Governments require money to govern the country, take up development activities for citizens, and secure the nation against external and internal threats. Tax is the most important source of money for both State and Central Governments. The indirect taxation policy and structure in India have progressively changed, especially after the economic reforms of the 1990s, and have resulted in higher economic growth. These reforms transformed the economy into a market-based economy, boosting tax revenues to the governments, propelling growth and profits for industries and traders, and a jump in employment remuneration and surplus income for the working people.
However, the plethora of different taxes and high overall tax rates prevented the nation from sustaining and achieving higher economic growth. The need for tax reforms and the discussions that followed, across governments, economists, and industrial bodies, finally culminated in the implementation of the landmark GST regime from the year 2017.
Did you know? The simplified taxation reform of GST has doubled the tax base from nearly ₹ 66 lakhs to more than ₹ 1.24 crores!
The introduction of GST in India
Reforms of indirect taxes by bringing in Goods and Services Tax were first recommended by the Kelkar Task Force on Fiscal Reforms, in the year 2004. With broad acceptance of the basic concept of GST across the political spectrum, the intent to bring GST legislation started in the year 2006, culminating in the GST constitutional amendment Act of 2017. GST is indeed a path-breaking indirect tax reform, subsuming different taxes and creating a common national market by dismantling inter-state trade bottlenecks. GST came into effect from 1st July 2017. Although it had to contend with several teething problems like inadequate preparedness, delays, technical problems with GST Network, the tax regime has since stabilised bringing in widespread acceptance, and importantly doubling the number of taxpayers, and increasing governments’ revenue.
Definition and Meaning of GST
GST is a tax imposed on goods and services with the value addition at each stage. This includes a comprehensive and continuous chain of benefits starting from the producers as well as the service providers up to the retailers. The end-consumer bears the tax.
This type of taxation at different stages of value addition has resulted in GST being termed as Value Added Tax. In simple words, GST is an indirect tax (or consumption tax) taxed on the supply of goods and services.
What makes GST different:
- 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, but is meant to be refunded to all parties in the various stages of production other than the final consumer
- Destination-based – as tax is collected from point of consumption and not at the point of origin (like previous taxes)
Definition of Goods under GST:
Goods under GST, means every kind of movable property other than money and securities, but includes actionable claims, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
Definition of Services:
Services under GST mean anything other than goods, money, and securities, but includes activities relating to the use of money or its conversion by cash or any other mode, for which a separate consideration is charged.
The important concepts of GST
GST primarily covers five dimensions:
- There will be no distinction made between goods and services; All goods and services (barring a few exceptions) will be brought under the GST regime
- The taxation burden will be divided equally between manufacturing and services, through a lower tax rate meant to increase the tax base
- For inter-state transfer of goods and services, a new statute called IGST will come into force replacing CST
- The cascading effect of different taxes- CST, surcharges, additional customs duty, luxury tax, entertainment tax, will be removed, and CGST and SGST will replace at the same price
Objectives of GST:
A landmark tax reform, GST introduction has envisaged achieving a set of objectives, which are:
- One Country – One Tax
- Consumption-based tax instead of a tax on manufacturing
- Uniform GST registration, payment, and credit of input tax
- To eliminate the cascading effect of Indirect taxes on a single transaction
- Subsume all indirect taxes levied at the centre and state Level under the GST regime
- Reduce tax evasion and corruption
- Increase productivity
- Increase Tax to GDP Ratio and revenue surplus
- Increase compliance
- Reducing economic distortions
Scope of GST:
GST covers all goods and services, except alcoholic liquor for human consumption. In the case of petroleum and petroleum products, it has been provided that these goods shall not levy Goods and Services Tax, till a future date to be notified on the recommendation of the Goods and Services Tax Council.
Types of GST:
There are three types of GST. They are:
Important GST Terms:
The Goods and Services Tax regime has several important terms that traders and consumers should know. They are:
Goods and Services Tax, (GST) is a single, indirect, multi-stage, destination-based consumption tax, which replaces almost all the existing Central and State taxes, including but not limited to CENVAT, Octroi, Sales Tax, and Excise Duty, etc. GST has come into effect from 1st July 2017.
Goods and Services Tax Identification Number is a unique and legal identity granted to a business registered under GST, by the government of India. GSTIN is a 15 character alphanumeric, PAN-based, distinctive number, which is allotted state-wise.
