Knowledge Base

Background of GST in India

Governments need money to provide infrastructure to the nation, for defence and to fulfil the basic needs of people. Governments can only spend money they get from people. It collects this money in many forms. Tax is one of the major sources of revenue for the government. On a very broad level, there are two types of taxes – direct and indirect. The Goods and Service Tax (GST) is an indirect tax. First mooted way back in 2000, GST has now replaced many Central and State taxes like excise duty, VAT and service tax in India. It is a single comprehensive tax levied on all goods and services produced in India as well as those imported from other countries. The Empowered Committee of State Finance Ministers (EC) that had worked on State Value Added Tax (VAT) was assigned the task to formulate the GST in conjunction with State representatives. The EC released its first draft on GST in November 2009. However, for various reasons, the bill was passed as a law in August 2016. It was also ratified by more than 50% states of India.   

As a tax, GST is not a new concept. It is already implemented in many other countries. One of the very first countries to introduce GST was France, which implemented this tax structure way back in 1954. So far, more than 150 countries have adopted GST, including Canada, New Zealand and Australia. The single GST replaced several taxes and levies which included: central excise duty, services tax, additional customs duty, surcharges, state-level value added tax and Octroi. For now, GST is at two levels – the state and the central. This is called as the dual GST system. Both these are applicable on all goods and services. The government of India has also created a new taxpayer identification number called as TIN. It will be linked to the PAN. The GST is governed by a GST Council and its Chairman is the Finance Minister of India. Keeping in mind the federal structure of India, there will be two components of GST – Central GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value chain. From 8th July, 2017, GST has been made applicable to the state of Jammu and Kashmir too, bringing the whole of India under its purview.

Currently, GST slabs are pegged at 5%, 12%, 18% & 28%, depending on the service / product offered by the entity. As of today, hotels and lodges with tariff below Rs 1,000, educational & health services, grandfathering service has been exempted under GST. Petrol and diesel, two of the most revenue fetching products are kept out of it. They are still taxed by the Govt. of India under Central Excise Act, 1944 and by the State under VAT acts of respective states. Alcohol too is taxed only by the states under the Excise Acts of the respective states. When it was first implemented, tobacco was not taxed under GST. However, it has now been bought under the purview of GST, and that too under one of the highest tax rate slab which is 14% CGST and 14% SGST. In addition to GST, most tobacco products are levied Compensation Cess also which is distributed to the states.

Salient Features of GST

  • Concurrent powers in Parliament & State legislatures to make laws governing goods and services
  • IGST will be levied and collected by the Central government on interstate transaction of goods & services and apportioned between Union and states in the manner provided by Parliament by law as per the recommendation of GST Council
  • Principle for determining the place of supply and when a supply takes place in the course of interstate trade or commerce shall be formulated by the Parliament
  • GST will be levied on all supply of goods and services except alcoholic liquor
  • GST on select petroleum products will not be levied till a date to be notified on the recommendation of GST council

[ Note: this information is current as of 2020 ]

Pros and Cons of GST
GST is considered as a path breaking step in the field of indirect tax reform in India. Since it subsumes a large number of state and central taxes, GST mitigates the cascading effects of double taxation. It is said to pave the way for a common national market by removing the trade barrier between Indian states.

  • Since GST subsumes 17 direct and indirect tax levies, compliance costs will be reduced
  • Input tax credit will encourage suppliers to pay taxes rather than evade them
  • Revenue will be higher due to ease of paying GST
  • States and the Centre will have dual oversight
  • Transport cost and time will decline due to lesser restrictions on inter-state borders. This will improve logistics
  • Reduced compliances will lead to increased efficiency
  • Higher exemption limit set by the GST Council (from Rs. 20 lakh to Rs. 40 lakh) benefit small traders
  • For e-commerce businesses, the supply of goods across the border came under variable tax laws. The delivery trucks crossing borders were required to produce the necessary documents along with the VAT declaration and registration number. With GST in place, e-commerce businesses will stand to benefit

However, like everything else in the real world, there are some disadvantages to GST as well. Detractors of GST point out that:

  • GST needs to be filed every month. Its implement forces companies to opt for GST compliant accounting solutions. This increases their operating cost
  • The GST returns need to be submitted only online. This may prove to be a disadvantage as many people in rural India are still not well versed in using online solutions. In addition, connectivity can be prove to be an issue, especially as the submission deadline nears
  • GST needs to be paid slab wise. The current slab range is on the higher side compared to the earlier service tax regime
  • Different slabs for different products and sectors can obfuscate matters for businessmen. However, as time passes, it is expected that they will get comfortable with the GST structure
  • SMEs will have to pay higher taxes

GST in India vs. GST in Other Countries
The Indian GST case is structured for efficient tax collection, reduction in corruption, easy inter-state movement of goods etc. However, the one big difference between the Indian model of GST and similar taxes in other countries is the dual GST model. Many countries in the world have a single unified GST system; only a few countries like Brazil and Canada have a dual GST system whereby GST is levied by both the federal and state or provincial governments. In India, a dual GST is proposed whereby a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of every transaction of supply of goods and services.

How will IT be used for the implementation of GST?
For the implementation of GST in the country, the Central and State Governments have jointly registered Goods and Services Tax Network (GSTN) as a not-for-profit, non-Government Company to provide shared IT infrastructure and services to Central and State Governments, tax payers and other stakeholders. The key objectives of GSTN are to provide a standard and uniform interface to the taxpayers, and shared infrastructure and services to Central and State/UT governments.

All said and done, GST is heralded as a game changer for Indian economy. In the long run, it is expected that GST will make business easier, facilitating the ‘Make in India’ campaign. Since it is still at a nascent stage, most companies and small companies prefer to outsource their GST filing to competent consultants. Pune is one major such destination because of the availability of skilled resources.