Goods and Services Tax Regime in India

Overview of Goods and Services Tax Regime in India

Introduction

The Goods and Services Tax (GST) is probably the most awaited tax reform in India, one of the world’s fastest growing economies. India is thriving to become more and more open to the world market and a preferred destination for investment. GST can be described as, and will be a strong measure in that direction, conducive for its growth and to become a competitive player in the global market.

What is GST?

GST is a comprehensive indirect tax designed to replace the existing multiple taxes levied by the union and the states at varied rates. It is one indirect tax for the whole nation which will make India one unified common market.[i] It is a destination based tax levied on the supply of goods and services, right form the manufacturer to the consumer making available credits of input taxes in subsequent stages of payment of tax. So the tax will be levied on each stage for the value added to goods or services instead of a tax on tax system in practice. A simple illustration is below:

A person who manufacture a product worth100 rupees with a tax of 10% has to pay Rs. 10 as tax. When he sell it for 150 rupees the tax to be paid is 10% of 150, ie, Rs. 15 under the current tax regime. But under the GST, it will be 15-10= 5. That is, input tax credit (already paid 10 rupees on raw materials) is available under GST, making it tax payer friendly and removing the dilemma of tax on tax.

GST will subsume or include in it various indirect taxes levied by the union and the states. Some of them are, the central taxes like service tax, excise duty, cesses etc. and the state taxes like sales tax, entertainment tax, luxury tax etc.[ii] The existing system of levying these different taxes at various levels and rates was indeed an unpleasant and undesirable practice keeping business minds unsatisfied and at times hurt.

Current Indian GST Framework

India is going to put in place through 101st constitutional amendment[iii], a dual GST framework considering the federal nature of the country. That is, there will be a Central GST (CGST) and a State GST (SGST). So the Union and the States can levy GST at once. The states are entitled to do it on all transactions in a State. As far as inter-state transaction of goods and services is concerned, the Union will levy and collect Integrated GST (IGST) on all transactions of such nature.

When it comes to tax credit at each levels, the Input Tax Credit of CGST can be utilized to discharge the liability of CGST and that of the SGST can be utilized to discharge the liability of SGST, but cross utilization of them is not allowed. However cross utilization would be permitted for the payment of IGST.[iv]

There are certain goods and services exempted from the purview of GST. Alcoholic liquor for human consumption, petroleum and petroleum products will not be subsumed with GST till the Government decides.[v] A GST Council, consisting of Union Finance Minister as Chairman and Finance Ministers of the States and the Union Minister of State in charge of Revenue or Finance as Members, will be constituted to make recommendations on model GST laws, goods to be exempted, decide on tax rates, determination of compensation for the States etc.[vi]

Benefits of GST

  • GST will make the current tax regime more efficient, tax payer friendly and might reduce litigation.
  • Do away with multiple taxes and tax on tax or cascading effects.
  • Lower tax rate and increased growth of economy can be expected.
  • Business community will be benefitted on account of reduction in transaction costs, increase of competitiveness and zero rate for export.

Conclusion

Implementation of GST will help India to be the part of almost 160 countries which have some form of GST.[vii] It will help to increase the growth of the country especially when it is reeling under the strain of demonetization. This is a drive in the right direction to make India an investment hub as it is being attempted by the government under the banner of ‘Make in India’ initiative. Although India has ranked only 130th in the ease of doing business ranking compiled by the World Bank[viii], it is expected that in coming years it can perform well. Likewise, it is also hoped that the country will be able to address the various concerns associated with respect to GST, like keeping some goods outside of its purview and other problems come in the way of its implementation.

[i] http://dor.gov.in/sites/default/files/GST_FAQ.pdf.

[ii] http://icmai.in/icmai/Taxation/upload/GST-In-India-vol1.pdf.

[iii]http://www.prsindia.org/uploads/media/Constitution%20122nd/Constitution%20(101%20Amendment)%20Act,%202016.pdf.

[iv] http://icmai.in/icmai/Taxation/upload/GST-In-India-vol1.pdf.

[v] Article 366 (12A), see, http://www.dor.gov.in/Gstintro.

[vi] Article 279 A of the Constitution of India.

[vii] http://www.treasury.gov.my/pdf/gst/list_of_countries.pdf.

[viii] http://www.doingbusiness.org/data/exploreeconomies/india.

 

Author: Ajikrishnan S

Ajikrishnan S is currently pursuing his fourth year B.A. (Criminology) LL.B. (Hons.) at CSI College for Legal Studies, Kottayam, Kerala, India. He has participated in many moot court and debate competitions as part of the course. His areas of interest includes Constitutional law, Criminal law and International law.