GST, a landmark tax reform in India, represents a significant shift from a fragmented taxation system to a more unified approach. Introduced to simplify the complex web of indirect taxes, GST has streamlined tax compliance and reshaped India’s economic framework.
Before GST, businesses and consumers had to deal with various taxes like VAT, service tax, and excise duty, each with its own rules and rates. This often led to confusion and made things complicated for everyone involved. GST changed all that by introducing a single tax that applies to almost all goods and services. This has made understanding and paying taxes easier for businesses and reduced the tax burden for consumers.
In this blog, we’re going to take a close look at GST – what it is, how it works, the impact of GST implementation, and most importantly, what taxes it replaced. We’ll explore how GST is making a difference in the way businesses operate and how it benefits customers. We’ll also compare India’s GST system with similar systems in other countries, discuss the advantages of GST as well as its disadvantages, and sum up what this big change means for India.
Understanding the Structure of GST
|Tax on goods and services within a state
|State counterpart of CGST
|Intra-state transactions in states
|Similar to SGST, for Union Territories
|Intra-UT transactions in Union Territories
|Tax on interstate transactions and imports
|Interstate transactions and imports
The Goods and Services Tax (GST) in India is founded on the principle of unifying multiple indirect taxes into a single tax system. This structure is designed to bring uniformity and standardization across the country, thereby reducing the complexity of multiple taxation systems and improving the ease of doing business.
GST combines central taxes (like excise duty and service tax) and state taxes (like VAT and entertainment tax) into one system. It’s essentially made up of three components:
- CGST (Central GST): Levied by the Central Government on all transactions of goods and services within a state.
- SGST/UTGST (State GST/ Union Territory GST): Levied by the State / UT Government for transactions within a state / UT.
- IGST (Integrated GST): Levied on interstate transactions and imports, shared between the state and central governments.
Under GST, both the Central and State governments have concurrent jurisdiction, which means they both are involved in taxing goods and services. This dual model ensures a comprehensive tax base, allowing both central and state governments to achieve their revenue targets while simplifying the tax structure for businesses and consumers.
The implementation of GST has simplified the tax-paying process for businesses. For instance, a business in Mumbai selling goods to a customer in Mumbai would pay CGST and SGST. If the same business sells to a customer in Delhi, IGST is applied.
One of the key features of GST is the seamless flow of input tax credit. This means businesses can deduct the tax they have paid on inputs from the tax they need to pay on output. This mechanism prevents the cascading effect of taxes, reducing the overall tax burden.
Also Read: Structure of GST in India
Taxes Subsumed by GST
One of the most important features of GST is its ability to absorb various indirect taxes that were previously levied both by the Central and State governments. This consolidation aims to eliminate the cascading effect of taxes – a situation where a tax is levied on a tax.
Central Taxes Merged into GST
The GST framework in India incorporated several central taxes to create a more streamlined and efficient tax system. These include:
- Central Excise Duty (CENVAT): Initially levied on goods and services as they moved from production to warehousing.
- Additional Excise Duties: Applied to specific goods as outlined in the Additional Duties Act of 1957.
- Excise Duties on Medicinal and Toilet Preparations: Indirect taxes on products like medicines and toiletries.
- Additional Duties of Excise on Special Goods: Extra duties on items like tobacco, sugar, and mill-made textiles.
- Additional Duties of Customs (Countervailing Duty – CVD): Imposed on imported goods to level the playing field for domestic manufacturers.
- Service Tax: A tax on various services such as those offered by restaurants, travel agents, and cable operators.
- Central Surcharges and Cesses: Various additional charges and cesses previously imposed by the central government.
State Taxes Incorporated into GST
Alongside central taxes, numerous state taxes were also absorbed into the GST regime:
- State VAT (Value Added Tax): A tax levied at each stage of the supply chain, differing across states.
- Central Sales Tax (CST): Taxed on sales made during interstate trade.
- Luxury Tax: Imposed on goods and services deemed luxurious.
- Entry Tax: A tax by state governments on goods moving from one region to another.
- Entertainment and Amusement Tax: Levied on commercial entertainment events.
- Taxes on Advertisements: Charged on advertising in print media.
- State Surcharges and Cesses: Various additional charges imposed by state governments.
The Impact of Subsuming Taxes
By subsuming these taxes, GST eliminates the scenario where goods and services were taxed multiple times at different rates as they moved through the supply chain. This not only simplifies the tax structure but also reduces the overall tax burden, benefiting both consumers and businesses.
Table: Comparison of Old Tax Structure vs. GST
|Old Tax Structure (Example)
|Plus: Excise Duty (12%)
|Plus: VAT (12.5% on ₹1,120)
|Total Cost Pre-GST
|GST Rate (18%)
|Total Cost Post-GST
In the old tax structure, a product with a manufacturing cost of ₹1,000 would attract an excise duty and then VAT, each calculated at different stages, leading to a final cost of ₹1,260 to the consumer. Under GST, the same product would attract a single tax, leading to a final cost of ₹1,180. This shows a reduction in the tax burden due to the removal of the cascading effect.
The transition to GST represents a significant change in the tax regime in India. By consolidating multiple taxes into a single tax system, GST has made taxation more transparent and efficient. Understanding the GST subsumed taxes is crucial for businesses and consumers to appreciate the advantages of GST over the old tax structure.
