In 2017, the Goods and Services Tax (GST) replaced several State and Central indirect taxes. Some of those taxes before GST were:
- VAT
- Service tax
- Sales tax
- Entry tax
- Excise duty tax, etc.
Levying GST eliminated the cascading effect of taxes on the Indian economy.
Explain Cascading Effect of Taxes
Cascading tax effect simply means "tax on tax". This happens when a product is taxed at every stage of its production before it is sold to the final customer. At every stage, a new tax is imposed on the already taxed product so its value keeps increasing. So, the final customer has to pay a higher price because of all the taxes involved.
Comparison between Previous Tax and GST
What was the Previous Tax Structure?
In 2005, Value Added Tax (VAT) was introduced into the Indian taxation system. It is an indirect tax.
- Introduced to make India a single integrated market.
- VAT replaced sales tax.
- It's a consumption tax levied on a product anytime it adds value to the supply chain.
- Calculated using the product's price minus any prior taxable expenses of items utilized in the product.
- In 2014, VAT was introduced in all states and union territories except Andaman and Nicobar Islands and Lakshadweep Islands.
Drawbacks of VAT
- Under the VAT system, it was not viable to claim Input Tax Credit (ITC) on services.
- Cascading Effect of taxes.
- Various states have different VAT rates.
- CST input cannot be subtracted from VAT and vice versa.
- Every state has its VAT legislation.
- Multiplicity of taxes.
Why was GST Introduced?
- Former Prime Minister Late Shri Atal Bihari Vajpayee formed a committee to write the GST law in 2000. This committee proposed the concept of "one nation, one tax".
- A task force known as the “Kelkar Task Force” was formed in 2004 to strengthen the taxation system by implementing GST.
- However, the implementation of GST was first postponed in 2008 and later failed in 2010 as the government took no concrete steps.
Also Read: Things You Need to Know About GST Explained in Details
What are its Benefits Over VAT?
- The primary goal of implementing the GST system was to simplify India's tax structure. Doing this would eliminate the tax system's complexity before GST, which suffered from various multi-dimensional issues.
- The complexity of taxation and its cascading impact was an important reason for changing the old taxing system on goods and services.
- The former tax structure featured many taxes, including excise duty on manufactured goods, Wealth Tax, Sales Tax, VAT, Central Sales Tax, Import and Export Taxes, Service Tax, Luxury Tax, and plenty of others, all of which produced a lot of complications and inadvertent tax distribution.
The disadvantages are better explained through the following example:
Let us suppose a consultant provides services to his clients.
Under VAT regime/Before GST: The consultant would have charged 15% service tax on services of Rs. 75,000. So, his output tax was Rs. 75,000 x 15% = Rs.11,250. Then, if he purchased office supplies for Rs. 25,000 by paying 5% as VAT, it would cost Rs. 22,000 x 5% = Rs. 1,250. He had to pay Rs. 11,250 output service tax without getting any deduction of Rs. 1,250 VAT already paid on stationery. His total tax outflow is Rs. 12,500
After GST Implementation: GST on service of Rs. 75,000 @18% = Rs. 13,500. Now, subtract GST on office supplies (Rs. 25,000 x 5%) = Rs. 1,250. Therefore, the net GST liability to pay is Rs. 12,250
Implementation of the GST removed various geographical hardships for trading and business, and the entire nation came under a single taxing system. This can be understood from the table below :
|
Taxes included from earlier tax regime into the current GST framework: |
Taxes excluded from the earlier tax regime: |
|
Service Tax |
Electricity Duty |
|
VAT/Sales Tax |
Toll Tax |
|
Central Sales Tax |
Alcohol consumption |
|
Entertainment Tax |
Property Tax |
|
Luxury Tax |
Countervailing Duty |
|
Lottery Tax |
|
|
Entry Tax |
|
|
Tax on Lottery |
The Different Components of GST
The structure of GST has three important components:
CGST – The Central Government levies it on intra-state sales of the product
SGST – The state Government collects it after an intra-state sale
IGST – The Central Government of India collects it from an inter-state transaction
Also Read: GST Rates in India - List of Goods and Service Tax Rates, Slab
What are the Differences between GST and VAT
|
Parameter |
GST |
VAT |
|
What does it tax? |
Both goods and services |
On the sale of Products (separate tax for services) |
|
When is the tax applicable? |
On the supply of goods and services |
At the time when goods are sold |
|
Tax rate and laws |
Uniform tax rates across India |
Each state has different rates and laws |
|
Who has authority over taxes |
