Published On: 21st February, 2024
INTRODUCTION:
GST stands for Goods and Services Tax. It is an indirect tax that has replaced a lot of indirect taxes like the Value Added Tax, Service Tax, and Excise Duty. The Goods and Services Tax Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017. It is levied on goods and services. It is a destination-based, multi-stage, comprehensive tax, levied on every value addition. It is the single domestic indirect tax law for the entire country. In the case of intra-state sale of goods and services central GST and State GST are charged, whereas for inter-state sales integrated GST is charged.
INDIA BEFORE GST:
Before GST was introduced in 2017, India had a complex and multi-layered indirect taxation system. Various indirect taxes were levied at different stages of the supply chain, amongst which excise duty was a significant component of the pre-GST era. Other taxes that were levied were Service tax for various services, Value Added Tax for states on the occasion of sales of goods, and Central Sales Tax on interstate sales. Additionally, other local taxes were also levied. Earlier the threshold for central excise was Rs. 1.5 crores and the threshold for Value Added Tax used to range between Rs. 5 lakhs to Rs. 20 lakhs depending on the state and the threshold for Service Tax was Rs. 10 lakhs.
Under the earlier system of indirect taxation, certain areas like the North east were able to enjoy some exclusive exemptions. The registration was decentralized under the State and the Central Authorities. The taxes were levied at the place where the goods were manufactured or sold or where the services were rendered. In the case of imports, the Centre used to charge tax under a separate Act. The tax amount was collected by the state the transaction had taken place and the earnings collected by a particular state were at the complete disposal of the State government. The tax rates and the rules that were followed differed in every state. Since every state had different rules, regulations, and rates several forms had to be filled for the movement of goods and services across the state borders which made the taxation very complex.
NEED FOR REFORM:
There were several shortcomings in the pre-existing taxation structure of the country that compelled the need to introduce a better system for the implementation of indirect taxation. Such shortcomings were –
- SIMPLIFICATION OF STRUCTURE –
The pre-GST era had a very complex and multi-layered system for the imposition of indirect taxes. The introduction of GST made the structure of implication of taxes much simpler by compiling various indirect taxes under a single umbrella.
- TAX CASCADING –
One of the biggest issues with the pre-existing taxation structure of the country was the existence of the tax cascading effect, where tax was applied on top of already taxed components adding to the inflationary effect. GST provided the tax credits across the supply chain which in turn ensured that tax was levied only on the value addition on every stage.
- TRANSPARENCY AND ACCOUNTABILITY –
The GST introduced a more seamless mechanism that aimed to bring a higher degree of transparency and accountability in the taxation system. The use of a technology-driven platform for taxation helped in overcoming a lot of loopholes in the pre-existing taxation system.
- REDUCTION OF COMPLIANCE BURDEN-
The compliance costs in the pre-GST era were very high because of a multiplicity of taxes and changing rules and regulation state after state. The businesses had borne the burden of a complex web of tax laws and rates. GST simplified the compliance mechanism thus making it easier for the businesses to adhere to the tax regulations.
- UNIFICATION OF MARKET-
The smooth flow of goods and services was ensured after GST reforms eliminated the multiplicity of taxes across the state borders. Harmonized tax rates and regulations, facilitated the ease of doing business, thus promoting interstate commerce.
- BOOST ECONOMIC GROWTH –
The introduction of GST was also aimed at promoting more and more investments and enhancing the overall competitiveness of Indian businesses in the global market, which in turn boosted the overall economy.
- CONSUMER BENEFIT –
The rationalization of taxes under GST has led to an overall reduction in overall tax incidences, ultimately benefiting consumers through lower prices for goods and services.
LEGISLATIVE JOURNEY OF GST
The initial idea of GST was introduced under the Atal Bihari Vajpayee-led government in 2000 and a task force was formulated to set up the GST model. Several discussions and deliberations took place under the empowered committee of state Finance Ministers during 2007-2014 which played a crucial role in formulating the framework of GST. In 2017, four crucial bills- Central GST, Integrated GST, Union Territory GST, and the Compensation Law were introduced and passed in both houses of Parliament, paving the way for GST roll-out on 1st July 2017. The GST council was constituted comprising the members of both Centre and State members to make decisions and ensure a cooperating federalist approach.
FEATURES OF GST :
Being a comprehensive indirect tax reform aimed at unifying and streamlining the taxation system the key features of GST are –
- GST replaced the fragmented and complex tax structure with a ‘‘Unified system’’ that subsumed a range of indirect taxes.
