As a consumer, one must be aware of what we are being charged for and what goes out of our pocket when making any payment. The most important factor affecting our spending is the Goods and Services Tax (GST). But do we all know what GST is really all about?
Meaning of Goods and Services Tax (GST)
GST is a comprehensive indirect tax, which will be levied on the manufacture, sale, and consumption of goods and services. It will be applicable to the whole of India. This tax will replace all the central and state government taxes. The introduction of GST will be a significant reform of the indirect tax structure of India.
Under the GST method, all the central and state government taxes will be merged into a single tax, which will reduce cascading or the double taxation effect. GST will be levied at each stage of sale or purchase of goods and services throughout India based on the input tax credit method, wherein manufactures and traders can get tax credits on the expenses incurred for inputs or goods purchased for the purpose of manufacture or resale. Under this method, all the GST registered businesses will be eligible to claim the tax credit. The main aim in introducing GST is to abolish all indirect taxes. Every person who is providing or supplying services is liable to charge for the GST.
Draft GST Bill
Pending for a long time, the GST bill was passed recently in the Rajya Sabha. With the approval of the GST bill in the Rajya Sabha, India is now closer to witnessing GST as a reality. Still, the drafting and finalisation of GST law is no less than a herculean task in itself. Model law provides that the GST will replace all the service, entertainment and luxury taxes completely, whereas some central excise and state value-added tax laws, most of which will also be subsumed, shall continue to apply to some specified goods, namely petroleum, alcohol, and tobacco. The current draft bill provides the broad framework of how GST legislation will operate. Various tax rebates, exemptions, abatements etc., which are being provided under the current tax structure, are missing under the draft model. The model law is a combination of existing indirect laws, namely central excise, customs, service tax and VAT. It will be helpful to know the current tax situation to understand the importance of GST.
Current tax structure in India
There are two types of tax in India- direct tax and indirect tax. A direct tax is a tax that is directly levied on a person and collected from the same person, for example income tax. On the other hand, indirect tax is a tax that is indirectly collected. Indirect tax is levied on one person and collected from another person, for example sales tax.
We can also classify the tax structure in India on the basis of imposition. Some taxes are imposed by the central government and in some cases, states have sole power to levy and collect the tax. For example, service tax, customs duty, and excise duty are levied and collected by the central government, while value added tax, stamp duties, land revenues, and state excise taxes are levied and collected by the state government. People hire professionals to file taxes on their behalf. A lot of tax-filing firms are present in the market, but after the digitisation of all the filing processes, it has become easier to get your work done.
Cascading effect in current tax structure
One of the main objectives of the new taxation regime is the avoidance of "taxation over taxes" or the cascading effect. Removal of a cascading effect is important to reduce deadweight loss, i.e. a slump in a total surplus of supply. The cascading is caused due to a levy of a variety of taxes by union and state governments, some of which overlap. It has raised the tax burden on Indian products, because of which, Indian products are not able to compete in the international market.
How will GST remove the cascading effect of taxes?
GST will mitigate the cascading effect in a major way and will pave the way for a unified national market. This means that there will not be a “tax on tax” situation, which is currently applicable when goods are moved from one state to another.
Benefits of GST
The implementation of GST will help create a common market in India and reduce cascading effects of the tax on the cost of goods and services. Not only the tax but also the cost of goods and services may be affected in some sectors, and there will be a boost in revenue. Multiple taxes like octroi, central and state sales taxes and entry fees will no longer be present and all will be brought under the GST. All in all, we assume that life will only get simpler.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
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- Value added tax
- Indirect tax
- model law
- goods and services
- tax credits
- registered businesses