All about GST

Rajesh K Sharma
Broadly, there are two types of taxes, Direct Taxes and Indirect Taxes. In India, taxes are levied at two levels, one at the Central Government Level and other at the State level. Some minor taxes are levied by local authorities such as Municipalities. Constitution of India allocates the power to levy various taxes between Centre and State.
Direct taxes are imposed on the income derived from salaries, profession, business, etc. In this case, income recipient pays tax direct to the Central Government. Unlike direct taxes, Indirect Taxes are levied on the consumers when they purchase daily use products. These taxes are collected by traders and then deposited with the Central/State Government and that is why these are called indirect taxes. Under the category of Indirect Taxes, introduction of Value Added Tax(VAT) has been considered to be a major step and now Goods and Services Tax(GST) is being seen as additional perfection over VAT.
Why GST:
GST is an indirect tax on sale of goods and services. Suppose we buy a detergent. It includes various taxes like Excise Duty, Customs Duty on imported raw materials, VAT and so on. So, presently we pay a number of taxes on the same product. As has been rightly pointed out by Select Committee of the Rajya Sabha on the 122nd Constitutional Amendment Bill which stands for introduction of GST in India, “Firstly there is no uniformity of tax rates and structure across states. Secondly, there is cascading of taxes due to tax on tax. No credit of excise duty and service tax paid at the stage of manufacture is available to the traders while paying the State level VAT and vice versa. Further no credit of State taxes paid in one state can be availed in other states. Hence the prices of goods and services get artificially inflated to the extent of this tax on tax”. Owing to multiple benefits and simplicity of GST, it has been adopted by over 150 countries
Another deficiency of the present system is that due to imposition of entry tax at State Borders, there are long queues of trucks causing huge traffic jams and increasing cost of goods. According to an estimate by Crisil Research, eliminating delays at check points will yield additional saving of 0.4% to 0.8% of sales of companies. However, State Governments are yet to agree to removal of border check points.
How GST works:
The GST will subsume multiple taxes at Central as well State Level. At Central level, CGST will subsume Central Excise Duty(CENVAT), Service Tax, Countervailing Duty, Central Sales Tax, Special Additional Duty of Customs, etc. whereas at State Level, SGST will subsume Sales Tax or VAT, Entertainment Tax, Luxury Tax, Taxes on Lottery, betting and gambling, Octroi and Entry Tax, Purchase Tax, etc. Centre will levy IGST on inter-state supply of goods and services and States will have the right to levy SGST on intra-state transactions including on services.
However, in the present form, some taxes will be left out of GST, viz., Basic Customs Duty, Export Duty, Road & Passenger Tax, Toll Tax, Property Tax, Stamp Duty, Electricity Duty, etc.
GST is levied at the time of sale and not manufacture and is thus a destination based tax. Due to this reason, States which were production oriented were opposed to it whereas states which were having large number of consumers came in support of this legislation. However, to overcome opposition, Central Government has promised to compensate losing States for the first five years of implementation of GST.
Rate of GST:
Rate of GST shall be decided by GST Council, the apex policy making body for GST which will be headed by Finance Minister of India and comprising of State Ministers in charge of Finance portfolio. Today, Excise Duty stands at 12%, VAT at 14% and Service Tax at 12%. Therefore, the rates of GST may be between 12% and 26%. The average worldwide GST rate is around 18%.
Advantages of GST:
GST makes the system more transparent and is self-policing in itself. Prime Minister Narendra Modi has called GST a tool to end tax terrorism. It will boost tax collection by bringing the unorganized sector under the purview of taxation. While the rate of inflation may initially go up, owing to elimination of cascading effect of indirect taxes, cost of goods/services shall come down. GDP is also expected to go up with the implementation of GST. It will lead to easy compliance, better competitiveness, uniformity of tax rates, transparency, streamlining of overall tax burden and ultimately usher into an era of One Nation, One Tax and One Market.
Way Forward:
122nd Constitutional Amendment Bill to roll out GST stands now cleared by Parliament, Lok Sabha as well as Rajya Sabha and is now required to be ratified by at least 16 out of 31 provinces with Assemblies(29 states and two of seven union territories). Follow-up in this regard by States has already started with Assam becoming first state to pass GST Bill in its Assembly. Let’s hope that proposed implementation of GST from April, 2017 results in unification and oneness of nation in the field of Indirect Taxation.
(The author is Chairman, Jammu Srinagar Chapter of Cost Accountants)
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