CGST, SGST, and IGST:
These are the three major taxes under GST:
a) CGST: Is Central GST and is to be taxed by the Centre on intra-state businesses
b) SGST: Is State GST and is to be taxed by the State, on intra-state businesses
c) IGST: Integrated GST, and is to be taxed by the Centre, on inter-state businesses and imports
Awareness of this taxing structure and different terms of GST will enable the taxpayers to avail credit against each other- as per the eligibility, enhancing ease and transparency in the taxation cycle.
Reverse Charge is a mechanism with a supervisory framework, to help monitor and increase the tax coverage, compliance, synchronisation, and trackability amongst the unorganised, partly organised, and fully organised sectors in the country.
Generally, the supplier of goods or services is liable to pay GST. However, in specified cases like imports and other notified supplies, the tax liability will be the responsibility of the recipient under the reverse charge mechanism.
A mixed supply is an amalgamation of two or more individual supplies of goods or services or any other arrangement of goods or services made by a GST Taxpayer, at a single price. The components of the mixed supply are an intentional blending and made from a business perspective.
Example: A mixed supply could be a gift set comprising of a pen, a wallet, and a tie.
A composite supply is an organic mixing of two or more individual supplies of goods and services or any other natural arrangement of goods or services made by a GST Taxpayer, at a single price. A composite supply is further broken into two parts.
This is the major and the foremost element in the Composite Supply of goods or services.
This is the dependent element resting on the Principal Supply.
A composite supply could be a breakfast combined with the accommodation package in a hotel, which would be seen as a natural blend. In this case, the accommodation package is the Principal Supply and the breakfast is a dependent Supply.
A continuous supply is the supply of goods and/or services at a specific recurrent interval. (Eg: fortnightly/monthly), with the payments also received in the same manner.
The continuous supply of goods/services example is the services provided by a telecom operator.
ITC is an Input tax credit. It is the credit received by manufacturers for paying taxes for inputs used in the manufacture of products. Similarly, a dealer is entitled to receiving an input tax credit, if s/he has purchased goods for resale.
To avoid double taxation on raw materials or items used as inputs to make other products (items), the maker of the next item can avail credit of taxes paid on the inputs while paying tax on the output.
- 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 is not the same pan-India, but differs as per states, and does not apply to the composite taxpayers.
GSTR is GST Return. It is a document that captures the income details supposed to be filed by the Taxpayer with the GST Authority, to determine his/her tax liability.
There are eleven types of GST returns, from GSTR-1 to GSTR-11, capturing and catering to different taxpayers.
A GSTR usually includes:
- Sales data
- Purchase data
- Output GST - as derived from Sales
- Input Tax Credit - GST paid on purchases
GST Compliance Rating:
GST Compliance Rating is a numerical value from 0 to 10, which indicates a measure of GST compliance. GST compliance rating is assigned by the government to all the taxpayers. The rating is based on several factors like timely filing of returns, the accuracy of the data submitted.
What is the meaning of GST applicability?
GST is a multi-stage tax system that is comprehensive and applied to the sale of goods and services. The main aim of this taxation system is to curb the cascading effect of other Indirect taxes and it is applicable throughout India.
Benefits of GST:
Notwithstanding the initial teething problems and challenges, GST has brought about many substantial benefits to Citizens, Industry /Trade, and the Central/State Governments.
i) For the Citizens:
a. Simpler tax system.
b. Reduction in prices of goods and services due to removal of cascading taxes.
c. Transparency in the taxation system.
d. Increase in employment opportunities.
e. By and large a uniform price regime across the country.
ii) For the Trade and Industry:
a. Reduction in multiplicity of taxes.
b. Alleviation of double taxation/ cascading
c. Simpler tax regime-fewer rates and exemptions.
d. More efficient neutralisation of taxes especially for exports.
e. Emergence and development of the common national market.
iii) For the Central Government and State Governments:
a. A unified common national market, giving a boost to attract Foreign Investment and promote the “Make in India” campaign.
b. Boost to export/manufacturing activity, increased GDP growth, generation of more employment, leading to poverty reduction.
c. Overall improvement of the investment environment in the country that will benefit the development of states
d. Uniform SGST and IGST rates to reduce the incentive for tax evasion.
e. Reduction in costs of enforcing compliance, with the elimination of multiple record keeping.
Goods and Services Tax (GST) has indeed been a path-breaking reform in the Indirect Tax regime. Although there had been several teething problems and technical issues, the GST system has since stabilized securing widespread acceptance across all stakeholders. Citizens and especially Industry, Traders, Auditors, and Tax Consultants –all have to be conversant with the several GST terms, compliance requirements. In the short span of 5 years since its introduction, GST has helped streamline the taxation system, bringing in perceptible benefits to key stakeholders – Citizens, Industry & Trade, and Governments.
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