India is a fast-growing economy, having recently overtaken the UK to be the 5th largest economy globally. The chain of reforms starting from the 90s has freed the country from the shackles of the license raj, propelling entrepreneurship, and startups to be part of this growth story. The rollout of GST in the year 2017 – considered to be the biggest fiscal reform in independent India, has truly been a game changer for the country’s economy. There are around 160 countries in the world that have adopted GST.
Amalgamating various Central and State taxes into a single tax will help mitigate the double taxation, cascading of taxes, the multiplicity of taxes, and classification issues leading to a common national market. GST has ushered in a uniform tax system across the nation, with taxes being divided between the Central and State governments. GST is surely a very beneficial system for the entire nation. It results in profound and tangible benefits for all the stakeholders - Industry, government, and the consumer. GST results in a lower cost of goods and services propelling the economy further and helping make the country's products and services globally competitive. Are you aware that the tax collections for the FY 2021-22 were ₹27.07 trillion, which was ₹5 trillion more than the Union Budget’s estimate of ₹22.17 trillion? (as per PwCs document on “GST@ 5” – Five years of GST in India)
Did you know?
In order to develop a GST model, Vajpayee formed a group under West Bengal's Finance Minister, Asim Dasgupta. Ultimately, GST was implemented in India in 2017.
The Historical Journey of Taxation Leading to GST:
GST has had an interesting historical journey. It was in the year 2004 that the "Kelkar Task Force on Fiscal Reforms" recommended reform in the indirect taxes regime by adopting the Goods and Service tax. With broad acceptance of the basic GST concept across the political spectrum, the first attempt at GST legislation was made in the year 2006. This consensus eventually culminated in the GST constitutional amendment Act of 2017. GST came into effect on 1st July 2017. A profound tax reform, the Goods and Service Tax subsumed several different taxes and created a common national market by dismantling inter-state trade hindrances. The GST regime during the last 5 years has overcome several challenges, delays, and technical problems. It has since gained widespread acceptance and helped widen the tax base by more than 2 times, resulting in substantially increased revenues for the central and state governments.
Concept of GST in India
GST has an all-inclusive and constant chain of benefits from the produce or service provider point up to the retailer level, where the final consumer will bear the tax.
GST definition is better understood by understanding GST meaning in its entirety, especially the following key terms:
a) Goods: Goods mean all kinds of movable property, but not money and securities. It however includes actionable claims, growing crops & grass, and things attached to or forming part of the land which are agreed to be detached before supply or under a contract of supply.
b) Services: Services means anything other than goods, but include activities relating to the use of money or its conversion by cash or any other mode, for service a separate cost is chargeable
GST in Simple Terms Explained:
Goods and Services Tax is the simple meaning of GST. GST is a consumption tax or indirect tax, levied on the supply of goods and services.
Goods and Services Tax is:
- Comprehensive - as it has subsumed almost all the indirect taxes except a few state taxes
- Multistage – as it is imposed at every step in the production process, with the intent to refund to all parties in the various stages of production other than the final consumer
- Destination-based – as tax is collected from the point of consumption and not at the point of origin (like previous taxes)
Basic GST Concept
The basic concept of GST can be explained in the following ways:
- There is no distinction between goods and services except for a few exceptions
- The tax burden will be equally shared between the manufacturing and services sectors, through a lower tax rate meant to increase the tax base.
- A new statute called IGST will replace the Central Sales Tax that is applicable for inter-state transfer of goods and services.
- CGST and SGST will replace various taxes like CST, surcharges, additional customs duty, luxury tax, and entertainment tax, together eliminating the latter's cascading effect.
The Objective of Goods and Service Tax:
GST’s adoption was envisaged to achieve the following objectives:
- One Country – One Tax
- Tax on consumption instead of a tax on manufacturing
- Subsume all indirect taxes levied at the Center and State governments under GST
- To remove the cascading effect of indirect taxes on a single transaction
- Uniform GST registration, payment, and credit of input tax
- Bring down tax evasion and tax-related corruption
- Increase productivity
- Improve Tax to GDP Ratio and revenue surplus
- Increase tax compliance
- Reduce economic distortions
What is Meant by GST?
GST is best understood by getting acquainted with all the key terms used in the GST regime. They include
a) GST: The Goods and Services Tax is a single, indirect, destination-based consumption tax levied at multiple stages. It replaces most of the existing Central and State taxes, including central VAT, Sales Tax, Excise Duty, and Octroi.
b) GSTIN: Goods and Services Tax Identification Number is a unique identity granted by the government of India to a business registered under GST. GSTIN is, therefore a distinctive number that has 15-characters, is alphanumeric, and is PAN-based. GSTIN is allotted state-wise.
c) CGST, SGST, and IGST: These are the three major taxes under GST.
- CGST: Is Central GST, which is levied by the Centre on intra-state businesses
- SGST: Is State GST levied by the State on intra-state businesses
- IGST: Integrated GST is levied by the Centre, on inter-state businesses and imports
d) Input Tax Credit (ITC): ITC is an Input tax credit, received by manufacturers for paying taxes on inputs used in the manufacture of products. Likewise, a dealer is entitled to receive an input tax credit on goods purchased for resale purposes. To ensure there is no double taxation on raw materials or items used as inputs to make other products, the maker of the next product/item can avail credit of taxes paid on the inputs but will pay tax on the product/item made. ITC works as follows:
- If the tax paid on inputs is higher than the tax on the output, the difference in tax can be claimed as a refund.
- Input Tax Credit differs as per states, therefore not uniform across India. The input Tax credit is, however, not applicable to the composite taxpayers.
e) GSTR: GSTR stands for GST Return. It is a document filed by the Taxpayer with the GST Authority, which captures the income details of the taxpayer and tax liability. There are eleven types of GST returns (GSTR-1 - GSTR-11) that apply to different taxpayers. A GSTR typically includes:
- Sales data
- Purchase data
- Output GST - calculated as per Sales
- Input Tax Credit - GST paid on purchases of raw materials.
Benefits of GST:
GST has resulted in many substantial benefits to Citizens, Industry, Trade, and the Central and State Governments.
Benefits to Citizens:
- Simpler tax system.
- Reduced prices of goods and services due to the removal of cascading taxes.
- Transparent taxation system.
- Better employment opportunities.
- A uniform price regime across the nation
Benefits to Trade and Industry:
- Double taxation and tax cascading eliminated
- Multiple taxes reduced.
- Simpler tax regime, which means fewer tax rates and exemptions.
- Efficient neutralization of taxes especially for exports.
- Emergence and further development of the common national market.
Benefits to Central Government and State Governments:
- A unified common national market, giving further fillip to the inflow of foreign investment and domestic manufacturing
- Reduced tax evasion on account of uniform SGST and IGST rates
- Increase in manufacturing activities and export, leading to increased GDP growth and employment, resulting in poverty reduction
- Overall improvement in the country's investment climate
- Better tax compliance and reduced enforcement costs
Drawbacks of GST
- High tax burden of SMEs
- Burden of Compliance
- Increased costing
- Expenditure on Information Technology
Also Read: Complex GST Rules a Big Barrier to Small Businesses Selling Online
Goods and Services Tax is acclaimed tax reform in India. The GST system since its introduction 5 years back, has overcome several challenges and technical difficulties, to gain widespread acceptance by all stakeholders. A simplified taxation system has been one of the key outcomes. All in all, GST has resulted in several benefits to Citizens, Industry, and Governments. As GST implementation progresses further with refinements along the way, Consumers, Businesses, Auditors & Tax Consultants need to develop familiarity with GST in its entirety, to avail of benefits and comply without difficulties.
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