GST is the most remarkable and ambitious tax reform in India’s post-independence history. Its aim and vision were to levy a single national uniform tax across the nation on all types of goods and services. GST has replaced multiple taxes like sales tax, service tax, etc., which made India more of an integrated national market and brought more people into the taxation net. By improving efficiency, it can add substantially to finances as well as the growth of the country. Implementing a new tax regime, inculcating both goods and services by the State and the centre in a large and complex system is perhaps unprecedented in the modern tax history of the globe.
GST is a tax with a comprehensive and continuous chain of set-off benefits to the level of retailers. It is mainly a tax only on value addition at each stage, and a supplier at each step is allowed to set off through a credit tax mechanism. The burden of GST is ultimately borne by the final consumer which is the end-user of the commodity or service provided.
India and Indirect Tax Regime
Before the introduction of GST, the indirect tax regime of India suffered from various drawbacks and limitations. There was a burden of tax-on-tax in the pre-GST system of central excise duty and the sales tax system of the states. GST had to take under its wings, a profusion of indirect taxes of the states and the centre. It has integrated taxes on goods and services to set off relief. Further, this regime has also captured value additions in the distributive trade.
Currently, the service sector constitutes a tax base with cast potential that has not been exploited yet in India. In this context, GST is justified as it has covered almost all the services for taxation. Since major state and central indirect taxes are included under GST, the multiplicity of taxes has been substantially reduced, reducing the operation cost of the national tax system. The uniformity in procedures and tax rates across the country will go a long way in reducing the cost of compliance.
In crux, GST is a comprehensive indirect levy of tax on manufacturer, consumption and sale of goods, and services at the country level. GST is an indirect tax for the whole of the nation to make it one unified shared marketplace. It is designed to give India a world-class tax regime and improve the process and collection. It will end the long due distortions of differential treatment of the services sector and manufacturing sector. It will also facilitate seamless credit across the entire supply chain and all states under a joint tax base.
Why Was There a Need for GST in India?
As we discussed, the old indirect tax regime had many drawbacks and limitations. GST was able to cover, reduce, and nullify the majority of the shortcomings by offering its advantages. Here are few bullet points which explains why GST was needed:
Seamless Flow of Credit:
As GST is a destination tax, the revenue of SGST ordinary accrues to the consuming states. The interstate supplier in the exporting State can set off the available credit of CGST, SGST/UTGST and IGST against the IGST payable on an inter-state supply made by him. The importing state buying is allowed to avail the credit of IGST paid on interstate purchases made by him. Thus, unlike the earlier scenario where the credit chain used to break in case of interstate sales on account of non-VATable CST, under the GST regime, there is a seamless credit flow in case of interstate supplies.
The centre transfers to the importing State the credit of IGST used in payment of UTGST/SGST. The revenue of interstate sales does not accrue to the exporting State, and the exporting State transfers to the centre the credit of UTGST/SGST used in payment of IGST. Thus, the IGST needed a robust settlement mechanism amongst the centre and the State.
A central agency is needed which can act as a clearing house and verify the claims and inform respective governments to transfer the funds. This is possible only with the help of a robust IT infra.
Boosts in exports:
Suppose the Indian marketplace is competitive in terms of pricing. In that case, more and more foreign players will try to enter, which will result in more numbers of exporters and ultimately benefit the nation.
GST eliminates all other taxes of indirect nature, and this will effectively mean that the tax amount paid by end consumers will reduce. As we study economics, lower the prices, more will be demand for that product, which will result in more consumption and will benefit the entities.
Increase in revenue:
One reason behind the need for GST was also to boost the revenue from the indirect taxes in the nation. GST is easy to understand, and a simple tax structure will bring more taxpayers and in return, it will increase the revenue for the Indian government.
Easy and straightforward tax structure:
Before GST, taxpayers needed to pay a lot of taxes, but with GST, a single tax system, only one tax needs to be paid, which is comparatively easy and convenient to understand. For accounting, business complexities will reduce and result in less paperwork, saving both money and time.
As we discussed the issues with the old indirect tax regime, a new and better tax regime was needed in India, and GST was in talks for an extended period. Though GST still has some shortcomings that the council constantly looks over and improves, the outcomes have been excellent and have been a successful revolution till now! GST covers up and nullifies the old system’s negatives and offers merits, which we discussed in this article.