There’s no denying that yield from indirect taxes is the bedrock of government’s revenue. Indirect taxation consists of all those taxes which are indirectly collected form the consumers on the consumption of goods and services by union and state government through intermediaries at different stages.
In the case of indirect tax, the liabilities of the tax can be passed on to someone else. This means that when the whole seller pays VAT on his sale, he can pass on the liabilities to retailer and when retailer pays the tax, he can pass on the liability to customer. So, in effect, customer pays the price of the item as well as the VAT out various levels on it. This whole system leads to double taxation. This system directly hits the final consumer who has to bear the whole burden and this burden is largely bore by the poor people who spend a major portion of their income on the consumption of goods. To make the consumer somewhat free and to release them from the load of all taxes, the govt. of India has preluded the concept of GST, i.e. Goods and Services Tax. GST has been launched as the One hundred and first Amendment of Indian Constitution at the midnight of June 30- July 1, 2017 applicable to the whole of India. Central Hall of Parliament became the witness of the Mega launch of GST rolled out by the President and Prime Minister of India.
Applauded and Glorified by the Government, GST came into existence as the most awaited and conscientious tax rejuvenation post 17 years of hectic arguments (since 2000 when it was first proposed) among the center and the states. Being an indirect tax, GST is going to replace the plethora of all indirect taxes which were previously imposed by Union and State Governments. GST is the landmark amendment in the history of Indian taxation System. Since Independence and the amendment is expected to bump up GDP by a percentage point or even more.
Cascading Effect: Issues of Present multi- staged Tax System
One of the primary goal of a taxation regime is always avoidance of “taxation over taxes” or “cascading effect” of incident taxes. Cascading effect of taxes is one of the major distortions of the Indian Taxation Regime. This cascading caused due to levy of variety of charges by Union and State Govt., has raised the tax burden on Indian products and made them less competitive in the international market. The gargantuan sizes of corporate taxes owe much to this taxation structure and have led to adoption of tax evasion practices. The common man finds himself throttled in the Gordian knot of multiple tax rates, laws and elaborated processes and often fails to comply with these complex legislations. The extra tax paid due to taxation of already taxed amount is finally bore by the end user or consumer which is common man and strikes them badly in addition to inflation.
Federal Structure of our democracy allows both states and Centre to the levy taxes separately and this has caused the cascading mainly. While Excise Duty, Service Tax and Central Sales Tax are levied by the Central Government, VAT, Entry Tax, State Excise, Property Tax, Agriculture Tax, Luxury Tax and Octroi, etc. is charged by the State Governments.
There are many possible transactions which come under the ambit of two or more of these taxes and the value of second tax is arrived at by adding the value of first tax to value of transaction. The prevalent complex, multi-staged and cascading tax structure steals the advantage of availability of cheap labour and other factors of production and brings the market price (post taxes) at par or above par the price of international price. Hence the manufacturing industry of India is not able to compete with other countries due to high market prices if product.
Goods & Service Tax (GST): An Integrated Tax System
GST is a comprehensive and compendious indirect tax on manufacture, sale and consumption of goods and services throughout the India. Introduction of GST is a significant step in the transformation of Indian indirect tax system. The simplicity of the tax will lead to easier administration and enforcement. Amidst economic crisis across the globe, India has posed a beacon of hope with ambitious growth targets, supported by a strategic understanding named GST that is expected to provide the much needed stimulant for economic growth in India by transforming the existing base of indirect taxation towards the free flow of goods and services throughout the nation. GST will turn India into one common national market, leading to greatest ease of doing business from the consumer’s perception, the greatest benefit would be in terms of a reduction in the overall tax burden which is currently estimated as 25-30%, free movement of goods from one state to another and reduction in the paper work to a large extent.
The Frame of Reference for GST in India
In general, there ae mainly tow models of GST, Unitary and Dual. In the former, Union Government collects GST while in the later both Union and State Government collects GST. India has chosen to adopt the Dual system of GST. A four-tier structure has been formulated for the running GST regimes in India which includes:
- Central GST (CGST)
- State GST (SGST)
- Integrated GST (IGST)
- Union Territories GST (UTGST)
CGST and IGST are the concept of Union Government while other two is of state and UT’s matter. IGST is applicable on inter-state sales that will help in smooth transfer between States and Union.
