GST(Goods & Service Tax):Objectives,Details & Benefits


Meaning of GST

GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017. The Act came into effect on 1st July 2017; Goods & Services Tax Law in India is a comprehensivemulti-stagedestination-based tax that is levied on every value addition.

In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of goods and services. This law has replaced many indirect tax laws that previously existed in India.

GST is one indirect tax for the entire country.

Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. Inter-state sales are chargeable to Integrated GST.

Now let us try to understand the definition of Goods and Service Tax – “GST is a comprehensive, multi-stagedestination-based tax that is levied on every value addition.”

GST is a tax on goods and services under which every person is liable to pay tax on his output and is entitled to get input tax credit (ITC) on the tax paid on its inputs(therefore a tax on value addition only) and ultimately the final consumer shall bear the tax”.

Objectives of GST

Goods and Service Tax (GST) is a comprehensive tax levy on manufacture, sale and consumption of goods and service at a national level under which no distinction is made between goods and services for levying of tax. It will mostly substitute all indirect taxes levied on goods and services by the Central and State governments in India. The objectives of GST are as follows:

TO ELIMINATE THE CASCADING EFFECT OF INDIRECT TAXES ON SINGLE TRANSACTION

The basic objective of GST is to remove cascading effect of the taxes. Cascading effect of taxes mean levy of tax on tax. GST would be levied only towards the net value added portion and not towards the entire portion of value as the tax payer would enjoy input tax credit.

 TO SUBSUME ALL THE INDIRECT TAXES AT THE CENTRE AND STATE LEVEL

Barring few indirect taxes, all the major indirect taxes levied by central and state governments have been subsumed into GST. Thus, the taxpayer and supplier need not bother about paying multiple indirect taxes under different laws.

TO REDUCE THE TAX EVASION AND CORRUPTION

GST would help in curbing of tax evasion and reduce corruption in tax department. In the system of GST, there would be less chance to claim false input tax credit as it requires matching of invoices between recipient and the suppliers. Input tax credit can be claimed only if the tax has been deposited by the registered supplier to the Government. Each invoice wise matching and verification would be made to ensure that taxes are properly paid to the government.

TO INCREASE TAX COMPLIANCE

Tax compliance under GST is expected to be more compared to the previous tax regime. As the number of tax laws have been subsumed, the tax payer would have to comply mainly with GST law with returns and registration needed. There is no need to file different returns and obtain different registration for compliance.

TO INCREASE THE TAX TO GDP RATIO AND THE REVENUE SURPLUS

GST would increase the tax to GDP ratio and it is expected to be about 11.9% by 2019-20. The more tax to GDP ratio, the more would be the tax collections and it indicates the status of better economic system of the country. More tax compliances and wider tax base would result in higher tax revenue to the government and the objective of GST is to have a revenue surplus to the government.

TO BRING MORE PEOPLE UNDER THE TAX NET

GST helps in widening of the tax base and bring large number of people into tax net. In earlier regime, there were many exemptions and rules for registration for different types of taxes. Now there is a single limit for turnover below which registration would not be required. More tax payers would be covered under the tax net which ultimately could result in increasing the tax base and tax revenue for the government.

TO ACHIEVE THE POLICY OF ONE NATION ONE TAX

GST replaces multiple indirect taxes which were existing in the previous regime. There is a single and neutral tax in most cases so there would not be any differences in the tax rates between one state to another state. In this way, GST law has achieved the policy of one nation one tax.

TO PROVIDE A SEAMLESS CREDIT OF INPUT TAXES

Cross-sectional credit of input was not allowed earlier. Also, there were many restrictions and conditions in previous tax regime. In GST, much simpler rules have been laid to utilize the cross-sectional credit of input taxes. For example, a trader who was earlier not allowed to take credit of service tax paid on services is allowed to take credit on goods as well as services. The seamless system of credit would ensure that the taxes on supplies are paid to the extent of value additions and net liability and double taxations are avoided.

What are the components of GST?

There are 3 taxes applicable under this system: CGST, SGST & IGST.

