GST stands for Goods and Services Tax. It is a tax on the manufacture, sale and consumption of goods and services. It is collected at the consumption point.
There are three components of GST-
- Central GST (CGST) – It will be levied by Centre.
- State GST (SGST) – It will be levied by State.
- Integrated GST (IGST) – The Central Government will levy IGST on inter state supply of Good and Services.
The indirect tax structure in India is quite complex. The central and state governments levy different kinds of taxes. We pay Value Added Tax (VAT), Service Tax, Excise duties, import duties, sales tax etc. It is complicated and costly to manage the taxation both for the Government and businesses. Implementation of GST aims to end existence of numerous taxes on goods and services and have one rate.
The taxation system will change from being production based to being consumption-based. There will be consistency in tax rates across the country. It is supposed to bring in efficiency, transparency and fair process.
Let us look at a simplified example to show the taxation effect for a product in pre GST and post GST scenarios-
Here a manufacturer buys raw material, manufactures a product and sells it to the retailer who intends to sell to the end consumer-
How will the GST be beneficial to me?
There are many benefits of GST -
- Currently production of goods is taxed at high rates. Moreover, tax on tax adds to the cost and the final price that the consumer pays. If the GST rates are rational, overall tax will come down making thus making prices lower.
- Rather than having a gamut of taxes, one tax will be levied. This will simplify transactions.
- Goods will easily flow between states making availability better. Goods will be fresher as they will not be languishing on the state borders, stopping at check posts for octroi duty payment.
- If there is only 1 tax, there will better compliance, lesser tax evasion and lesser uncertainties in production and distribution. This will make India a better place to do business and trade.
The GST bill that aims to simplify the indirect tax system was finally passed in the Parliament this month. Discussions on the GST tax rate and roll out plans are on.
There are some challenges and concerns regarding the bill -
- Major changes in administration, IT and infrastructure are required.
- The opposition parties in the Parliament want a cap on the GST rate which is not acceptable to the ruling party.
- State governments feel they will lose power in terms of collecting taxes.
- Products and services that have a lower tax rate than the GST applicable will get more expensive. If the GST rate is high, then goods and services will become more expensive in the hands of the consumer. For example, processed foods and luxury cars attract a higher tax now. With GST, they might be cheaper. But services such as mobile network, insurance services might get expensive as the tax will be higher post GST. There are some concerns that it might stoke up inflation depending on how much of the effect is passed on to the end consumers.
- One rate is not acceptable for all goods. Essential products and services may be required to have a lower rate compared to other goods and services. This is not yet finalised.
How will GST be levied and how will it be divided between the Centre and States?
The Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State. For transactions involving multiple states, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on the goods and services. The states would get the benefit of tax credit appropriately.
What is not included in the GST regime?
Alcohol, petroleum, high speed diesel, motor spirit, natural gas and aviation turbine fuel are excluded from the GST net.
What is next in the GST saga?
The GST bill was passed by the Rajya Sabha. A GST council will be set up to finalize all matters such as GST rate, categories of products and services etc. The government wants a roll out by April 1, 2017.