GST stands for Goods and Services Tax, which is the newest form of indirect taxation that came into action in India post 1st July, 2017. The aim of introducing GST was to avoid the earlier multilevel VAT (Value added tax) as well as Central and State Sales Taxes (ST), the calculations of which were rather cumbersome.
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What is Tax?
In order to fully understand GST, we need to first have a brief knowledge about the basics of the taxation system in India. Taxes can be broadly classified into two categories:
- Direct taxes – includes our income taxes and wealth taxes. This tax is paid by an individual to the Government direct without any person in the middle; here the Citizen is the payee and the Government is the collector.
- Indirect taxes – includes other taxes like GST, customs tax, luxury tax. This tax is not paid directly by the customer to the Government; instead it follows a hierarchical process of tax payment in which each participating individual (like customer, retailer, whole seller, and manufacturer) pays their own share of tax.
Disadvantages of the previous tax system in India
GST was introduced because many economists were of the opinion that the previous indirect tax system of sales tax and value added tax were becoming extremely incompetent to deal with problems that the Indian economy faces today.
- VAT and Sales tax are multilevel tax systems, and so are extremely cumbersome to calculate and implement.
- Because of its complexity, there are innumerable loopholes in this system which is successfully exploited hydra headed grotesque businessmen in order to evade taxes.
- Again, for its cumbersome nature, the customers need to be extremely aware of what they are paying and how they are paying, or else they are likely to get ripped off.
- It’s based on a billing system, which makes it extremely cost-ineffective to implement.
- One of the major disadvantages of the previous VAT and ST system was that it inevitably resulted in slow but gradual inflation.
What is GST and why was it introduced?
GST is the newest form of indirect taxation system that was first proposed in the Parliament in 2006, and eventually brought into force by the government of India by the Goods and Services Tax Act on 1st July, 2017. It has taken the place and has abolished the erstwhile rather complicated system of VAT and Sales Tax.
Goods and Services Tax is already present in 140+ countries across the world and it was first introduced in France 1954. Unlike most of the countries in the world, India, we have dual tax system, i.e., there are two taxes to be paid – Tax to the Central government (now Central GST) and Tax to the State Government (now to be known as State GST).
Central GST or CGST will remove all the previously existing central level taxes including – Central Excise Duty, Additional Excise Duty, Central Service Tax, Additional Duty of Customs, Secondary and higher secondary Education Surcharges.
State GST or SGST will replace all the previously existing taxes to the State Government, namely – VAT, sales tax, Purchase Tax, Entertainment Tax, Luxury Tax, Lottery Tax, miscellaneous State Cess and Surcharges.
There are still few taxes that don’t come under the purview of GST that includes Customs, Stamp Duty, Petroleum Tax, Electricity tax and Liquor Tax.
Advantages of GST
- It removes multiple taxation.
- Creates lesser tax disputes.
- There will be a significant reduction of tax on manufacturers as this GST is a consumption side tax which will enable manufacturers to have a better chance in world market competition due to lower pricing.
- When GST will be completely implemented, India will get a boost of about 0.9-1.5 % boost in GDP.
- A uniform tax structure implemented uniformly across all states will help prevent tax evasion and leakage and will increase the revenue of the Government.
- It will promote seamless interstate flow of goods which will significantly lower the transit time and will improve the truck utilization.
- Since this tax is uniform throughout all States and for all services, competitor will not get any undue advantage, in the form of tax benefit, due to his location.
- There will be few sectors that will greatly benefit from GST system even considering the higher 15% rate applied on them which includes – Cement, Automobiles, Consumer durables, Logistics, Entertainment, Metal, Building materials, etc. All these sectors currently have about 25% – 30% tax rate which is likely to be reduced once GST is fully implemented.
Disadvantages of Goods and Services Tax
- Since this GST is applied on the manufacturing side and not on the consumption side, several manufacturing States, like Tamil Nadu will have to incur losses. To make up for this, the Central Government has decided to provide compensation to these states for their losses for a period of five years.
- There will be dual control on every business by both the State and Central Government. For example, the retail business had only the State Government’s intervention, but with GST, both the State and the Center can intervene in to the business thus hindering rapid expansion of business.
- All forms of credit regarding GST will be available with online-only GST network, which requires the use of internet. This might impact small businesses negatively or where there is poor penetration of internet services and awareness.
- State will lose autonomy to change tax rate and will now be done only by the GST council.
- Petroleum and Liquor is still kept out of the purview of GST but they form about 40% of India’s total trade.
- If the GST rate is kept at a higher side, it may have a negative impact on inflation.
- There are few important sectors that currently enjoy no taxes or duty. These sectors will now be negatively impacted. They include essential commodities, like – Diary products, Textile, Media, Pharmaceuticals, IT/Its, Telecommunication.
“The consumer is the king today, and with GST, we intend to bring uniformiy in taxes” – These were the words of Prime Minister Narendra Modi when the constitutional amendment bill was passed by the parliament. Nobdy has seen the
Future and at this point of time, we can only speculate what impact GST will have on our everyday life and future.