GST, or the Goods and Services Tax, is the single tax levied on the process of manufacturing to consumption of goods and services, eliminating all the earlier Indirect Taxes. The global history of GST dates back to 1954, when France became the first country to implement this tax regime. Since then, more than 160 countries have adopted this tax system. Like many, India followed suit. In India, GST came into effect in 2017, bearing a dual structure.
A Brief History of GST Bill in India
- The then Prime Minister Atal Bihari Vajpayee proposed the idea of GST in the year 2002. A committee was then set up to design a Goods and Services Tax Model for the country.
- In 2004, Kelkar Task Force on Fiscal Responsibility and Budget Management proposed a nationwide implementation of fully integrated GST.
- While presenting the Union Budget of 2007-08, the Union Finance Minister announced the GST launch date as 1st April 2010. However, the lack of political consensus deferred the GST start date several times.
- On 19th December 2014, the NDA government presented the Constitutional (122nd Amendment) Bill 2014 on GST in Parliament. The Lok Sabha eventually passed the bill on 6th May 2015.
- On 14th May 2015, the bill was referred to a Joint Committee of both the Houses of Parliament. After incorporating recommendations from the committee, the Rajya Sabha passed the GST Bill on 3rd August 2016.
- The Constitution (101st Amendment) Act 2016 came into force after ratification by the required number of State governments and the approval of the President of India.
- On 29th March 2017, after the approval of the GST Council, the Lok Sabha passed the following Central legislations :
- GST Bill, 2017
- IGST Bill,2017
- UTGST and SGST Bill, 2017
- GST (Compensation to Cess) Bill, 2017
- All States and Union territories passed their respective SGST and UTGST Acts by 30th June 2017. Hence the GST implementation date was set as 1st July 2017. It marked the beginning of a path-breaking tax reform in our country
Evolution of GST in India
GST is a significant indirect tax reform that attempts to create a unified national market. India has adopted a dual GST structure where the Centre and States have the power to levy taxes concurrently. As a result, the earlier concept of setting multiple taxes on production and sale of goods and services no longer exists. Instead, a single tax is now levied on the manufacturing and supply of goods and services at the consumption end. Below are the various State and Central taxes under the old system:
Central excise duty
VAT/ Sales tax
Additional excise duty
Additional customs duty
Special additional duty of customs
Tax on Lottery/ Betting/ Gambling
Excise duty levied under Medicinal & Toiletries preparations.
The introduction of GST at both Centre and State levels has provided the much-needed relief to ease of doing business in India. It has eliminated the cascading effects of numerous Central and State taxes on consumer prices. It has brought transparency to the entire taxation process, production and supply of goods and services. Here's a short history of the GST tax, and how it evolved from a Bill to an Act.
Constitution Act 2016 (101st Amendment)
The introduction of GST demanded an amendment in the Constitution of India to empower the Centre and the States to levy and collect it. Thus, the Constitution (101st Amendment Act) was passed. It is now known as the Goods and Services Tax Act, 2017.
Article 246A was brought, which had an overriding effect on Article 246. Article 246A gives power to the Centre and States to make laws concerning GST. However, the Central government has an exclusive power to make laws on any inter-State supply of goods.
- GST shall be imposed on the supply of goods and services except for alcoholic liquor for human consumption.
- GST shall be applied on the following goods from the date of the notification by the government as per the recommendation of the GST council:
- Petroleum crude
- High-speed diesel
- Motor spirit(petrol)
- Natural Gas
- Aviation turbine fuel
Also Read: GST Portal India's Online Tax Office
The previous indirect regime suffered from various shortcomings. Before the introduction of GST, major taxes applicable in India were as follows:
The tax levied by the government on the provision of services.
Central Sales tax
The tax levied by the Central Government on the inter-State sale of goods. It implies that tax was only paid on the supply of goods from one State/ Union territory to another State/ Union territory.
The tax levied by the government on the manufacture of goods.
The tax levied by the government on the import or export of goods.
The tax levied by the government on the intra-State sale of goods. It implies that the sales take place within a State/ Union territory.
Drawbacks in Pre-GST Regime
Multiple value-added taxes like Central Excise Duty and State-Level VAT created roadblocks in the entire manufacturing and production process of goods and services in India. Small businesses especially faced multiple difficulties due to the deficiencies in the earlier regime.
1. No Integration of taxes
There was no integration of VAT on goods ( State levy) with the tax on services/ manufacture (Central levy), which led to double taxation on the manufacturer and producer.
2. No distinction
The earlier tax regime did not differentiate between the characteristic nature of manufacturing goods and rendered services. Certain transactions were subject to double taxation and were taxed as both goods and services under the earlier regime.
3. Litigation formalities
There was a huge amount of legal issues due to various tax disputes regarding credit availed, and classification of goods, etc.
