It’s nearly a month left in the implementation of single largest Tax structure in India which will subsume many Indirect taxes, levied by both Central and State Governments. India is trying to execute the GST Act since 2010 but due to various political and administrative issues, it lagged behind but the year 2017 will witness as a game-changer in the Economic Structure of India with the implementation of GST from 1st July 2017.
To introduce GST and to have a consensus among States and Union, the Joint Working Group of State Finance Ministers in its report recommended that a dual GST for country like India is harmonious for its effective implementation as it is felt that the single GST will not be prevailed due to Centre-State Relations and Federal Structure of the country.
What is GST?
Goods & Services Tax is a single largest tax which will replace existing indirect taxes charged at the different level of operations in the market. Indian GST Act is based on dual tax structure i.e. Central GST levied by Central Government and State GST levied by State Government. The GST will subsume various indirect taxes levied by both Central and State like custom duty (countervailing tax), service tax, central excise duty, other excise duty and surcharges at the central level and VAT, Entertainment Tax, Luxury Tax, Taxes on lottery, betting and gambling, state cess and surcharges at the State level.
In another way, GST is a valued added tax on goods and services that is paid by the final consumer while the retailer will be taking credit of the tax he has paid while buying goods for retail. So in this, all the services of the retailer or the chain behind him have taxed apart from the actual value of production of that good. This can be explained by a hypothetical example by supposing that there is a chain of a manufacturer, wholesale dealer and the retailer and GST is 10%. Suppose the manufacturer purchases the inputs worth Rs.100 for producing a good worth Rs.140. He will pay net GST of Rs.4 by taking the tax credit of Rs.10 on the inputs. Similarly, the wholesaler who buys this good and sells it for Rs.150 will pay net GST of Rs.2 and the retailer who sells it for Rs.170 will pay net GST of Rs.2 by taking the tax credit for his purchase which comes out to be Rs.15.
Why GST Bill?
India’s current Tax structure is very complex. According to Constitution of India States has the right to charge tax on sales of goods and services and Centre on the manufacturing of goods and services. With this reason, India has many taxes being enforced which make its current tax structure very complex creating a perilous environment for companies and traders.
On the other way increase in a number of taxes being imposed by the state is large in numbers and one by one withdrawing of these taxes will solve the problem of double taxation which will create the path for the unified national market. If you look at the consumer’s view, the biggest benefit would be that the tax burden on the commodities will be reduced. Today the tax burden is approximately 25% to 30%, but after execution of GST Indian products would be able to compete with foreign goods more effectively because of a low tax burden, which will have an encouraging effect on the economical development of the country.
The Constitution of India has given full rights to GST council to decide the rates at which the GST will be charged. It was decided in the council meeting to introduce five slabs of tax rates i.e. 0%, 5%, 12%, 18% & 28%. On Gold and Silver, a special tax rate is decided which is going to be 3% at the last meeting of GST council. The tax which was paid on the exported item will be refunded back on the same rate and the same amount tax will be charged on imported item equivalent to GST charged on that item inside the country. With the implementation of GST-small traders and producers have to undergo one tax system, which will be fruitful to small traders because currently those traders who have yearly turnover > Rs.10 Lakhs have to pay Value Added Tax (VAT), but after coming of GST this limit is extended to Rs. 20 Lakhs, with this it means that those traders whom yearly turnover lies between 10 Lakhs and 20 Lakhs they are not required to pay VAT and not necessarily required registration.
GST will eliminate cascading effect:
As we know that in Indirect Taxation system the burden of the tax is borne by the last consumer but collection of taxes is done by traders or sellers. When a trader purchases a commodity it gets Input Credit which it uses to pay its taxes. With this system, a tax is only charged on value-addition. Traders collect tax from consumer and after deducting their Input credit (tax paid on purchased good) remaining tax is paid to Government.
In the present system, the excise duty and service tax are levied by the central government and sales tax by the state government (VAT or Sales Tax). For this reason, the practitioner cannot use the input credit (tax paid on the purchase) of the sales tax in payment of excise duty and service tax and the service tax (tax paid on services) and excise duties in the sales tax payment (Self-purchased goods cannot use the credit of excise duty). Due to this, a tax is charged after tax in the present system, which increases the price of goods and services.
This problem will be fixed from the introduction of GST, the same type of indirect tax will be made in the entire country, so that the traders will get the full credit of the GST paid on the goods and services purchased, which they can use for the payment of GST on the goods and services sold. This will only tax on value addition and the tax on taxes will be eliminated, which will reduce costs.
The impact of GST on General Public:
Firstly, it is reality that the burden of Indirect Taxes is directly borne by final consumer. Currently on every single item there are various taxes charged which makes the item expensive but after implementation of GST only one tax will be imposed by which the overall cost of manufacturing will be reduced.
Secondly, with the execution of GST, the tax will be charged at the same rate which makes the cost of item same across the country.
Thirdly, the central sales tax will be subsumed into GST which will reduce the cost of the product.
Impact of GST on Businesses:
At present, businesses have to pay different types of indirect taxes such as excise duty on producing commodities, sales tax on trading, service tax on providing service etc. With this, businesses have to comply with various types of tax laws, which are very difficult and complex tasks. But due to the implementation of GST, they will have to follow indirect laws only, which will facilitate business in India
It is being said that business will be easier due to coming of GST but in the initial years businesses may have to face difficulties. For example, GST will have to file three different types of returns each month. Earlier it was one.
At present, the businessman cannot use the input credit (tax paid on the purchase) of the sales tax in the payment of excise duty and service tax and the service tax (tax paid on services) and excise duties in the payment of sales tax (Excise duty on purchased goods) cannot use the credit due to this the cost of goods and services increases. But due to the implementation of GST, the businessmen will get the full credit of the GST paid on all types of goods and services which they can use to pay for GST on the goods and services sold. This will reduce overall costs.
At present, selling of goods from one state to another in the state gets a Central Sales Tax of 2%, which does not get input credit. Since the implementation of GST, central sales tax will not be imposed, which will reduce the cost of goods. Although it was proposed that in the initial few years, additional GST would be installed at the rate of 1% in the producing states, so that the loss is borne by producing state be recovered but due to protest of opposition parties it was taken back.
GST will give more relief to industry, trade, and agriculture through a more comprehensive and wider coverage of input tax set-off and sales tax set-off, subsuming various taxes under it which will lower the tax burden on an average dealer, trader, farmer, consumer, etc. The phasing out of Central Sales Tax would reduce the cost of manufacturing goods and services. This would likely to increase the competitiveness of Indian products worldwide due to its lower cost.
We are thankful to Yash Mittal, our correspondent for this Article. Yash Mittal is a second year law student at ILNU.
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Disclaimer: The Article represents the views of the author only and by no means reflect the opinions of ILNU of any person associated with it. Any counter opinion to the views of the author are welcomed for a healthy debate and discussion.