Impact of GST Implementation
The Goods and Services Tax (GST) has been a transformative force in the Indian economy since its implementation. It has reshaped how businesses handle tax compliance, making a significant shift from a complex, multi-layered tax system to a more streamlined and unified approach. Here are some of the major impacts that we can observe:
- Simplification of the Tax Structure: The most significant impact of GST implementation is the simplification of the tax structure. Before GST, businesses had to manage multiple state and central taxes, each with its compliance requirements, tax rates, and filing processes.
- Enhancing Transparency and Accountability: GST has introduced a more transparent and accountable tax administration system. With the implementation of digital platforms like the GST portal, businesses can now file returns, pay taxes, and claim refunds online, leading to a more efficient and less time-consuming GST compliance procedures.
- Boosting the Indian Economy: The impact of GST implementation on the Indian economy has been profound. By eliminating the cascading effect of taxes, GST has made goods and services cheaper, benefiting consumers.
- Ease of Doing Business: GST has contributed significantly to improving the ease of doing business in India. The uniform tax regime has leveled the playing field for businesses across states, fostering a more conducive environment for starting and growing businesses.
- Long-term Economic Benefits: In the long term, GST is expected to lead to a more efficient allocation of resources, a boost in manufacturing and exports, and an increase in GDP growth. By creating a single national market, GST has enhanced India’s attractiveness as an investment destination.
GST Framework Worldwide
Globally, the GST framework, often known as VAT, is adapted in various forms to fit local economies. In the European Union, VAT standardizes taxation across nations like Italy and Germany, while countries outside the EU, such as Brazil and Japan (with its Japanese Consumption Tax), tailor it to their specific needs. Originating in France in 1954, VAT has been adopted by around 174 countries, including recent adopters like India and Canada, for its simplified structure and efficient tax collection, demonstrating its worldwide efficacy and adaptability in fiscal policies.
The Indian GST model, distinct in its structure, is built on foundational principles similar to those in international systems. It has been specifically tailored to align with the unique requirements of the Indian economy, ensuring it addresses local business and consumer needs effectively.
Also Read: GST and the Global Economy
Pros and Cons of GST
The following table presents a clear comparison of the advantages and disadvantages of the GST system. It shows how GST has streamlined and improved the tax system in many ways, while also highlighting the challenges and downsides, particularly during the initial transition phase.
|Pros of GST System
|Cons of GST System
|Unifies multiple taxes into a single system.
|Initial complexity in understanding and implementing new procedures.
|Eliminates the cascading effect of taxes.
|Transition challenges for businesses adapting to the new input tax credit system.
|Centralized and streamlined compliance process.
|Increased compliance burden for small businesses due to digital and reporting requirements.
|Greater transparency with uniform tax rates.
|Confusion in the initial stages due to frequent changes in tax rates and rules.
|Costs to Consumers
|Potentially lower prices due to reduced tax burden.
|Short-term price increases in some sectors during the transition to GST.
|Simplified administration and enforcement.
|Challenges in the GSTN (GST Network) system causing technical glitches.
|Input Tax Credit
|Comprehensive input tax credit system benefits businesses.
|Complexity in availing and reconciling input tax credits.
|Facilitates smoother interstate commerce.
|Required adaptation to new IGST regulations for interstate traders.
|Reduces opportunities for tax evasion.
|Initial teething problems in monitoring and compliance.
|Potential for long-term economic growth and efficiency.
|Short-term economic disruption during the transition phase.
|Adaptable structure for future tax reforms.
|Requires continuous updates and policy changes, leading to uncertainty.
In conclusion, GST has revolutionized the Indian tax system by subsuming multiple indirect taxes, making it more straightforward and transparent. Understanding the GST subsumed taxes is essential for taxpayers to comply with the law and avoid penalties. While direct taxes like income tax and customs duty on imports remain outside its purview, GST’s introduction has marked a significant progress in India’s journey towards the reformation of its taxation system.
Frequently Asked Questions (FAQs)
What taxes are subsumed under GST?
GST subsumed taxes like VAT, Service Tax, and Excise Duty, streamlining multiple indirect taxes into a single, unified system for better compliance and efficiency.
How has GST implementation impacted businesses?
The impact of GST implementation includes simplified tax structure, increased transparency, and improved compliance procedures, significantly enhancing the ease of doing business in India.
What are the key GST compliance procedures?
Key GST compliance procedures involve monthly tax returns filing, digital invoicing, regular GST payments, and adherence to standardized rates, ensuring uniformity across the nation.
Can you list some advantages of GST?
Advantages of GST include reduced tax burden due to input tax credit, streamlined interstate commerce, and elimination of the cascading effect of taxes.
How does GST benefit consumers?
The GST consumer perspective offers transparency in pricing, potential cost reduction due to input tax credit, and simplifies understanding indirect tax rates on purchases.
Are small businesses affected by GST?
Small businesses face initial challenges adapting to GST compliance procedures but benefit from the simplified tax regime and potential market expansion opportunities.
Does GST simplify tax filing?
Yes, GST simplifies tax filing by consolidating multiple indirect taxes into one, with digital platforms facilitating easier and faster compliance and filing processes.
What’s the impact of GST on market prices?
The impact of GST on market prices varies; it reduces the tax burden, potentially lowering prices, but transition phases might temporarily affect price stability.
How has GST improved tax administration?
GST has enhanced tax administration by automating processes, reducing human errors, and improving efficiency through a unified, transparent, technology-driven approach.
What is the significance of the GST council?
The GST Council plays a crucial role in determining GST rates, rules, and regulations, ensuring a balanced approach that considers both business and consumer perspectives.