The Goods and Service Tax introduced on 1st of July, 2017 in India has been instrumental in great economic progress with a major transformation in the indirect tax system in the country. GST simplified the tax structure and promoted the ease of compliance by replacing the complex system of multiple taxes levied by the central and state governments with a unified tax, aligning with the vision of ‘one nation, one tax’.
GST is a destination-based tax levied at each stage of the supply chain, allowing for a seamless flow of credit, reducing the tax burden on the end user or customer. Digitization and online compliance have increased transparency and helped the government curb tax evasion. The inclusion of small businesses into the formal economy has facilitated unprecedented economic growth in the country. Here we discuss in detail the structure, components, and impact of GST on the economy in India:
Prior to the introduction of GST, the multiplicity of taxes levied on the same supply chain, leading to a cascading effect of taxes, caused a heavy burden for the consumer. Moreover, the various tax laws had different tax rates and tax practices, dividing the country into separate economic zones and creating barriers and a deterrent to the free flow of trade in the country. The numerous taxes also resulted in high compliance costs for the taxpayers.
Therefore, a necessity to create a unified, efficient, and transparent indirect tax regime was felt by the government to benefit businesses and the economy of the country. The GST Council was formed to make decisions on different aspects of GST, like tax rates, exemptions, and administrative procedures. Thus, the GST laws were implemented on 1st of July 2017, after much deliberation and discussion between the central and state governments and amendments to the constitution, replacing the complex web of state and central taxes.
Components of GST
GST is an indirect tax levied on the supply of goods or services or both, replacing multiple taxes including VAT, excise duty, service taxes, etc. It creates a single national market, a common tax base, and uniform tax laws for the center and state. The GST regime has a dual structure comprising state GST (SGST) and central GST (CGST) levied concurrently by the state and central governments, respectively.
This dual structure ensures that both the central and state governments have a share of the GST revenue. An additional integrated tax is levied on interstate supplies and imports that are collected by the central government but apportioned to the destination state. IGST eliminates the complexities of different tax rates and procedures across states, making interstate trade more efficient. Therefore, we can list the components of GST as follows:
- Central GST (CGST): It is the tax levied by the central government on intra-state transactions that are within the state.
- State GST (SGST): This is the tax levied by the state government on intra-state sales.
- Integrated GST (IGST): This tax is levied by the central government on interstate transactions.
- Union Territory GST (UGST): It is the tax levied on the supply of goods and services in the Union territories and is collected by the Union territories.
Structure of GST in India
In India, under GST, goods and services are categorized into different tax slabs. The four-tier structure of GST is 0%, 5%, 12%, 18%, and 28%.
- Exempted (0%) Slab: In this category are included essential items like fruits, vegetables, milk, buttermilk, curd, natural honey, flour, hulled cereal grains, jaggery, fish, chicken, eggs, Sindhur, Kajal, bangles, coloring books, stamps, judicial papers, newspapers, jute, handloom, etc.
- Lower Rate (5%) Slab: This category includes most of the most common goods and services. It includes the remaining articles under CPI and large-scale consumption goods like frozen vegetables, cashew, cashew nuts, raisins, tea, coffee, kerosene, coal, medicines, agarbatti, economy flight tickets, rail tickets, etc.
- Standard Rate (12%–18%): This category includes the bulk of the rest of the goods and services.
The 12% slab includes dairy products, cell phones, accessories, business class air tickets, and movie tickets priced under Rs.100/-.
The 18% slab includes pasta, bakery items, cornflakes, preserved vegetables, jams, soups, ice creams, mineral water, cleaning equipment, hair dryers, panels, electronic items, five-star and luxury hotels, telecom services, etc.
- Higher Rate (28%): This category mainly comprises products like paint, cement, pan masala, aerated water, personal care items such as deodorants, shaving creams, shampoos, dye, sun screen, automotive, electronic gadgets, bathing products, soft drinks, etc.
The composition scheme was introduced to make compliance simpler and allow small businesses to concentrate on the growth of their business. In this scheme, businesses with an annual turnover below a specified limit can opt for this scheme, where they pay tax at a lower rate but cannot claim input tax credit. The compliance processes are also simpler.
Input Tax Credit (ITC)
To ensure taxes are not paid on taxes and to eliminate the cascading effect of taxes, an input tax credit mechanism was introduced in GST. ITC is an essential part of GST, which ensures that tax is levied only on incremental value addition at each stage of the overall supply chain. The credit for taxes paid on inputs, capital goods, or input services against the output tax payable is the basis of the GST system. The government aimed to ensure a seamless flow of credit and tax collection, preventing misuse and evasion.
Benefits of GST
The various benefits of the introduction of GST in India can be enumerated as follows:
- GST brought higher revenue as more business and unorganized sectors were brought into the formal economy, brought uniformity in taxation, and eliminated the cascading effect of taxes.
- Reduced compliance burden, brought transparency because of the online system of taxation, and created an overall efficient indirect tax system.
- GST implementation has benefited all the stakeholders; consumers have benefited from lower prices due to the elimination of taxes at multiple levels.
- Trade and industry benefited from the seamless flow of input tax credits and the uniformity of a single indirect tax throughout the country.
- GST helped in the reduction of costs due to online processes. In this system, all processes, including registration, filing of returns, and tax payments, are done online; compulsory electronic invoices for specific businesses have eased compliance, eliminating the interaction of the taxpayer with the tax authorities.
- Manufacturers could now make better decisions with regard to the sourcing of raw materials, the location of manufacturing, and warehousing facilities. With the abolition of tax-related barriers at interstate borders, the ease of interstate trade was enhanced.
- The autopopulation of various fields in the taxpayer’s returns and the invoice matching ensured that taxes not paid were not claimed and brought transparency and integrity to the tax system.
- E-way bills that are required to be carried during the transportation of the goods helped curb unauthorized movement of goods and prevent tax evasion.
- The requirement of certain businesses to generate e-invoices for B2B transactions has helped minimize fraudulent invoice generation and ensure that the input tax credit claimed is actual and genuine.
- The increase in the number of GST registrations is proof enough of the popularity and beneficial nature of this tax system.
Frequently Asked Questions
- What is the concept of e-invoicing?
Answer: As per the new rule, the government has made it compulsory for businesses that have a turnover above Rs. 100 crore to opt for e-invoicing of all B2B transactions.
- Why is GST called a destination-based tax?
Answer: In GST, the tax accrues to the taxing authority that has jurisdiction over the place of consumption or place of supply. Hence, it is called a destination-based tax.
GST in India has brought about an enormous shift in the indirect tax structure of the country. The four-tier structure, with some exceptions for gold and real estate and exemptions on food, education, and healthcare, has helped keep inflation under check while protecting essential and crucial items. Tax collection costs have been reduced for the government, and exports have become more competitive. As small and medium businesses and unorganized sectors are included in the formal economy, there is improved compliance and economic growth in the country. The online portal, electronic processes, and the goods and services network (GSTN) have made it easier for taxpayers to fulfill their tax obligations and helped the tax authorities monitor and control tax evasion. We can say for sure that GST has brought about a radical change for the better in the indirect tax system in India.