India's tax regimes date back to 1870 when James Wilson first introduced taxation laws. This was done to recover from all the losses suffered by the Britishers in India while tackling and controlling the Sepoy Mutiny of 1857.
Since then, India has witnessed a cascade of indirect taxes at various levels. But more recently, in 2017, the Government of India introduced the Goods and Services Tax (GST) to rule down all the taxes and bring them under the aegis of a single integrated tax regime. The motive of this move was to facilitate controlling tax evasion and otherwise smoothen the tax collection process in the country through this structure of GST.
Did you know?
India did not undergo any hike in inflation post the introduction of GST, whereas other countries did face several economic issues.
What is the Goods and Services Tax (GST)?
The Goods and Services Tax, popularly known as GST, is an indirect tax brought in by the Indian government on 1st July 2017. It was meant to replace the plethora of direct and indirect taxes such as Value Added Tax (VAT), excise duty, services tax, etc.
GST is imposed upon the furnishing of goods and services. In the Indian context, the Goods and Services Tax Law is a thorough, multi-level, goal-oriented tax charged as per the addition of value to goods and services. Hence, it can be said that the structure of GST is a singular domestic indirect overarching tax regime for the whole country.
The structure of GST comprises three taxes levied under different conditions:
- Central Goods and Services Tax: CGST is appropriated by the Union Government of India in all states for state sales.
For example, a trade and commerce exchange is happening within Bihar.
- State Goods and Services Tax: SGST is appropriated by the state government on a state to state sale.
For example, a transaction taking place in Madhya Pradesh.
- Integrated Goods and Services Tax: IGST is collected by the Union Government for sales between states.
For example, a trade transaction happens from Bihar to Jharkhand.
Also Read: Differences between GST and Previous Tax Structure
What is the 4-tier GST Tax Structure?
The structure of GST is a 4-tier tax structure in India. The GST tax structure is set up so that all the essential goods, services and a few edibles are encompassed in the lowest level of the GST tax bracket. High valued goods and services and de-valued goods are positioned in the highest level of the GST tax bracket.
The Goods and Services Tax or GST Council has decided upon the four-tier structure of GST to be 0%, 5%, 12%, 18% and 28%, and this would be followed strictly.
An attempt to keep inflation under check can be seen through the step wherein essential goods and items, which are the primary food units, are excluded from the GST regime. Nonetheless, a 5% tax would still be levied upon some common commodities. On the other hand, most standard services would be charged upon a tax rate of 12% and 18% tax slab, whereas the high valued items would be charged with 28% tax.
GST Tier
India has a 4-tier rate structure of GST or the Goods and Services Tax regime.
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Zero Rate (0%)
Within this classification of the GST council structure, it has been decided that a few basic commodities would not be charged at all. Most Consumer Price Index (CPI) units can be placed under this rate tier.
The following items have been placed under the zero rate GST tier structure:
- Raw vegetables such as potatoes, tomatoes and various protein-based vegetables, etc.
- Live animals such as poultry, sheep, goats, bird shelled eggs, fish, etc.
- Unpacked corn, maize, wheat, cereal grains, and soybeans.
- Various constituents of the human blood and human blood itself.
- Raw materials such as raw silk, its waste, khadi fabric and yarn, charcoal, handloom fabrics and unprocessed wool.
- Tools and instruments such as spades, shovels, tools used for agricultural purposes, etc.
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Lower Rate (5%)
If we look at this rate tier, a 5% tax will be applied on a major part of the common goods and services. This would include the remaining articles under the CPI and large scale consumption products. For example, frozen vegetables, tea, coffee, economy flight tickets, rail tickets, etc.
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Standard Rate (12% and 18%)
The bulk of goods and services come under the aegis of this rate tier. The Government of India decided to keep two standardised rate slabs of 12% and 18% for this tier to keep inflation under check.
The 12% rate slab comprises dairy products, accessories, cellphones, business class air tickets, and movie tickets priced below ₹100.
Items charged under the 18% rate slab are pasta, bakery items, cleaning equipment, hairdryers, panels, electronic items etc.
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Higher Rate (28%)
This rate slab of 28% sees the inclusion of more than 200 products, which mostly comprise products such as paint, cement, automotive, electronic gadgets, bathing products, soft drinks, etc. However, some items that fall under this slab category are charged with an additional tax by the Indian government.
Objectives of Goods and Services Tax (GST)
The objectives of the Goods and Services Tax are listed below to further explain the structure of GST:
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To Reach the Goal of a Unified Tax Regime for the Country
The Goods and Services Tax regime has facilitated the collation of various taxes under a single inverted tax structure. The benefit of this single tax pattern is that every state in India would follow the same GST rate structure for the same products and services. Hence, controlling tax rates becomes subtle for the Central Government and makes deciding rates and policies easy.
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To Encompass Majority of the Tax Rates in India
For many years, India followed a cascade of indirect taxes such as Central Excise, Value Added Tax (VAT), etc., which were applied at various supply chain levels. In addition, taxes were governed by both the states and the Centre. Therefore, instead of a unified and unionised tax structure, GST was introduced.
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To Keep a Check on Tax Evasion
India's Goods and Services Tax laws are quite stricter than the earlier indirect taxes in action. Under the new GST tax regime, the taxpayers can mark out an input tax credit only on bills put up by their respective suppliers. The initiation of e-invoicing has further encouraged this motive. Additionally, as GST is a national level taxing structure, it becomes easier for the government to keep surveillance and catch the defaulters more quickly and efficiently.
Also Read: Know About Inverted Duty Structure under GST
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To Enlarge the Base of Taxpayers
GST has facilitated enlarging the taxed population in India. Earlier, every single registration had to be enrolled under every tax law with a different ending limit based on the business's overall value. But now, with GST being a single integrated tax system levied both on goods and services, it has led to an increase in businesses registered under tax statutes.
Conclusion
Through the structure of GST, the Government of India has attempted to smoothen the tax collection and distribution processes and bring about the business setups under a formal economic tone.
When businesses are well aware and follow the structure of GST properly, they get to experience the benefits of having a unified tax system and easy input credits. Stakeholders and finance experts welcome GST as a new change as it helps provide an Iapetus to the economy. Hence, the Goods and Services Tax can be seen as quite an effective step to bring about a formal structure in the Indian economy which would help in proper tax appropriation and distribution.
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