What is GST?
The goods and services tax (GST) is a value-added tax (VAT) levied on most goods and services sold for domestic consumption. The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services. In other words, Goods and Service Tax (GST) is levied on the supply of goods and services. Goods and Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. GST is a single domestic indirect tax law for the entire country. In the chain of supply the items for sale will go through multiple change of hands along with its supply chain: Starting from manufacture until the final sale to the consumer.
Let us consider the following stages:
- Purchase of raw materials
- Production or manufacture
- Warehousing of finished goods
- Selling to wholesalers
- Sale of the product to the retailers
- Selling to the end consumers
When we are talking about the journey of the GS, its journey began in the year 2000. It all started when a committee was set up to draft law. Well it didn’t immediately pass and launched, it actually took 17 years from then for the Law to evolve. In 2017, the GST Bill was passed in the Lok Sabha and Rajya Sabha. On 1st July 2017, the GST Law came into force.
The main aim is to achieve the ideology of ‘One Nation, One Tax’
When GST was launched it has replaced multiple indirect taxes. These are which were existing under the previous tax regime. The advantage of having one single tax means every state follows the same rate for a particular product or service. Tax administration is easier with the Central Government deciding the rates and policies. Common laws can be introduced, such as e-way bills for goods transport and e-invoicing for transaction reporting. Tax compliance is also better as taxpayers are not bogged down with multiple return forms and deadlines. Overall, it’s a unified system of indirect tax compliance. India had several erstwhile indirect taxes such as service tax, Value Added Tax (VAT), Central Excise, etc., These taxes were used to be levied at multiple supply chain stages. Some taxes were governed by the states and some by the Centre. There was no unified and centralized tax on both goods and services. Hence, when GST was introduced it all became centralized. Under GST, all the major indirect taxes were subsumed into one. It has greatly reduced the compliance burden on taxpayers and eased tax administration for the government. Though GST has several beneficiary objectives, one of the primary objectives of GST was to remove the cascading effect of taxes. Previously, due to different indirect tax laws, tax payers could not set off the tax credits of one tax against the other. For example, the excise duties paid during manufacture could not be set off against the VAT payable during the sale. This led to a cascading effect of taxes. Under GST, the tax levy is only on the net value added at each stage of the supply chain. This has helped eliminate the cascading effect of taxes and contributed to the seamless flow of input tax credits across both goods and services. GST laws in India are far more stringent compared to any of the erstwhile indirect tax laws. Under GST, taxpayers can claim an input tax credit only on invoices uploaded by their respective suppliers. This way, the chances of claiming input tax credits on fake invoices are minimal. The introduction of e-invoicing has further reinforced this objective. Also, due to GST being a nationwide tax and having a centralised surveillance system, the clampdown on defaulters is quicker and far more efficient. Hence, GST has curbed tax evasion and minimised tax fraud from taking place to a large extent. GST has helped in widening the tax base in India. Previously, each of the tax laws had a different threshold limit for registration based on turnover. As GST is a consolidated tax levied on both goods and services both, it has increased tax-registered businesses. Besides, the stricter laws surrounding input tax credits have helped bring certain unorganised sectors under the tax net. For example, the construction industry in India. Previously, taxpayers faced a lot of hardships dealing with different tax authorities under each tax law. Besides, while return filing was online, most of the assessment and refund procedures took place offline. Now, GST procedures are carried out almost entirely online. Everything is done with a click of a button, from registration to return filing to refunds to e-way bill generation. It has contributed to the overall ease of doing business in India and simplified taxpayer compliance to a massive extent. The government also plans to introduce a centralised portal soon for all indirect tax compliance such as e-invoicing, e-way bills and GST return filing.
A single indirect tax system reduces the need for multiple documentation for the supply of goods. GST minimises transportation cycle times, improves supply chain and turnaround time, and leads to warehouse consolidation, among other benefits. With the e-way bill system under GST, the removal of interstate checkpoints is most beneficial to the sector in improving transit and destination efficiency. Ultimately, it helps in cutting down the high logistics and warehousing costs. Introducing GST has also led to an increase in consumption and indirect tax revenues. Due to the cascading effect of taxes under the previous regime, the prices of goods in India were higher than in global markets. Even between states, the lower VAT rates in certain states led to an imbalance of purchases in these states. Having uniform GST rates have contributed to overall competitive pricing across India and on the global front. This has hence increased consumption and led to higher revenues, which has been another important objective achieved. Since the GST regime eliminates the tax on tax, the cost of goods decreases. Also, GST is mainly technologically driven. All the activities like registration, return filing, application for refund and response to notice needs to be done online on the GST portal, which accelerates the processes.
There are three taxes applicable under this system: CGST, SGST & IGST.
- CGST:It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra)
- SGST:It is the tax collected by the state government on an intra-state sale (e.g., a transaction happening within Maharashtra)
- IGST:It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)
In most cases, the tax structure under the new regime followed. In the earlier indirect tax regime, there were many indirect taxes levied by both the state and the centre. States mainly collected taxes in the form of Value Added Tax (VAT). Every state had a different set of rules and regulations. Inter-state sale of goods was taxed by the centre. CST (Central State Tax) was applicable in case of inter-state sale of goods. The indirect taxes such as the entertainment tax, octroi and local tax were levied together by state and centre. These led to a lot of overlapping of taxes levied by both the state and the centre. For example, when goods were manufactured and sold, excise duty was charged by the centre. Over and above the excise duty, VAT was also charged by the state. It led to a tax on tax effect, also known as the cascading effect of taxes.
The following is the list of indirect taxes in the pre-GST regime:
- Central Excise Duty
- Duties of Excise
- Additional Duties of Excise
- Additional Duties of Customs
- Special Additional Duty of Customs
- Cess
- State VAT
- Central Sales Tax
- Purchase Tax
- Luxury Tax
- Entertainment Tax
- Entry Tax
- Taxes on advertisements
- Taxes on lotteries, betting, and gambling
CGST, SGST, and IGST have replaced all the above taxes. However, certain taxes such as the GST levied for the inter-state purchase at a concessional rate of 2% by the issue and utilisation of ‘Form C’ is still prevalent.
It applies to certain non-GST goods such as:
- Petroleum crude
- High-speed diesel
- Motor spirit (commonly known as petrol)
- Natural gas
- Aviation turbine fuel and
- Alcoholic liquor for human consumption.
It applies to the following transactions only:
- Resale
- Use in manufacturing or processing
- Use in certain sectors such as the telecommunication network, mining, the generation or distribution of electricity or any other power sector
During the pre-GST regime, every purchaser, including the final consumer paid tax on tax. This condition of tax on tax is known as the cascading effect of taxes. GST has removed the cascading effect. Tax is calculated only on the value-addition at each stage of the transfer of ownership. Understand what the cascading effect is and how GST helps by watching this simple video.
Now coming to today’s news, India’s Goods and Services Tax (GST) revenues grew 13% in March, 2023. This has set a record to the second highest monthly collections of ₹1.6 lakh crore. This is collected from the indirect tax, with receipts from goods imports rising 8% and inflows from domestic transactions and services imports rising 14% from a year ago. This is the 12th month in a row that GST collections have been over ₹1.4 lakh crore. March’s tax quantum was only eclipsed previously in April 2022, when collections were ₹ 1,67,540 crore. Gross GST collections for 2022-23 are 22% higher than 2021-22 at ₹18.10 lakh crore, reflecting an average gross monthly collection of almost ₹1.51 lakh crore.
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