Reasons for Adopting Dual GST System
India is a federal country where both center and states have been assigned the powers to levy and collect taxes through appropriate legislation. Both level of government have distinct responsibilities to perform, according to the division of power prescribed in the Constitution for which they need to raise resources. A Dual GST will, therefore, be in keeping with the Constitutional requirement of fiscal federalism.
A GST is a consumption based tax, Revenue of State Governments depends on the consumption of Goods & Services within the State. Consequently, some states may have to suffer. With the view to prevent the states from revenue losses, the Union government has assured that if any government suffers in terms of less income generation due to introduction of GST, that portion of revenue loss will be compensated by Union Government for the period of five years from the date of implementation of GST Act.
Demystifying the Tax Slab:
The rate has been codified in the four-tier tax slab structure under GST regime, which shall cover every product, commodity and service sold or brought in India. Interestingly, 0% tax rate is also inserted under which essential commodities of everyday use such as Food Grains, Rice, Wheat, etc. are included. This will help the rural population to a greater extent and help in controlling inflation. There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on gold.
|Nil||Essential Commodities for everyday use.||Sleeper, Metro Tickets and seasonal passes.|
|First||5%||Products of mass consumption, sugar, tea, Edible Oils, Domestic LPG, spices, etc.||Railways(AC), Airlines(Economy Class), cab aggregators, Restaurants with less 50 lakh turnover, etc.|
|Second||12%||Processed Food Items, Almonds, Butter, etc.||Non AC Restaurants, Airlines (Business Class), Real Estate, etc.|
|Third||18%||Capital Goods, Toothpaste, Hair Oil, Soap, Ice Cream, etc.||AC Restaurants, Telecom & Financial Services, etc.|
|Fourth||28%||Tier 1: White and Brown Goods like TV, AC, Refrigerators, Soft Drinks, etc.
Tier 2: 28% + 15% cess – luxury cars, tobacco products, pan masala and Aerated Drinks.
|5 Star Hotels, Movie Tickets above Rs. 100, state authorized lotteries, etc.|
However, there are three items which do not fall under the purview of GST, i.e. Alcohol for human consumption, Petroleum products viz. petroleum crude, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel and the last one is Electricity which has been kept aside under the range of GST.
GST in Countries Other than India
Presently there are around 160 countries which follow GST tax system or VAT in some form or other. France was the first country to implement GST to reduce tax evasion. Similar to Indian Context, It is only Canada that has the Dual GST System. Throughout the world, Rate of GST Ranges between 15-20% generally. It may differ to higher/ lower side in few countries. Although we do not follow an ideal GST, we just follow the Indian version of GST which is termed as Indian GST.
GST as Beneficiary for common man as well as for government in Long run:
An economy of a country can grow only if its people and their business grow and there is an increase in the Government’s Revenue in the long run. GST has been introduced to flourish the morality and to deliver the corruption free trade throughout the country. Here, there are some points plotted which describes the benefits of GST for all:-
- GST shall ease the way for doing business and will attract the foreign capital and foreign investment in the country.
- GST shall reduce the overall transaction cost of businesses and that will affect the business positively.
- GST will curb circulation of black money. This can only happen if “Kacha Bill” or temporary bill normally followed by traders and shopkeepers is put to check. A unified Tax Regime will lead to less corruption which will indirectly affect the common man.
- Reduction in the total cost of different goods can also passed on to the customers.
- Reduced cost will somehow induce people to purchase more and this will enhance the demand of products and boost their sales thereby benefiting the overall economy.
- The enhanced production means reduction in the unemployment rate. It is also expected that GST will also contribute to produce more jobs in the field of accounts & commerce. This may reduce the unemployment in the country by a pin point.
- If more employment is generated in the country, this lead to high demand. This vicious circle of Demand – Production – Employment – Demand implies that the GDP of the country can see an increasing Trend.
There is no doubt that GST is aimed at increasing the taxpayer’s base by bringing SMEs and the unorganized sector under its purview. This will make the Indian market more competitive than before and create a level playing field between large & small enterprises. Further Indian Businesses will be able to better compete with other foreign countries.
Hence, GST is expected to positively benefit the two pillars of growing economy i.e. Indian’s Business climate as well as the Financial System of the country. Both of them play a crucial role in shaping the economy of any country. However, all will not be smooth sailing. A policy change of such a huge nature is sure to be forced with teething troubles. Therefore, a strict check on profiteering activities will have to be done, so that the final consumers can enjoy the real benefit of GST.
Author : Tabassum Saifi