What is GST? Goods & Services Tax Law Explained!

The Goods and Services Tax  (GST) is finally launched on the 1st of July. GST is one indirect tax for the whole nation, which will make India one unified common market.

But what is GST and how will it reform the current tax structure? There are many more questions to be answered. Let’s discuss this further in detail.

What is GST ?

GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes 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. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. Under GST, goods and services will be taxed at the following rates, 0%, 5%, 12%, 18%, 28%

What are the benefits of GST ?

The benefits are summarized below.

  1. Single and transparent tax proportionate to the value of goods and services
  2. Easy compliance
  3. Uniformity of tax rates and structures
  4. Removal of cascading
  5. Improved competitiveness
  6. Gain to manufacturers and exporters
  7. Simple and easy to administer
  8. Better controls on leakage
  9. Higher revenue efficiency
  10. and most importantly Relief in overall tax burden

What are the taxes bound together in GST ?

The following taxes will be bound together by the GST:

  • Central Excise Duty
  • Commercial Tax
  • Value Added Tax (VAT)
  • Food Tax
  • Central Sales Tax (CST)
  • Introit
  • Octroi
  • Entertainment Tax
  • Entry Tax
  • Purchase Tax
  • Luxury Tax
  • Advertisement tax
  • Service Tax
  • Customs Duty
  • Surcharges

 

THE NEED FOR GST

Suppose Mr. A sells goods to Mr. B and charges sales tax, then Mr. B re-sells those goods to Mr. C after charging sales tax. While Mr. B was computing his sales tax liability, he also included the sales tax paid on previous purchase, which is how it becomes a tax on tax.

This was the case with the sales tax few years ago. At that time, VAT was introduced whereby every next stage person gets credit of the tax paid at earlier stage. This means that when Mr. B pays tax of Rs. 11, he deducts Rs. 10 paid earlier.

Similar concept came in Excise Duty and Service Tax also, which is called Cenvat credit scheme. To a huge extent, the problem of cascading effect of taxes is resolved by these measures.

However, there are still problems with the system that have not been solved till date. We shall talk about these problems now.

  • The credit of Input VAT is available against Output VAT. The credit of input excise/service tax is available against output excise/service tax. However, the credit of VAT is not available against excise and vice versa.
  • VAT is computed on a value which includes excise duty. This shows that there is still a tax on tax!

GST will solve this problem. Let us see how.


PRESENT SYSTEM OF INDIRECT TAXES

Let us first understand the various indirect taxes that are presently being levied by the Central & State Governments.

​(*CVD – Countervailing Duty; SAD – Special Additional Duty)

  • The GST shall subsume all the above taxes, except the Basic Customs Duty that will continue to be charged even after the introduction of GST.
  • India shall adopt a Dual GST model, meaning that the GST would be administered both by the Central and the State Governments.

DUAL GST MODEL

We begin by stating the dual GST model and the taxes levied on each kind of transaction. See these abbreviations before we understand them-

  1. SGST – State GST, collected by the State Govt.
  2. CGST – Central GST, collected by the Central Govt.
  3. IGST – Integrated GST, collected by the Central Govt.

Now look at the chart that follows:

These are the taxes that shall be levied under the new system of GST. Let us understand how this operates –


HOW GST OPERATES?

Case 1: Sale in one state, resale in the same state

In the example illustrated below, goods are moving from Mumbai to Pune. Since it is a sale within a state, CGST and SGST will be levied. The collection goes to the Central Government and the State Government as pointed out in the diagram. Then the goods are resold from Pune to Nagpur. This is again a sale within a state, so CGST and SGST will be levied. Sale price is increased so tax liability will also increase. In the case of resale, the credit of input CGST and input SGST (Rs. 8) is claimed as shown; and the remaining taxes go to the respective governments.

Case 2: Sale in one state, resale in another state

In this case, goods are moving from Indore to Bhopal. Since it is a sale within a state, CGST and SGST will be levied. The collection goes to the Central Government and the State Government as pointed out in the diagram. Later the goods are resold from Bhopal to Lucknow (outside the state). Therefore, IGST will be levied. Whole IGST goes to the central government.

Against IGST, both the input taxes are taken as credit. But we see that SGST never went to the central government, still the credit is claimed. This is the crux of GST. Since this amounts to a loss to the Central Government, the state government compensates the central government by transferring the credit to the central government.

Case 3: Sale outside the state, resale in that state

In this case, goods are moving from Delhi to Jaipur. Since it is an interstate sale, IGST will be levied. The collection goes to the Central Government. Later the goods are resold from Jaipur to Jodhpur (within the state). Therefore, CGST and SGST will be levied.

Against CGST and SGST, 50% of the IGST, that is Rs. 8 is taken as a credit. But we see that IGST never went to the state government, still the credit is claimed against SGST. Since this amounts to a loss to the State Government, the Central government compensates the State government by transferring the credit to the State government.


ADVANTAGES OF GST

Apart from full allowance of credit, there are several other advantages of introducing a GST in India:

  • Possible reduction in prices: Due to full and seamless credit, manufacturers or traders do not have to include taxes as a part of their cost of production, which is a very big reason to say that we can see a reduction in prices. However, if the government seeks to introduce GST with a higher rate, this might be lost.
  • Increase in Government Revenues: This might seem to be a little vague. However, even at the time of introduction of VAT, the public revenues actually went up instead of falling because many people resorted to paying taxes rather than evading the same. However, the government may wish to introduce GST at a Revenue Neutral Rate, in which case the revenues might not see a significant increase in the short run.
  • Less compliance and procedural cost: Instead of maintaining big records, returns and reporting under various different statutes, all assessees will find comfortable under GST as the compliance cost will be reduced. It should be noted that the assessees are, nevertheless, required to keep record of CGST, SGST and IGST separately

POINTS TO PONDER : FOOD FOR THOUGHT

The GST is a very good type of tax. However, for the successful implementation of the same, we must be cautious about a few aspects. Following are some of the factors that must be kept in mind about GST:

  • Firstly, it is really required that all the states implement the GST together and that too at the same rates. Otherwise, it will be really cumbersome for businesses to comply with the provisions of the law. Further, GST will be very advantageous if the rates are same, because in that case taxes will not be a factor in investment location decisions, and people will be able to focus on profitability.
  • For smooth functioning, it is important that the GST clearly sets out the taxable event. Presently, the CENVAT credit rules, the Point of Taxation Rules are amended/ introduced for this purpose only. However, the rules should be more refined and free from ambiguity.
  • The GST is a destination based tax, not the origin one. In such circumstances, it should be clearly identifiable as to where the goods are going. This shall be difficult in case of services, because it is not easy to identify where a service is provided, thus this should be properly dealt with.
  • More awareness about GST and its advantages have to be made, and professionals like us really have to take the onus to assume this responsibility.

 


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