Goods & Services Tax (GST)

The Goods and Service Tax (GST). This concept has been prominent since the time it was set in motion. Paying taxes helps in the revenue generation for a variety of government services. But what makes GST different compared to our old taxation system that India followed for years? Why was GST introduced? What led to the change? It is important to know these questions to understand GST.

Prior to the GST regime, India followed the Direct and Indirect tax-paying system. In this system, the direct tax was charged on the incomes of the individual and the indirect tax was levied on the purchase of goods and services. The indirect tax was divided into two subcategories: Central Indirect Tax (which included excise duty, service tax, CVD, additional excise and central sales tax) and State Indirect Tax (which included VAT, luxury tax, purchase tax, entry tax, entertainment tax and octroi). These taxes were a major setback to all the startups and running businesses in India. When combined with all these taxes, one will understand that businesses couldn’t survive any longer. So, in order to facilitate ease of business and easy compliance, GST was introduced on 1st July 2017.

France was the first country to introduce GST in the year 1954 after which about 160 countries in the world applied the same policy. GST is referred to as a comprehensive, multi-stage, destination-based taxation system that is levied on every value addition. In simple terms, it is an indirect tax levied on all the supply of goods and services. Based on the kind of transaction, there are four types of GST, viz. Central Goods and Service Tax (CGST), State Goods and Service Tax (SGST), Integrated Goods and Service Tax (IGST) and Cess. The motto of GST is One Nation One Tax One Market! This means that GST is focused on creating one market for the entire nation. There are a variety of reasons behind this notion.

The most important one was the cascading effect that led to the higher price of any product bought in the state or manufactured. In the cascading effect, the Central and the State governments would levy taxes on the same goods. The Central government would levy excise duty on the manufacturer, while the State government would levy VAT on the sales of the product. For example, 12% is charged as excise duty by the Central government and 5.5% is charged as sales tax by the State government. This extensively increased the rate of the product. So, GST here proved to be of utmost benefit, wherein the manufacturer would charge GST on one single rate and just once which would get distributed half among the Central and the State govt. For example, if the rate is 12%, then the Central gets 6% and the State gets 6%.  

The second was the different rates charged by different states. The rate of VAT on the same item would vary from state to state. Since VAT was charged by the states, the Central government had no authority to guide the changing rates. States had all the liberty to change the rates at their discretion. Hence, the rate would keep increasing in every state from 5% to 5.5% to 6%. Under GST, there is a single governing body that decides the rate on all the products. These rates are similar for all the states. Hence, it brought uniformity. The idea is the convert the nation into one single market without any discrimination.

There are many transactions where it is difficult to figure out whether the transaction is a sales transaction or a service transaction. For example, software is a product according to the State Government. Hence, it levied VAT on the use of the software, whereas on the other hand, in the Central government’s opinion, it is a service hence it charged Service Tax on the software. Under GST, only one tax is applied which does not lead to the burden of overpricing. 

GST included a scheme called the Composition Scheme. This scheme was designed to benefit small businesses with a turnover of fewer than ₹1.5 crores. Under this scheme, the business gets an option to pay taxes at lower rates. This move lowered the burden on small businesses in the country. 

Since GST is completely online, the corruption rate reduced successively. Obtaining registration, filing returns, and amendments in GST all happen to be online. Hence, 1 to 1 meetings with the officers are very less. The threshold for registration in GST has increased. Earlier in the VAT structure, businesses with a turnover of ₹5 lakh and above were liable to pay tax and ₹10 lakh and above, in the case of services. Under GST, businesses with a turnover of ₹20 lakh and above only are supposed to get registered under the GST and ₹40 lakh and above, in the case of services. This lowered the burden on all the small businesses. 

GST is a destination-based tax system, wherein the goods/services will be taxed at the place where they are consumed and not at the origin. So, the state where they are consumed will have the right to collect GST. This incidentally boosts the manufacturing sector for more production. Because GST is paid by the consumer to the government, the manufacturing sector gets encouraged towards more production. Though the manufacturing sector earns the benefit of no tax, the retailers and businesses, too, earn almost equal benefits for purchasing those manufactured products. 

GST, most importantly, works on a very vast concept called ITC- Input Tax Credit. This ITC is very vital for businesses and firms. These sectors get returns on the tax paid to the government. When a firm or a business is registered under GST, it gets the advantage of getting returns on the tax paid for any purchase. There are conditions through which a business can avail of the ITC benefit:

  1. Businesses should be registered under the GST act.
  2. Businesses should have tax pay documents, like tax invoices and debit notes.
  3. The tax should be paid by the supplier through cash or through credit.
  4. Returns should be filled by the recipient of goods/services.

These conditions fulfill all the requirements that can help the business to avail of ITC. GST also has a small concept called Reverse ITC. Normally the supplier collects the tax from the recipient and pays to the government on behalf of the recipient but if the service is given by a government servant itself, then the recipient pays the tax to the government directly. The supplier here plays no role. 

GST, in itself, is a vast concept that has helped boost startups and businesses in the country. Too many taxes and heavy payments do not burden the businesses anymore. Even if the benefit is received by the government, in terms of taxes, it is comparatively less but its ultimate aim is to boost the manufacturing sector, flourish more businesses and increase the economy.

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