Goods and Services Tax is one single and unified tax levied on the supply of goods and services. Only the end customer bears the GST in the supply chain. Several experts and economists consider GST as the most ambitious fiscal reform in India since Independence.
GST has replaced seventeen indirect taxes that were previously levied on goods and services by both the Central and State Governments. The tax framework was complex. But the GST has liberated India of such tax burden.
Tax Law in the Pre-GST Era
In the previous tax regime, every state had different rules and regulations. The states used to mainly collect taxes in the form of Value Added Tax. Several indirect taxes were levied such as entertainment tax, octroi tax and local tax by the centre and the states.
Under VAT, the taxes were levied at the place of manufacture of goods or at the place where they were sold. The registration process was decentralised under central and state authorities.
In the old scenario, the VAT varied from one state to another but the central and service taxes were uniform. The centre also charged service charges on a couple of services, on imports, for inter-state transfers, etc.
According to the pre-GST era, there are mainly two types of taxes. They are:
1. Direct Tax
Direct Tax is based on an individual’s ability to pay. This means that a person who has more resources or earn more should pay more taxes as compared to a person who has less income and resource. Such a tax is imposed to help redistribute the wealth of the nation. Direct Tax cannot be passed on to another person; the organisation or individual entity on whom the tax is levied has to take full responsibility of paying the tax.
2. Indirect Tax
In contrast to Direct Tax, Indirect Tax is imposed upon an individual, the payment of which is ultimately fulfilled by another person. The body that collected the payment then remits the same to the government. The final bearer of the tax is, therefore, the consumer who pays the tax by paying more for a certain commodity.
Some of the Indirect Taxes in the pre-GST regime are central sales tax, central excise duty, state VAT, luxury tax, entertainment tax, entry tax, special additional duty of customs, additional duty of customs and excise, purchase tax, cess, taxes on advertisements, etc.
How Does GST Operate?
GST has been an attempt to remove the pre-existing geographical barriers and creating an open market. It is an attempt to create a market that is open to all for buying, selling, importing and exporting.
However, the impact of the Goods and Services Tax (GST) has not been uniform throughout. If we look thoroughly, there have been both advantages and disadvantages.
GST advantages and disadvantages – Things to Know
1. Destination-based Tax
As opposed to the earlier principle or origin-based tax, GST follows a mechanism in which the taxes are collected at all the stages a commodity has to go through. However, the input tax credit which is paid at the preceding stage is available at the succeeding stage of the transaction as a set-off.
This has helped in eliminating the cascading/”tax-on-tax” effect. GST has also benefited industries with smoother cash flow and better capital management. It has helped in bringing down overall taxes.
2. GST Rates
Four broad classifications are made with regard to tax rates under GST. They are- 5%, 12%, 18% and 28%. Some goods and services are exempted from these rates. Special metals such as gold attract a tax rate of 3%. The GST also requires businesses to file returns every month.
3. Stock in Transition
On stocks that remained unsold before the GST rollout, the manufacturers and retailers were allowed to carry input tax credit for 3 months. They could claim 60% of the input tax credit on those stocks.
4. Input Tax Credit in a Supply Chain
The smooth flow of input credit in a supply chain is one of the salient features of GST. Input Tax Credit allows a person to reduce the amount of tax that he/she has paid earlier on inputs and pay only the remaining balance amount.
5. Anti-profiteering Clause
The Government has included an anti-profiteering mechanism to make sure that the service providers and manufacturers pass on the benefits to the final consumer. It is mandatory to pass on the advantages of tax reduction because of the input tax credit to the ultimate customer.
6. Administrative Control
All administrative controls of about 90% of taxpayers have turnover below 1.5 crores to ensure a single interface. It is also divided equally between both the central and state tax administrations. It also stated that the states will bear compensation for any loss of revenue from the implementation of GST for 5 years.
7. Who does GST apply to?
GST applies to all businesses and all persons. Businesses include manufacturing, trade, commerce, any profession or vocation. Persons who are liable to GST include individuals attached to any company, firm, co-operative society, trust, LLP, HUF and so on. Agriculturists however, are not liable to the GST. GST has a vital impact on everyone. Irrespective of whether someone runs a business or provides any kind of service, GST will impact that person.
8. Products Not Part of GST
Some products such as petroleum, electricity, aviation turbine, diesel and alcohol for human consumption are not part of GST. Other commodities such as vegetables, fish, meat, etc. are also exempted from GST. Decisions about these commodities will be taken later by the GST Council.
GST is thus an IT-enabled tax mechanism and is expected to bring buoyancy to revenue collection. It has been in action for two years now and has brought transparency in the tax collection procedure. Especially by eliminating the cascading effect it has also simplified the entire tax framework. This tax regime is still in its nascent stage but it is hoped that this regime will bring about benefits to both the government as well as the consumers.