After collection, tax is equally shared by the state and central government |
After collection, the tax is confined to the state in which the sale takes place |
|
Tax return filed |
Returns should be filed on every 20th day of the next month for the previous month |
returns are filed either on the 10th, 15th, and 20th of the next month for the previous month |
|
Payment Methods |
Online and offline payment choices available (Online payment is compulsory if the GST payable is more than Rs. 10,000) |
Only offline payment
|
|
Input tax credit |
Input tax credit benefit is available which means a taxpayer can claim the credit on the supplies received |
No input tax credit benefit exists on customs duty paid |
|
Compliances for goods moved |
A similar set of compliances for the movement of goods between different states |
Compliances for the movement of goods between states differ from one state to another. |
|
Who collects the tax? |
State where the consumer resides |
The state where the seller resides |
Concerning different taxes, these are the following differences between VAT and GST
|
Parameter |
VAT |
GST |
|
Service Tax |
Under the Finance Act, the centre imposes service tax on a list of services on a provision/payment basis. |
Depending on the regulations governing Place of Supply, the State GST absorbs service tax. |
|
State VAT |
Except for certain products, all others are taxed under VAT. |
State GST absorbs this tax under itself |
|
Excise Duty |
Excise duty will be charged until the product is manufactured under VAT. |
Under GST, the excise duty is replaced by Central GST, and tax will be levied upto the retail level. |
|
Basic Customs Duty |
Under VAT, the government levies a separate tax on imports. |
Same tax levied as before GST. |
|
Special Additional Duty |
The central government levies a separate tax on imports under VAT. |
Under GST, this duty is absorbed by State GST. |
|
Entry Tax |
Certain governments apply an entry tax on inter-state transfers that are considered as imports in the local region under the VAT. |
Entry tax will not be collected under the GST, but an extra 1 percent will be collected as a tax on the inter-state supply of specific commodities. |
|
Central Sales Tax |
When it comes to inter-state transfers including C-Forms, CST is charged at a reduced rate of 2 percent under VAT. Otherwise, the full rate applies, which varies from 5 to 14.5 percent. |
This tax will be imposed under GST, however, dealers will be eligible for full credit. |
|
Tax on Export of Commodities and Services |
Under VAT, this tax is not required. |
No change. |
|
Tax on Inter-State Transfer of Commodities to Agent or Branch |
Under VAT, this tax is not required against Form F. |
This tax will be imposed under GST; however, dealers will be eligible for full credit. |
|
Cross Set-Off of Levy |
Set-off of service tax and excise charge is allowed under VAT. |
Set-offs between State GST (SGST) and Central GST(CGST) are not permitted under GST. |
|
Tax on Transfer of Commodities to Agent or Branch |
This tax is normally excluded under VAT; however, its applicability depends on state processes. |
Under GST, this tax may be imposed unless TIN of the transferor and transferee is the same. |
|
Disallowance of credit on certain items |
There are a few non-creditable items and services that are subject to VAT and CENVAT requirements. |
There would be no such disallowance under GST unless the GST Council permits it. |
|
Disallowance of inputs or input services utilized in exempted commodities or services |
Not permitted under VAT |
Unless the GST Council selects a list of things that come under the Negative List, there would be no such disallowance under GST. |
|
Cascading Effect |
There is a credit available between service tax and excise duty under VAT, but no set-off against VAT on excise duty. |
Credit is granted under GST on the entire amount of taxes paid up to the merchant. |
|
Threshold limits for levy of tax |
The national excise barrier is Rs.1.5 crore, while the VAT barrier varies from Rs.5 lakh to Rs. 20 lakh depending on the state. The service tax threshold is Rs.10 lakh. |
According to the GST Council's proposals, the State GST will vary from Rs.10 lakh to Rs.20 lakh. |
|
Levy of tax on NGOs and government bodies |
Certain government entities, non-profit organizations, and public sector undertakings will be subject to VAT. |
No changes under GST. |
|
Exemptions |
Certain regions, such as the North-East, will be eligible for VAT exemptions. |
There would be no such exemptions under GST, and the GST Council may establish an Investment Refund Scheme for specific zones. |
Pre and Post GST India
In the pre-GST era
CENVAT
- CENVAT (excise duty) is imposed on products made in India, but only at the manufacturing level.