- GST operates on a “Dual model” with both central and state governments having the authority to levy and collect taxes on goods and services.
- The inter-state transactions are covered under the aspect of “Integrated GST“, which ensures a seamless flow of goods and services throughout the country.
- GST allows businesses to claim an “Input Tax Credit” on the tax that was paid on the previous stages of the supply chain.
- The introduction of GST was included with the concept of the “Composition Scheme” which gave businesses under a specific threshold limit to pay tax at a fixed rate without the need for detailed invoicing and compliance.
- GST is a “Destination Tax” wherein the tax is collected at the point of consumption, which ensures the tax is collected at the final customer’s location.
IMPACT OF GST ON VARIOUS SECTORS:
The impact of GST on different sectors of India has been varied, with most of them being benefited from the introduction of GST and a few facing a few difficulties. Considering the manufacturing sectors the major benefit was the eradication of the cascading effect of taxes and the availment of Input Tax Credits leading to cost savings, however, the Small and Medium-sized enterprises had to face the burden of transition and compliance burden. E-commerce platforms have a uniform and more secure market to enter. The automobile industry largely benefited from the uniform tax structure, and input tax credit, which reduced the logistics and distribution costs but a few segments witnessed price fluctuations while transitioning and the tax on hybrid vehicles also increased. The real estate sector became more transparent with the introduction of GST.
The retail and consumer goods sector became more price rationalized with the elimination of multiple taxes, thus reducing the ultimate burden on consumers. The service sector saw a more transparent and simplified tax structure. the concept of the reverse charge mechanism made compliance easier for small service providers.
CHALLENGES AND CRITICISM:
One of the biggest criticism GST has been facing is the frequent change in the slab rates which creates a lot of confusion amongst the businesses and the taxpayers. The compliance became more burdensome for the Small and Medium Enterprises. There were some glitches in the GSTN portal during the initial phase that hindered the smooth transition. The anti-profiteering provisions designed to ensure that the businesses pass on the benefits of reduced tax burden to the consumers faced a lot of implementation challenges raising concerns over the effectiveness of the new taxation system.
TECHNOLOGICAL ASPECT OF GST:
One of the most striking features of GST was that its framework was prepared in such a way that a lot of compliance tasks could get done online and became more user-friendly. The cornerstone of this system is the development of GSTN, a robust IT infrastructure that facilitates online registration, return filing, and overall administration.
GSTN allows a seamless registration of the potential taxpayer. It is equipped with invoice matching and input tax credit mechanisms which ensure accuracy and prevent tax evasion. Additionally, the implementation of e-way bills and integration of ERP systems with GSTN ensure seamless data flow, automating compliance processes and reducing manual errors.
THE ROLE GST PLAYED IN ECONOMIC GROWTH:
GST played a pivotal role in accelerating the economic growth of India. Being a successful replacement for a complex and fragmented tax system, it unified various state and central taxes into a single, transparent, and efficient tax regime. It facilitated a hassle-free flow of goods and services across the state borders. The elimination of the cascading effect of taxes reduced the tax evasion which lowered the overall tax burden to be borne by the businesses. The simplified tax structure invited not only domestic but foreign investments also. GST also bolstered government revenues and provided better space for development, social programs, and economic reforms. The creation of a more transparent, formalized, and user-friendly tax regime worked as a catalyst for fostering a more integrated and efficient economic growth trajectory.
GLOBAL TAXATION PRACTICES:
GST systems vary globally, reflecting diverse economic structures and policy objectives. The GST model of India is a destination-based – dual model containing both state and central components. Singapore has a single-tier system of GST with lower rates. Canada’s GST is implemented at the federal level, while the provinces apply their own sales tax. The European Union employs a destination-based principle of taxation just like India while Value Added Tax is prevalent to create a level playing field for member states. Malaysia has a similar multi-tier tax structure with varying rates. Whereas Brazil has both federal and state-level GST components while municipal taxes also exist. While the US has no nationwide GST it does apply sales taxes at the state level, with rates varying across the jurisdictions.
CONCLUSION:
One can easily conclude that the introduction of GST changed the economic landscape of a country for its betterment. GST reduced tax evasions, streamlined tax administration, and created a more business-friendly environment. While the criticism and challenges existed throughout the journey of GST such as compliance issues and periodic rate revisions, the overall impact of GST on the economy of India has been substantial. As the country navigates through the complexities of GST implications, it remains evident that tax reform has played a crucial role in shaping the economic roadmap of the nation.