  • CGST: Collected by the Central Government on an intra-state sale (Eg: transaction happening within Maharashtra)
  • SGST: Collected by the State Government on an intra-state sale (Eg: transaction happening within Maharashtra)
  • IGST: Collected by the Central Government for inter-state sale (Eg: Maharashtra to Tamil Nadu)

In most cases, the tax structure under the new regime will be as follows:

Transaction New Regime Old Regime
Sale within the State CGST + SGST VAT + Central Excise/Service tax Revenue will be shared equally between the Centre and the State
Sale to another State IGST Central Sales Tax + Excise/Service Tax There will only be one type of tax (central) in case of inter-state sales. The Centre will then share the IGST revenue based on the destination of goods.

Advantages of GST

1. Upcoming of Common National Market

Under the Pre – GST scenario, state and local self governments practiced notable sovereignty in taxation. With individual states having strong taxation rights, each used to levy indirect taxes such as VAT, Central Sales Tax, Service Tax, Excise etc in many different forms. Not only that, to attract investment in their respective states, state governments depended on incentives. This leads to different prices of the same goods and services in different states. While states benefited from such a tax structure, the economy as a whole suffered.

But with the coming of GST, the registered tax assessees now pay a single, uniform tax on goods and services across the country. In addition to this, GST is lead by a Central Tax Authority – the GST Council. This council is chaired by the Union Finance Minister and has various states as its members. Each state member thus participates in the formulation of the indirect tax policy of the country.

2. Elimination of Cascading Effect of Taxes

Cascading tax effect, also known as tax on tax, occurs when a good is taxed on every stage of its production, until it is sold to the final consumer. In such a situation, each succeeding transfer of good is taxed inclusive of the taxes charged on the preceding transfer. Consequently, the final consumer bears the burden of multiple taxes imposed on every stage of production, leading to inflationary prices. To better understand the tax on tax effect, let’s reconsider the above example.

3. Increased Exemption Limit for Small traders or Service Providers

Under the previous indirect tax structure, various indirect taxes had different sales turnover limits for registrations.

Annual Sales Turnover Limits for Indirect Taxes Under GST

The turnover limits for registration under GST are higher, which exempt the small traders and service providers from paying GST. In fact, in the 32nd GST Council Meeting, the turnover limits for GST registration were further increased. Hence, with the grant of such GST exemptions and benefits, 35 Lakh small traders, manufacturers and service providers are expected to be benefited.

4. Small Businesses Benefit from the Composition Scheme

To encourage reduced taxes and tax compliances, the Composition Scheme was introduced under GST. Small business owners registered under the scheme are required to pay a fixed percentage of tax on their turnover. In addition to this, unlike the regular GST tax payers, small businesses registered under Composition Scheme need to file one quarterly return. Following are the tax rates under Composition Scheme:

  • Small businesses with a turnover of Rs 1.50 crores would pay a flat GST rate of 1%. They will now file one tax return only.
  • Small service providers with an annual turnover of Rs 50 Lakhs would now pay a GST of 6% instead of 18%.

5. Reduced Tax Compliances as Number of Tax Returns to be Filed Under GST Has Come Down

Since a host of taxes existed under the previous indirect tax structure, the businesses registered for various indirect taxes had to bear multiple compliances.

Excise Return – Monthly/Quarterly depending on the scale of business unit (Large business, EOU or SSI)

Service Tax – Half yearly return

Value Added Tax – Monthly/Quarterly depending on the State that is responsible to collect VAT.

6. Registration and Filing Returns Under GST Made Simple as Everything is Done Online

Be it GST registration or return filing, a registered business owner can do everything online. This is certainly opposed to the earlier indirect tax regime, where a business owner had to get himself registered separately for various indirect taxes.

 

7. Regulated Unorganized Businesses

One of the motivations to implement GST was to get on board the unorganized sector and eventually increase the tax base. According to Economic Survey 2017 – 2018, post the implementation of GST, there has been a 50% increase in the number of indirect tax payers. Furthermore, there has been an increase in the number of voluntary registrations, especially small enterprises that sell goods to large enterprises. These small entreprises want to come under the ambit of GST and claim input tax credit benefit.

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