GST(Goods & Service Tax)

What is GST?

GST is an indirect tax throughout India to replace taxes levied by central and state government. GST will subsume various indirect taxes including  central excise duty, services tax , additional customs duty, surcharges, state-level value added tax.

The following taxes will be bound together by the GST:

• Entertainment Tax
• Entry Tax
• Advertisement taxes
• Taxes applicable on lotteries.

How GST operates?

Case 1: Sale in one state, resale in the same state

In the example illustrated below, goods are moving from Mumbai to Pune. Since it is a sale within a state, CGST and SGST will be levied. The collection goes to the Central Government and the State Government as pointed out in the diagram. Then the goods are resold from Pune to Nagpur. This is again a sale within a state, so CGST and SGST will be levied. Sale price is increased so tax liability will also increase. In the case of resale, the credit of input CGST and input SGST (Rs. 8) is claimed as shown; and the remaining taxes go to the respective governments.

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Case 2: Sale in one state, resale in another state

In this case, goods are moving from Indore to Bhopal. Since it is a sale within a state, CGST and SGST will be levied. The collection goes to the Central Government and the State Government as pointed out in the diagram. Later the goods are resold from Bhopal to Lucknow (outside the state). Therefore, IGST will be levied. Whole IGST goes to the central government.

Against IGST, both the input taxes are taken as credit. But we see that SGST never went to the central government, still the credit is claimed. This is the crux of GST. Since this amounts to a loss to the Central Government, the state government compensates the central government by transferring the credit to the central government.

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Case 3: Sale outside the state, resale in that state

In this case, goods are moving from Delhi to Jaipur. Since it is an interstate sale, IGST will be levied. The collection goes to the Central Government. Later the goods are resold from Jaipur to Jodhpur (within the state). Therefore, CGST and SGST will be levied.

Against CGST and SGST, 50% of the IGST, that is Rs. 8 is taken as a credit. But we see that IGST never went to the state government, still the credit is claimed against SGST. Since this amounts to a loss to the State Government, the Central government compensates the State government by transferring the credit to the State government.

GST Benefits to the Indian Economy:

• Removal of bundled indirect taxes such as VAT, CST, Service tax, CAD, SAD, and Excise.
• Less tax compliance and a simplified tax policy compared to current tax structure.
• Removal of cascading effect of taxes i.e. removes tax on tax.
• Reduction of manufacturing costs due to lower burden of taxes on the manufacturing sector. Hence prices of consumer goods will be likely to come down.
• Lower the burden on the common man i.e. public will have to shed less money to buy the same products that were costly earlier.
• Increased demand and consumption of goods.
• Increased demand will lead to increase supply. Hence, this will ultimately lead to rise in the production of goods.
• Control of black money circulation as the system normally followed by traders and shopkeepers will be put to a mandatory check.
• Boost to the Indian economy in the long run.

Impact of GST on Indian Economy:

• Reduces tax burden on producers and fosters growth through more production. The current taxation structure, pumped with myriad tax clauses, prevents manufacturers from producing to their optimum capacity and retards growth. GST will take care of this problem by providing tax credit to the manufacturers.
• Different tax barriers, such as check posts and toll plazas, lead to wastage of unpreserved items being transported. This penalty transforms into major costs due to higher needs of buffer stock and warehousing costs. A single taxation system will eliminate this roadblock.
• There will be more transparency in the system as the customers will know exactly how much taxes they are being charged and on what base.
• GST will add to the government revenues by extending the tax base.
• GST will provide credit for the taxes paid by producers in the goods or services chain. This is expected to encourage producers to buy raw material from different registered dealers and is hoped to bring in more vendors and suppliers under the purview of taxation.
• GST will remove the custom duties applicable on exports. The nation’s competitiveness in foreign markets will increase on account of lower costs of transaction.

Conclusion:

Indian taxation system of goods and services is characterized by cascading, distortionary tax on production of goods and services which leads to miss allocation of resources , hampering productivity and slower economic growth. To remove this hurdle, a pure and simple tax system like GST(Goods & Services Tax) is need of the hour in the country.