What is GST?
GST or “Goods and Service Tax” is a tax to be levied on supply of goods and services. It will cover almost all goods and services with a few exceptions and exemptions. Therefore, there will remain no distinction between goods and services for tax purposes.
Why there is need of GST?
Formerly, to mitigate the problem of double taxation and cascading effect, CENVAT and VAT were introduced, which were an improvement over the then existing tax system. However, the CENVAT and VAT have also remained incomplete in removing fully the cascading burden of taxes already paid at earlier stages. Besides, there are several other taxes, which both the Central Government and the State Government levy on production, manufacture and distributive trade, where no set-off is available in the form of input tax credit.
Therefore, the GST will be a further improvisation of existing tax system.
How GST will work?
There will be a shift from tax on the basis of origin to tax on the basis of destination. It is to be levied on Value Addition as the tax paid on purchase of input shall be allowed for set-off against tax on sale of such goods. Since, it will be a comprehensive tax and will have continuous chain of set-off, better set-off of claims will reduce unnecessary tax burden on customers.
Which taxes will be subsumed in GST?
GST is aimed to subsume all Indirect Taxes, except a few. The final list will be available on passing of Bill by Parliament; however, the proposed taxes to be subsumed under it are as follows:
Taxes levied by Central Government:
Taxes levied by State Governments:
Will still a few Indirect taxes remain, if yes then why?
There are a few Indirect taxes that constitute the major source of revenue for few states and a few products like alcohol etc. shall be taxed at prevailing rates to discourage their use. Also, it is proposed to include petroleum and octroi in the GST while providing for a five-year compensation for any possible revenue loss arising due to the implementation of the new indirect tax regime. These, may or may not come under the purview of GST.
Also, a few manufacturing states are allowed an additional levy of one per cent on supply of goods in inter-state trade for two years which can be extended further if the GST Council, proposed in the Bill, decides.
What will be the structure of GST?
There would be implemented a Dual GST Model i.e. Two components of GST:
- Central GST or CGST levied by Centre
- State GST or SGST levied by State
- The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services
- There will be a common base for CGST and SGST as the tax rates, threshold exemption limit and compounding provisions shall be mutually agreed by the Centre and the States. Recommended threshold limits for SGST on goods is Rs. 10 lakhs and CGST on goods is Rs. 1.5 crores. Threshold exemption limit for service tax shall also be appropriately high.
- There will be lower rates for necessary items and goods of basic importance and special rates for precious metals. All other goods shall be subject to general rates
- The taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST only and same principle will be applied on State GST. No cross utilization shall be allowed except in specified cases of inter-state supply.
- For inter-state supply, there will be an integrated tax known as IGST which shall be levied by Centre. The scope of IGST Model is as follows:
- That Centre would levy IGST which would be CGST + SGST on all inter-State transactions of taxable goods and services.
- The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases.
- The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST.
- The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State.
- The Centre will transfer to the importing State the credit of IGST used in payment of SGST.
- The GST will aim to encourage exports by taxing export at zero rates. The imports shall be taxed in line with inter-state transaction by levying IGST.
- The Composition/Compounding scheme for the purpose of GST will have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover which is recommended at Rs. 50 lakhs and 0.5% respectively.
Benefits of GST at a glance:
- To mitigate cascading or double taxation to 100%.
- Reduction of overall tax burden on consumer from about 24%-30% to 12%-14%.
- Making Indian products more competitive in international market.
- Shift from patch work of Indirect taxes to more meaningful and comprehensive tax.
- Encouragement of Exports by treating them zero-rated and Imports treated as inter-state sale.
- Transparent and corruption-free tax administration as well as smooth revenue generation by government.
- Raise employment and boost growth of Indian Economy.
Why is there a need for Constitutional Amendment?
The Constitution provides powers to Centre to levy taxes on service and State to levy taxes on goods. While, GST requires Centre and State both to levy taxes on goods as well as on services. Also, State does not have power to levy taxes on imports. Therefore, it will be required to amend Constitution so as to grant essential powers to both State and Centre and also to give effect to any other consequential matter.
What are the challenges in implementing GST?
- States fear to lose revenue:
There is a doubt among States that by implementing GST, they will lose a great deal of revenue. Thus, the Centre is struggling to obtain consensus on the matter. The Finance Minister has said that State will not losoe a rupee as Centre is also sharing their revenue from imports and services with the States. A provision is proposed to compensate States in the course of any losses faced.
- Need to implement IT facilitation in line with the new tax regime
Shift to a new tax regime shall require the working up of a new system for filing periodical returns and other information exchange purposes among assessees, Centre and States. It is being proposed that each taxpayer would be allotted a PAN linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax facilitating data exchange and taxpayer compliance. The exact design would be worked out in consultation with the Income-Tax Department.
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