Goods & Service Tax (GST) - Simplifying by Transparency

Posted in Finance Articles, Total Reads: 2500 , Published on September 04, 2015

First of all what is GST all about. It is a comprehensive levy of indirect tax on manufacturing, selling and consuming goods as well as services. GST is a value added tax which is levied at all points in the supply chain wherein the credit is allowed for any kind of tax paid on inputs utilized in making that supply. There will be no state boundaries for the ailment of input tax credit. It has been sort as a replacement of all the indirect taxes levied on goods and services by the Union as well as State Governments. Unlike State Value Added Tax (VAT), GST does not make any difference between tax charged on goods and services and thus there is a single tax rate to be levied on both the taxable goods and taxable services in the supply chain till the goods/services reaches the ultimate consumer.

With the introduction of GST, exports will be zero-rated and imports will be taxed at the same rate as that on domestic goods and services. This is in view to enhance exports and discouraging the practice of importing goods and services. Looking back at the history of GST, the then Finance Minister Shri Palaniappan Chidambaram made announcement for the implementation of Goods and Service Tax in his budget speech for the year 2006-07. Now the Government is determined to introduce GST by 1st April, 2016.

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The power to make laws in respect of supplies in the course of inter-state trade or commerce will be vested only in the Union Government. States will have the right to levy GST on intra-state transactions including on services. As India is a Federal Republic, GST will be implemented seperately by the Central and State Governments as Central GST and State GST respectively. The rates of Central GST and State GST would be approved appropriately. Around 150 countries have introduced GST in some forms .

At present, India is following dual tax system. The various indirect taxes that are charged on goods and services are sales tax (popularly known as VAT), excise duty, service tax and customs duty. The VAT mechanism which is operating in India since 2005 does not provide input tax credit for inter-state transactions and thus as a result of this the customer has to suffer double charges in the form of VAT. Presently levied CST would be eliminated with the introduction of GST. There will be uniformity of tax across the states. The indirect taxes which are expected to be included in GST are: at the State Level - Vat/ Sales Tax, Entertainment Tax, Luxury Tax, Taxes on Lottery, Betting and Gambling, Entry tax not in lieu of octroi; and at the Central level- Central Excise Duty, Additional Excise Duty, Excise duty levied under the Medical & Toiletries Preparation Act, Service Tax, Additional Customs Duty or Countervailing Duty(CVD), Special Additional Duty of Customs (SAD) and surcharges. The tax rate under GST is supposed to come down increasing the number of assesses by 5-6 times the current figures. As per experts, India will gain by $15billion a year due to the implementation of GST. The reason behind this gain is promotion of exports, creation of more employment opportunities as well as growth opportunities.

If we speak about the advantages of introducing GST, the first and foremost point that comes to our mind is the mitigation of the cascading effect or the double taxation effect. The combination of a large number of Central and State tax would reduce the cascading effect of tax in a major way. The reduction in multi point taxation system would also reduce excessive paper work that is employed in the current scenario. The exclusion of cascading effect of taxation will improve the competitive strength of the product and services in the market and thus would help in the GDP of the country. Believing the expert opinion, the introduction of GST would accelerate the economic growth. Although the tax rate will be lowered but the introduction of GST would widen the tax base and removing the multi point taxation system it will help in the growth of revenue for both the Central and the State government.

The administration of GST would become easier due to its transparent nature and this would indirectly benefit in reduction of administration cost. Provided proper IT infrastructure is available and there is proper integration at the Central and the State level, it is also expected that a single registration and compliance would be sufficient for both CGST and SGST and thus in this manner it would reduce administration and transaction cost. Implementation of GST would also make Indian product marketable and competitive in domestic as well as international market. If we look at it from the customer’s point of view, it would help in the reduction of overall tax burden which is presently estimated at 25%-30%. GST aims at reducing the average tax burden on the customers. The single point taxation system would relieve the business community of worrying about the taxation matters that may crop at each and every stage of their business process. Now the businessmen can focus on their major issues such as competitive pricing, quality improvements and diversification and innovation in their product line. GST is a step towards corruption free Revenue Services. Many malpractices will be identified and steps may be taken for addressing them and minimizing those malpractices.

Companies need to comply with the GST mechanism. The changes could be substantial and may require a proactive planning with a time-bound action plan depending upon the operating geographies, size and sector of the company. GST would bring a significant change in doing business in the country. Advocacy for best practices, gearing up for changes in the processes. Training teams and developing IT systems for being GST compliant are the key areas to be assessed.

This article has been authored by Saurabh Kumar Agrawal from IIM Kashipur.

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