- It was a critical obstacle to an efficient and neutral flow of tax credits.
- This resulted in the replacement of VAT for the GST in many countries.
Division of central and state tax:
- The Constitution divides the tax system between central and state governments.
- The state government had the right to impose any tax on affairs or objects of the state.
- In the case of services tax, the central government can collect taxes. Yet, the state government dominates in employment contracts.
- This structure created obstacles for the central government's income generation and distribution.
Not accounting for variables:
- The tax system does not consider various things like copyrights, patents, software.
- As a result, there were complications in classifying these goods under tax policy.
Central Monopoly
- With the boom in the service sector, the central government has monopoly in collecting taxes.
- The state governments lost their income by not imposing taxes on the service sector.
Offsetting
- Offsetting was not allowed under the CST for interstate sales of products.
- This increased the cascading impact.
Need for Technology
- Better tax control and administration requires considerable technology upgrades.
- The implementation is both costly and time-consuming.
Irregularities in the files
- The tax returns filed under federal and state tax systems had flaws due to no cross-checking.
Multiple Categories
- The indirect tax system includes 15 different taxes payable based on different standards.
- This required immediate and systematic regulation of the filling and calculation of taxes
Complex Systems
- The taxation system in India before GST was complex and needed fixing.
- Different taxes on the same products in different countries resulted in high inflation.
Also Read: Impact of GST on Different Sectors
In the Post-GST era
In a bid to solve the issues under the previous tax structure, GST benefited India in the following ways:
Increase in Revenue
- According to experts, GST strengthens the economy and will raise India’s GDP in future.
- GST has succeeded in expanding the taxable base by standardizing the obligation level.
- In the long run, tax compliance will be easier.
- An online tax system means more efficiency and accountability.
- This leads to fewer opportunities to get away with tax fraud.
Simplifying Tax Filing for businesses
- Business owners realized that the shift to the new GST system takes time, money, and management.
- The procedure of submitting GST returns will become simpler in the long run.
- All major indirect taxes are now unified.
- Thus, separate departments dedicated to maintaining vast tax documents are no longer required.
- As a start-up, one will no longer need to register for certain taxes such as VAT and Service Tax.
Making Certain Items More Affordable
- As a private taxpayer, one will notice that the price of certain items has decreased.
- This includes the reduction in the tax on private cars by around 5-6 percent.
- With a 5 percent levy, air transport and economy class travel became somewhat cheaper.
- The cost of eating out has remained stable. It depends on the type of establishment though. Whether the place has air conditioning, sells alcohol, and if it has a revenue of less than Rs.50 lakh per year are important factors.
- Unprocessed grains such as rice and wheat, unprocessed milk, vegetables, fish, meat, and unbranded flours are exempted from GST.
Conclusion
After looking at Old Tax Vs GST, we discover that the implementation of GST on products and services has made a significant improvement to the current tax structure. Regular taxpayers and businesses across the country have benefitted from the changes. However, there are still certain areas that need to be considered and improved under GST in future.