4. Origin based tax
The pre-GST regime of indirect tax was an origin-based tax. Taxes were collected and utilised by the State from where the goods and services originated. This encouraged the States to provide sales tax/VAT relief to attract industries and at the same time discourage the supply of goods from another State by imposing entry tax, octroi, luxury tax etc., on goods coming from other States.
5. Multiplicity of taxes at State Level
Several taxes at the State and local levels, such as Luxury Tax, Entertainment Tax, etc., were not included in the State VAT. Hence one had to pay multiple taxes for a single transaction.
6. Multiple compliances
Multiple compliance needed to be met by taxpayers in the previous tax structure which was time-consuming and required a lot of effort.
7. Cascading effect of Central Taxes
There was CST (Central Sales Tax) imposition on every footing in addition to State taxes. This resulted in double taxation, leading to a cascading effect on consumer prices. Central sales tax was not creditable, thereby adding to the cost of the goods. Goods were taxed at every production stage, leading to a piling effect on the final pricing of goods and services.
India had barriers in national as well as in the international markets. There were multiple taxes like Central State tax, VAT, entry taxes, custom duties etc. Even individual States collected an additional tax at State borders.
9. No cross utilisation
There was no cross utilisation of taxes available in the pre-GST era. For example - The Central Sales Tax was not available for set off with VAT.
The President of India has a right to constitute the GST Council under Article 279A of the Constitution. The composition has been discussed below:
- Chairperson of GST council - Union Finance Minister
- Members of GST Council- Union Minister of State in charge of Revenue or Finance, Ministers in charge of Finance/Taxation or any other minister nominated by States/ UT with the State legislature.
1. Scope of work
GST Council's scope of work is as follows:
- Recommendation on goods/services subject to or exempted from GST.
- Specifies tax rates on various goods/services.
- Sets threshold limit of turnover below which goods may be exempted from GST.
- Recommends taxes, cess, and surcharges levied by the Centre, State and local bodies.
- Notifies the date on which GST shall be levied on petroleum crude, high-speed diesel, petrol, natural gas and aviation turbine fuel.
- Any other matter relating to GST, as the council may decide.
2. GSTN Common Portal
The Indian Government set up a website www.gst.gov.in, managed by GSTN (Goods and Services Network), to establish an interface between the taxpayer and IT infrastructure at the Centre and State levels.
Benefits of GST
GST is a destination-based indirect tax imposed on the supply of goods and services. The pre-GST era had a lot of shortcomings that required the uniformity of taxes. GST is a great initiative taken by India. It is a win-win situation for the entire country. It is beneficial for the whole country- its stakeholders, businessmen, consumers and government. GST has brought a transparent system for the whole country that allowed the credit of taxes paid. Some of the benefits of the GST regime are as follows:
1. Unified National Market
GST has made India a unified national market with standard tax rates and procedures. It broke the barriers that were present due to the multiplicity of taxes.
With the introduction of GST in India, the cost of goods and services has decreased. It gave an advantage to the country by making the goods and services competitive at the International level.
3. No Cascading of taxes
Cascading of taxes happens when a tax is imposed on every stage of production. This practice ultimately increases the value of goods that leads to inflation. With the GST implementation, suppliers can take credit on the taxes paid to the government. This resulted in reducing the negative impact of the previous tax structure.
4. Benefit to stakeholders
GST is a single tax that subsumed various taxes and common people of the society. Now suppliers don't have to pay unnecessary taxes.
5. Single tax
Earlier, there were different taxes imposed on goods and services. With the origin of GST, only one tax is leviable on goods as well as services.
6. Automated process
Earlier, everything was manual which was a lengthy process. With the origin of GST, every process is automated to reduce the human involvement.
7. Reduced compliance of taxpayers
Due to the multiplicity of taxes, taxpayers were required to comply with different taxation-related laws. With the advent of GST, compliance on the part of taxpayers has declined.
8. Increased economic activity and investment
The cost of goods has declined with the introduction of GST. As goods are competitive in the international markets, exports and investment are rising. Demand is huge due to the low-cost products. People spend more when there is an increase in demand. This ultimately increases economic activity and investment by generating more employment.
9. Reduction in compliance costs
Taxpayers are not required to maintain multiple records with the origin of GST. They don't need to pay different taxes to the government.
10. Elimination of multiple taxes and Double taxation
Under the earlier regime, certain transactions were subject to double taxation and taxed as both goods and services. GST subsumed the majority of taxes at Central and State levy into one single tax. It also tackled the highly deputed issues related to double taxation.
11. Increase in Government revenue
Government revenue jumped up to 24% with the introduction of GST.
12. Robust IT system
Automation reduces the time taken by the taxpayer on filing the returns, registration, refunds and tax payments etc.
This was all about the historical background of GST in India - its evolution, pre-GST scenario, and benefits of GST. GST has come a long way. GST's history goes back to the year 2000 and took 17 long years to come into force. GST is a destination-based tax where you can take ITC on an inward supply of goods. It also solved many issues of the earlier tax regime.