A constitutional amendment is about to bring a system of GST – Goods And Service Tax in India. It is perhaps the most important economic reform of this time. This is one reform which is going to affect all of us. Again it is one of the complicated reform as most taxation matters usually are.
Present Tax Structure in India.
Currently taxation powers are divided between Union and States. Both levels of governments have their own set of areas where they can levy tax exclusively. The complex tax structure of India is further divided into Direct Taxes & Indirect Taxes.
Bucket of Direct Taxes is filled with Income Tax and Wealth Tax. Direct Tax means a tax which is levied directly on source of income or profit of a person or a company or on wealth of a person or a company. Power to levy and collect Income tax & Wealth Tax, which are referred to Direct Taxes lies exclusively with Union Government.
Bucket of Indirect taxes is filled up with Central Excise Duty i.e. taxes levied on manufacture of goods, Service Tax i.e. taxes on provision of services and VAT/CST i.e. taxes on resale/consumption of goods. Union Government has been empowered exclusively to levy and collect Central Excise Duty and Service Tax, Union Government has also been empowered to levy and collect CST where goods are resold across states of India. Whereas State Governments have been allowed to levy and collect VAT on resale/consumption of goods within the limits of their own state boundaries.
Problems with current tax structure.
India is politically one country, but economically it is fragmented. And therefore Union & States both act discrete and distinct in their own areas of taxes. This creates CASCADING EFFECT of taxes i.e. Tax on Tax.
To understand CASCADING EFFECT of tax, let us take and understand the simple example. Some commodity such as a Mobile Phone has to first be manufactured before it is bought/consumed. The Union Government, therefore, levies its Indirect Tax called Central Excise Duty on manufacturing of such Mobile Phone. Further such Mobile Phone will be sold to wholesaler/dealer with in the State or outside the State area. If such resale happens within the boundary of State, then State Government shall levy and collected VAT on the value of Mobile Phone. Now the value mentioned here not only includes the cost of manufacturing of Mobile Phone and Profit but also the Central Excise Duty levied by Union Government. And hence Central Excise Duty will be summed up along with cost of Mobile Phone and results in Tax on Tax i.e. VAT on Central Excise Duty.
In the above example, if the Mobile Phone is manufactured in the state of Maharashtra at the cost of ₹10,000/-, Union Government shall levy Central Excise Duty (E.g. 10%) on the value of Mobile Phone of ₹10,000/- i.e. ₹1,000/-. Central Excise Duty of ₹1,000/- shall be added to the cost of the Mobile Phone for levy of VAT when the same shall be further sold to the Dealer, i.e. VAT (E.g. 15%) shall be levied on the value inclusive of Central Excise Duty of ₹11000/- (Cost ₹10,000/- + Central Excise Duty ₹1,000/-) i.e. VAT of ₹1,650/-. VAT shall be levied by the state of Maharashtra as it has be sold within the same State after manufacturing by Manufacturer. And VAT on Central Excise Duty creates CASCADING EFFECT of ₹150/- (15% VAT on Central Excise Duty of ₹1000/-).
As the example suggest, there are multiple taxes when there is commerce within or across state borders which creates CASCADING EFFECT of taxes.
There are many other limitations of multiple taxes like:
- Lack of uniformity in rates & structure.
- Separate governance and separate compliance for each type of tax.
- Lack of seamless credit of taxes paid on input goods or service.
- Barrier to free movement of goods.
Is GST a solution to above problem..??
GST – Goods And Service Tax is an indirect tax reform which aims to remove tax barriers between states and create a single market. GST is one indirect tax for the whole nation – make India one unified common market.
- A destination based tax on consumption of goods and service tax.
- Single tax on supply of goods and services, right from manufacturer to the consumer.
- Tax only on value addition at each stage – No cascading effect of taxes.
GST – Goods And Service Tax = One Country + One Tax + One Market
A consumption based tax, the idea was to do away with the complications afflicting the current system of taxation. In a comprehensive GST regime all the transactions would be liable to a single unified tax.
Today we do not have any idea about the extent of taxes they pay on goods commonly. If we get a bill after buying merchandise, only VAT amount is mentioned on bill that we pay at the time of purchase. It is an understatement of the actual tax we have paid. Remember, well before merchandise reached the retail outlet, the Union Government has already levied and collected Central Excise Duty. The extent of Central Excise Duty is not mentioned in the bill.
Therefore, today it is reasonable to assume that we pay well over 20% of average tax for most merchandise we buy.
Under GST regime, it will not only reduce the cost of the goods due to eradication of cascading effect but it will also ensure free movement between States. And therefore, GST should give a good relief not only to the industry but also to the consumers.
The Goods and Service Tax (GST) will be a comprehensive nationwide indirect tax on manufacture, sale and consumption of goods and services throughout India. GST will be a single tax on supply of goods & service, right from manufacturer to the consumer. The aim is to have one indirect tax for the whole nation, which will make India a unified common market.
GST will be levied and collected at each stage of sale or purchase of goods or services, characterized with benefit of availing credit of every tax paid on purchase of raw material or services or capital investment for manufacturing of final product/service. The credit of input tax paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. Moreover it will enhance efficacy of the inter-state transportation of goods. The GST is all set to consolidate all State economies.
With GST, it is anticipated that the tax base will be comprehensive, as virtually all goods and services will be taxable, with minimum exemptions.
GST has been envisaged as an efficient tax system, neutral in its application and distributionally attractive.
‘Dual’ structure would be followed by the GST bill, meaning having two components – the State GST and Central GST. Separate powers would be enjoyed by them for administering and legislating their repetitive taxes, thereby empowering both equally.
GST amalgamates several central and state taxes into a single tax, mitigating cascading or double taxation effect. GST will facilitate a common national market. This would be hugely beneficial for consumers as the tax burden on inter-state logistics will be cheaper.
The GST structure would follow the destination principle. Accordingly, imports would be subject to GST, while exports would be zero-rated. In the case of inter-state transactions within India, State tax would apply in the state of destination as opposed to that of origin. The Goods and Services Tax (GST) is a value added tax that will replace all indirect taxes levied on goods and services by the Government, both Central and States, once it is implemented.
GST – Goods And Service Tax will subsume the taxes like:
1. From the basket of Union:
a. Central Excise Duty,
b. Additional Excise Duty,
c. Service Tax,
d. Central Surcharges & Cesses,
e. Special Additional Duty of Customs &
f. Central Sales Tax.
2. From the basket of States:
a. Value Added Tax,
b. Octroi & Entry tax,
c. Purchase Tax,
d. Luxury Tax,
e. Taxes on Lottery, Gambling & Betting,
f. State Surcharges & Cesses &
g. Entertainment Tax
Basically, it will have just four types of taxes, namely, State, Union Territory, Central and Integrated GST for tackling inter-state transactions.
GST will be a game changing reform for the Indian economy by creating a common Indian market and reducing the cascading effect of tax on the cost of goods and services. It will impact the tax structure, tax incidence, tax computation, tax payment, compliance, credit utilization and reporting, leading to a complete overhaul of the current indirect tax system.
GST will have a far-reaching impact on almost all the aspects of the business operations in the country, for instance, pricing of products and services, supply chain optimization, IT, accounting, and tax compliance systems.
The implementation of GST would mean ease of paperwork enhancing efficiency in trade within country with faster deliveries. Many sectors such as automobile, logistics, e-commerce, FMCG, etc. would get most benefited strengthening their position in the market and making them investment friendly.
We shall discuss on other aspects of GST soon in coming articles. To know more on GST, keep following us on UnBoxGST.com
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