What is GST?

Goods & Services Tax is a new value added consumption based indirect tax introduced in India with effect from July 1, 2017. As the name suggests, it is an indirect tax which is levied on supply of all goods and services in India. With the GST law passed by the J&K assembly as well, GST is applicable to whole of India including its territorial waters. It subsumes various erstwhile indirect taxes to become a comprehensive one India one tax.

GST applies to all stages of value chain namely primary, secondary and tertiary. It ensures that the taxes and rate for a specific product or a service remains same across India. A product say ‘shirt’ will have the same indirect taxation whether it is sold by the a manufacturer, distributor or a retailer; and whether it is sold in J&K or Tamil Nadu or Gujrat or Assam. To simplify the concept we can refer to the below table:

 
Under the Erstwhile regime Under GST regime
Primary (Manufacturer) Excise Duty & VAT/CST GST
Secondary (Wholesaler) VAT/CST GST
Tertiary (Retailer) VAT/CST GST

 

Value Added System

GST is a value added system in the sense that every person is required to pay GST on the value addition. A person under GST will be eligible to avail input tax credit of GST paid on purchase of goods and services and thus will effectively pay GST in cash on his value addition. The central excise, VAT and service tax were also value added tax systems but with restrictions. They had their limited credit allowances which led to certain taxes becoming a cost.

To take a few examples, a service provider like a Chartered Accountant, was not eligible to avail credit of VAT paid on purchase of a laptop. A shopkeeper selling goods was not eligible to avail credit of service tax paid on his mobile bill. Such restrictions amounted to taxes becoming a cost and they ultimately being passed on to the customers as higher rates.

Consumption Based Taxation

Another important feature of GST is that it is a consumption based destination tax. This means that tax will accrue to the State where the goods or services were finally consumed. All us would recall that till recently, States such as Tamil Nadu, Maharashtra, Gujrat, etc were opposing GST and States such as Uttar Pradesh, Bihar, Delhi were in favour of GST.

The reason was that the states mentioned first are manufacturing states and goods manufactured in those states were distributed across India. Therefore, such states earned a lot of revenue from CST. But under GST, the revenue will accrue to the State where the goods are finally consumed. So basically the states with less industrialization but good consumption will earn more revenues. To take an example, in case of a sale from Maharashtra to Bihar, the GST revenue will accrue to the State of Bihar.  

Levied on all goods and services

GST has been levied on all goods and services except a few. Alcohol for human consumption has been kept outside GST and the current State excise and VAT will continue on the same. 5 Petroleum products namely crude, petrol, diesel, ATF and natural gas are proposed to be brought under GST at a future date and the pre-GST taxes will continue till that time. Further GST has not been levied on sale of real estate and electricity duty. Besides the above goods/services, certain goods and services have been exempted from levy of GST.

What are the benefits of GST?

By way of subsuming various indirect taxes, GST has will ensure an easy indirect tax structure in India. Indian GST is not a pure GST but still retains many of the much required benefits.

  • As discussed above as well, it ensures that GST paid on purchase of goods and services is available as an input tax credit. Thus business practically becomes free from indirect taxes and can pass on such cost reductions in from of lower prices to their customers
  • In the VAT regime, a same commodity has levied VAT at VAT rates in different states. This led to multiple classification disputes. GST system has made sure that a specific product will be subject to the same GST rate across India. So if you are planning to expand your business in another state, you no more need to worry about the tax rate in that another State.
  • VAT was levied on the base price plus excise duty. GST eliminates this cascading of taxes, simplifies the tax calculations.
  • Certain transactions have suffered multiple taxes in the past due to both State and Centre Government wanting to tax them. Some of them are sale of software, restaurant, hotels, etc. With Indian GST being a dual GST, such confusions will end. Post GST.

How does GST operate in India?

Indian GST is a dual GST which means that both the State and the Central Government will levy tax on each and every transaction. Due to this, Indian GST has the following portions

  • Central GST – levied by the Central Government on Intra-state transactions
  • State GST (or UT GST in Union Territories) – levied by the State Government on Intra-State transactions
  • Integrated GST – levied by the Central Government on inter-state transactions with a portion of the tax accruing to the consumption State

Exports have been kept free from GST. However, import of goods and services will be subject to Integrated GST.

Conclusion

To conclude, GST is the greatest indirect tax reform since independence and should substantially affect how a business functions. Just like the Schrodinger’s cat, time will only tell whether GST was beneficial for the economy or not.