GST = Good Simplified Tax
Goods and Services Tax (GST) is indirect tax. Perceived as one of the most important tax reform in independent India, it was introduced in the 122nd Constitution Amendment Bill. It is a game changer as it is considered having far reaching consequences on the GDP and economy of the country.
The GST is a uniform tax that is proposed to be levied on all goods and services produced in the country and on all goods and services imported from abroad. It is a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India (except state of Jammu and Kashmir).
The objective is to consider India as one market. It will eventually replace a number of laws – VAT, Service Tax, CST, Excise, Customs, CENVAT, Entertainment tax, Luxury tax and related taxes.
How the GST works
Let’s say there is a manufacturing unit. In the present scenario, such unit will file income tax return and pay excise duty to the central government. When the manufactured product is supplied to dealers or retailers, the manufacturing unit will have to incur and pay value added tax –VAT. If there is an interstate sale involved, then it will additionally pay Central Sales Tax.
Similarly if services are rendered, service tax will have to be paid. Therefore, it is evident that the goods or services are taxed at multiple levels and multiple times. As a result, transaction cost and compliance cost increases.
Now, the GST will be tax on goods and services that are manufactured, produced and consumed. Such tax will be levied at each point of sale of goods or rendering of services. At the time of such sale of goods or rendering of services, the seller or service provider, may claim the input credit of tax which he has paid while purchasing the goods or procuring the services.
The GST seeks to lower and minimise (if not entirely remove) the number of such transactions and compliances. As a result the transaction cost and compliance cost will be significantly lesser. This is widely believed to help all business and business entities alike.
Destination based tax
The GST is destination based tax where the tax is not applied at the point of production but at the point of supply or consumption.
GST @ destination:
- Imports – taxed in India
- Exports – No tax in India
- Interstate transactions – Tax in state of final destination (not origin)
The intention of implementing the GST regime by the government is to impose uniform pricing across all States.
Levy of GST
- The levy of GST will be concurrent – levied by both the Central government and State government
- The GST rates vary from a minimum of 5% to 28%.
- Lower rates of tax are for essential commodities and the highest rates of tax are for luxury commodities.
- CGST can be cross credited with CGST only. Likewise for SGST. CGST and SGST cannot be cross credited with one another.
- CGST and SGST can be cross credited with IGST.
- 5 Union territories (except Delhi & Puducherry) will adopt UTGST Act.
Challenges in implementing GST
- Being an integrated or uniform which has impact on all States and union territories, it is necessary to lay down clear and exhaustive definitions of what constitutes goods, services, manufacture, sale and the like. This will minimise ambiguity in interpretation of law.
- Deciding the threshold limit of applicability is a key factor as it involves a balancing act between ensuring maximum business entities being brought under GST ambit without burdening the smaller business entities.
- Since the GST is being construed as a one stop shop tax levy which can be paid online, a state of the art latest and well-designed IT infrastructure becomes the fulcrum of GST implementation to ensure smooth compliance.
- Effective dispute resolution mechanism between States is absolutely necessary.
The Government of India has announced its plan to make the GST law operational with effect from 1 July 2017. The process of migration of existing business to the GST is going on in full swing.
Many developed and developing nations the world over have already implemented the GST successfully.
The GST, when implemented effectively will facilitate seamless movement across the nation and will reduce the overall transactional and compliance cost of running the business. This will in turn ensure increase in GDP and economic growth.