thus superior in many ways to the sales tax, where the tax is charged at only the final point of sale.
What will the Goods and Services Tax (GST) replace?
GST is supposed to replace the Value Added Tax which was introduced in India from 1 April 2005.
Value Added Tax itself had earlier replaced the General Sales Act.
GST seeks to improve upon the earlier system of VAT, by making some fundamental changes and additions.
Why is a Constitutional Amendment necessary for the implementation of GST?
The first key step for the implementation of GST has been the introduction of Constitution (122nd Amendment) Bill in the Lok Sabha.
A constitutional amendment is necessary because GST involves the redistribution and modification in powers of Center and State in terms of collection of taxes.
Currently, the Central government has the power to impose a tax on the production or manufacturing while States are given the power to levy tax on the sale of goods.
But for the GST to be effective, the Center must be granted the power to tax sale of goods, along with imports and inter-state trade, while states must be granted the power to tax services.
Fundamental changes that will be brought about by GST to our earlier form of taxation
In the words of finance minister, Arun Jaitley, the introduction of GST will be the “biggest tax reform since 1947”.
GST is promised to provide us with a unified tax framework and remove the problems caused by a multitude of inefficient indirect taxes, and improve revenue generation.
As per the press release by the government, “Central taxes like Central Excise Duty, Additional Excise Duties, Service Tax, Additional Customs Duty (CVD) and Special Additional Duty of Customs (SAD), etc. will be subsumed in GST”, while State taxes like like “VAT/Sales Tax, Central Sales Tax, Entertainment Tax, Octroi and Entry Tax, Purchase Tax and Luxury Tax, etc. would be subsumed in GST.”
Goods and services which are NOT under the purview of this Bill
Aviation turbine fuel, alcohol for human consumption, petroleum crude, high speed diesel, petrol, natural gas are not under the purview of this bill.
GST Council
The proposed Bill also introduces a GST council
It will comprise of the union finance minister, the union minister of state in charge of revenue or finance, and the minister in charge of finance or taxation or any other minister nominated by each state government.
The main purpose of this council is to seek a balance in the decision making, powers and duties between the Center and the State.
Major benefits of GST
The major change that will come with the introduction of GST is that along with goods, services will also be charged under a uniform framework.
GST seeks to redress the problem of tax-overlapping between Center and States, where certain goods are taxed repeatedly by both. To achieve this, GST proposes a dual system of taxation: Central GST and State GST (for inter-state transactions, an Integrated GST is also under consideration). Both will be taxed simultaneously on the same taxable base, and this will largely avoid the problem of tax-overlapping.
If GST succeeds in eliminating the double taxes levied by both Center and State there would be a reduction in the cost of goods and services. Also, a reduction in the cost of goods and services mean better prospects for exports.
GST seeks to build a nation-wide common market by including many indirect taxes such as VAT and sales tax, service tax, excise duty etc. under it.
Obstacles and difficulties in the implementation of GST
- The single biggest obstacle to the implementation of GST has been the apprehension of States that the immediate implementation of GST will result in losses for them.
- To tackle this, the Central government has proposed to pay for compensation of these losses to States for a limited period.
- Another problem will be in deciding the rate of GST that will be unbiased and acceptable to all parties involved.
