On July 1st, 2017 an indirect tax reform in the name of Goods and Service Tax (GST) came into being. It is a comprehensive, destination-based, multi-stage tax levied on value addition. In other words, GST is an indirect tax that is exacted on the supply of various goods and services. GST has replaced a lot of the previously existing indirect tax laws in the country. It is now just one indirect tax for the entire country. Taxes are now levied at every point of sale, under GST. A Central GST (CGST) and a State GST (SGST) are charged in the case of intra-state sales, and an Integrated GST (IGST) is charged for sales that happen between two states. Businesses are required to file GST returns that comprise of two monthly returns and one annual return.
GST benefits trade by reducing the multiplicity of taxes. It is a simpler tax regime with a more efficient neutralization of taxes. There are fewer rates and exemptions. A distinction between goods and services is no longer needed and this helps in the development of a common national market. Consumers are benefited by the much simpler tax system, the reduction, and uniformity of prices of goods and services across the country, and the transparency in the taxation system. GST aims at improving the overall investment climate in India. This creates opportunities for development across the states. GST also prevents the cascading or the double taxation of goods and services. A subdued taxation system, especially for exports, ensures that Indian products are more competitive in the international market.
It has been 19 years since GST began its gestation here in India. In 2000, a discussion on setting up GST in the country was started by the Vajpayee government. There are about 160 countries that follow a Goods and Services Tax in some form or the other with France being the first adopter of GST. India has a dual GST structure having CGST and SGST. Canada is the only other country with a dual GST. Across the world, GST ranges from a meager 1.5% to 27%. Here in India, there GST structure is four-tiered. 12% and 18% are the standard rates for goods and services. For essential commodities, a lower rate of 5% is levied. Luxury goods and Sin goods are levied with a much higher rate of 28%. To discourage the consumption of sin goods, the government plans to levy a cess higher than 28%. The first state in India that implemented GST was Assam.
The Constitution of India was amended to add articles that entrust the Indian Government to levy a GST. It was implemented under Article 279 of the Constitution. Before the amendments were introduced, a coexisting power of taxation between the Centre and the states did not exist. 33 GST Acts were passed for nationwide implementation. One for the Centre, an integrated GST, twenty-nine for the states and two for the Union Territories. Before a GST bill becomes a reality, it is required to pass all legislatures in the country, Central and State. When the constitution was amended, in September 2016, to allow the government to levy GST, the corresponding powers with regard to existing Indirect Taxes were removed albeit on a few products that, for the time being, are kept outside the purview of GST, like petroleum products. Alcohol and tobacco will fall under State excise duties and VAT.
GST has opened up the Indian economy to foreign investors who previously were reluctant to invest in the country because of the previously levied complex tax structures. Under GST, goods have been defined to mean any kind of moveable property and anything falling outside the category of goods is defined as a service. GST taxes the supply of these goods and services, including free supplies. Even if no consideration is paid, some supplies would be levied with GST. Another instance that attracts GST is the disposal of assets. If a company disposes of its assets, it is required to pay GST.
Under GST, if a company in India operates all across the country, it is required to more than 1000 GST returns a year. States with high manufacturing outputs collected more tax revenue than states with higher consumption, under the earlier laws. But GST is a consumption based tax, and states with high consumption will collect higher tax revenues. To counter this, the Centre has agreed to compensate these states with regard to a loss in tax revenue for the first five years, by collecting additional revenue from levying an additional GST cess for sin goods.
GST was brought in to remove the existing shortcomings in the Indirect Tax structure by bringing in a tax administration that is transparent and corruption-free. It also enables the country to navigate international markets with ease by providing healthy competition, and in turn, make the Indian market more stable.