Goods and Services Tax: What is GST in India? Indirect Tax Law Explained
Goods and Services Tax is an autonomous taxation that has been one of the major GST reforms since the history of India. It came into existence on July 1, 2017, replacing multiple indirect taxes levied at various stages of production and distribution. Its implementation marked a paradigm shift in India’s taxation framework, aiming to unify the country into a single market by subsuming numerous taxes into a single, comprehensive tax structure. This article provides an in-depth explanation of GST, its implications, and its functioning in the Indian context. This article will provide a complete guide on Goods and Services Tax (GST).
Understanding GST
GST is a destination-based, multi-stage indirect tax levied on the supply of goods and services. It plans to eradicate the cascading effect of taxes, which was a major drawback of the previous taxation system. In the old regime, taxes were levied at every stage of production and distribution, and thereby, the people suffered from “tax on tax.” GST, by design, ensures the collection of tax only on value added at every stage and reduces the overall tax burden upon the consumer. Its tax is controlled by the GST Council, a constitutional body, consisting of representatives from the central and state governments. Tax rates, exemptions, and procedural guidelines are determined by the GST Council with the aim of uniformity in the entire states’ causes. There is the levy of multiple GST rates which is currently categorized as 5%, 12%, 18%, and 28%, pertaining to the nature of the products. Some commodities like alcohol and petroleum were later not included in its scheme.
Structure of GST
GST in India is split into four constituents, to give an equal share of tax revenues:
1. Central GST (CGST) This is levied by the central government on intra-state transactions of goods and services.
2. State GST (SGST) This is raised by the state governments on intra-state supplies.
3. Integrated GST (IGST) is levied on inter-state transactions as well as importation. The revenues are collected by the center, but the states also have a share.
4. Union Territory GST (UTGST): It is applicable in Union Territories that do not have a legislature such as Chandigarh and Lakshadweep. This dual GST model was taken after consideration of India’s federal structure, allowing both the Centre and the states to collect and levy tax with the provision of non-taxation twice.
Key Features of GST
The key feature of GST is that it should be simple and transparent. Consolidation into a single tax simplifies compliance for businesses. This imposes the concept of Input Tax Credit (ITC), which allows the business to claim credit for taxes paid on inputs used in their production. This mechanism ensures tax is levied only on value added at each stage, resulting in overall lower tax liabilities. ITC is one of the prominent features of Goods and Services Tax in India.
The other characteristic is that it is a destination-based tax whereby the tax collected is at the state where goods or services are consumed rather than where they are produced. This encourages balanced regional development because tax revenues are distributed equitably between consuming states.
Also, the GST system is based on a technology-based platform, namely GSTN (Goods and Services Tax Network), for administering registrations, filings, and payments. The digital interface aids in providing maximum transparency, thereby reducing human intervention and scope for tax evasion.
Advantages of GST
GST has brought several benefits to the Indian economy. It has eliminated the cascading effect of taxes and reduced the overall cost of goods and services, making Indian products more competitive in international markets. For businesses, GST has become a simple system for tax compliance-replacing multiple taxes with a single tax framework. Efficiency in logistics has been promoted by the removal of state-level taxes because it eliminates border delays and decreases transportation costs.
While the views have become more positive, for consumers, GST has ensured greater transparency in pricing with clearly indicated tax components on invoices. This led to a reduction in what is termed ‘hidden cost,’ and henceforth, instilled trust and confidence. In addition, GST has widened the tax base through more business entries into the economy thus generating more revenues for the government.
Despite the many merits of GST in India, there has never been a dearth of challenges since it began. Major issues include frequent tax rate and compliance rule changes that leave businesses confused. Among these, SMEs have had a tough time adapting to this new system, citing large compliance costs and technical difficulties.
Exclusion of key sectors, like petroleum, alcohol, and real estate though kept out of the GST scheme of things, are still being taxed under the old regime, making this system less efficient as well as reducing the scope of the much-needed tax reform, GST.
Complexity of Return Filing Return filing, even for small businesses, has been one of the biggest challenges. The GSTN portal was supposed to be the one that was envisaged for smooth and hassle-free processes, but technical issues and system failures in many parts.
Effect on Different Industries
The impact of GST has fallen differently across the Indian economy’s different sectors. While for manufacturing, it acted as a boon, as GST streamlined the supply chain and reduced myriad logistical inefficiencies, the real estate sector bore both faces of the devil.
On the contrary, the service sector, which was till now taxed at one uniform rate, has witnessed a phenomenal increase in the tax burden under GST. For instance, most of the services are taxed at a standard rate that has, in turn, risen from 15% to 18% and therefore shifted the increased burden to the consumer.
GST and Federalism
As such, GST has rewritten the fiscal relationship between the central and state governments. In doing so, it has ensured cooperative federalism by pooling revenues into a common fund, though it raises serious concerns about the state’s financial autonomy since they have no control over tax rates or exemptions.
GST and Economic Growth
GST has brought a sea change in the economic scenario of India. It has removed tax-induced distortion and improved the ease of doing business, thus attracting greater investments. The unified tax structure has also improved India’s global competitiveness which has contributed to higher exports.
Goods and Services Tax Compliance and Enforcement
The success of GST will be dependent on the compliance part. The body is a self-assessment-based system wherein entities are to furnish authentic liability data regarding themselves. The anti-evasion measures embedded in the framework of GST comprise audits, penalties, and prosecution.
E-invoicing and GST e-way bill systems have also strengthened enforcement through goods movement and transaction verification in real-time. It has consequently reduced tax evasion and improved revenue collections. The onus of effective enforcement should however be balanced with support to the business, particularly the small business units not to overburden them.
Conclusion
While it’s true that the implementation has been cumbersome, GST has still achieved much. It has made compliance easier and reduced tax burdens, making the whole process more transparent. To support growing and small businesses, there are other scheme such as QRMP and RCM under GST.
With refining and optimization in its basket, India seems to make great promises by working towards economic growth and a united system of efficient and fair taxation. By addressing the problems that exist and building on its successes, GST, therefore, can indeed be a catalyst for development in India in the years ahead. Reach out to TaxDunia for clearing further doubts regarding Goods and Services Tax in India. Let us file your GST Returns so that you can meet compliance hassle-free.
