What is GST? - Benefits and Challenges for implementing Goods & Services Tax system

The present structure of Indirect Taxes is very complex in India. There are so many types of taxes that are levied by the Central and State Governments on Goods & Services.The GST seeks to untangle this and subsume all in one single tax, thereby making India an economically unified market.

PRESENT SYSTEM OF INDIRECT TAXES

Let us first understand the various indirect taxes that are presently being levied by the Central & State Governments.

​(*CVD – Countervailing Duty; SAD – Special Additional Duty)

• The GST shall subsume all the above taxes, except the Basic Customs Duty that will continue to be charged even after the introduction of GST.
• India shall adopt a Dual GST model, meaning that the GST would be administered both by the Central and the State Governments.

What is GST? 

It has been long pending issue to streamline all the different types of indirect taxes and implement a “single taxation” system. This system is called as GST ( GST is the abbreviated form of Goods & Services Tax). The main expectation from this system is to abolish all indirect taxes and only GST would be levied. As the name suggests, the GST will be levied both on Goods and Services.

GST was first introduced during 2007-08 budget session. On 17th December 2014, the current Union Cabinet ministry approved the proposal for introduction GST Constitutional Amendment Bill. On 19th of December 2014, the bill was presented on GST in Loksabha. The Bill will be tabled and taken up for discussion during the coming Budget session. The current central government is very determined to implement GST Constitutional Amendment Bill.

Why is there a need for this bill?

So check out the table below from PRS Legislative which explains the implications for the common man in simple terms.


PRS explains this table as this:

In the example given above the cost of the raw material is Rs 100. The manufacturer and the retailer add Rs 20 value each. The rax rate is assumed to be 10 percent for all taxes.

Under the current tax regime, both excise and sales are a value added tax system. However, there is no set-off for the taxes paid.

So on the Rs 100 raw material, the manufacturer pay Rs 10 as tax. The manufactuer adds Rs 20 value. To this the manufacturer adds Rs 2, which is the CENVAT or central Value Added Tax. in the example, the CENVAT is assumed at 10 percent of the Rs 20 value added by the manufacturer. So the cost for the retailer is Rs 132, which is Rs 100 (raw material) + Rs 10 (tax on raw material) + Rs 20 (manufacturer value addition) + Rs 2 (tax on the value addition). When the retailer sells it to the consumer, he adds his own margin at Rs 20. This takes the price to Rs 152. Add 10 percent sales tax to this, which increases the price by Rs 15.2. Thus the final price the consumer pays will be Rs 167.2. Of this final amount, the taxes the consumer paid is Rs 27.2.

Now look at the GST. Here, as PRS says, there is input tax credit. This means each person pays tax only on the value added by her. So the overall tax for the consumer comes down. In the above example, when the retailer sells the tax is applied only on her margin of Rs 20 and not on the Rs 132 which is the cost she paid to the manufacturer. So the tax the consumer pays is much lower at Rs 14 - Rs 10 (the tax paid by manufacturer when the raw material was bought) + Rs 2 (the tax on the manufacturer's value addition) + Rs 2 (the tax paid on the margin of the retailer).


In other words, under the current system, there is the cascading efffect or double taxation - the consumer pays tax on tax already paid by the manufactuer which is embedded in the prices. That is what makes the consumer higher tax, and in turn pay higher prices.

What is the applicable GST rate?

The rate (percentage) of GST is not yet decided.  As mentioned in the above table, there might be CGST, SGST and Integrated GST rates. It is also widely believed that there will be 2 or 3 rates based on the importance of goods. Like, the rates can be lower for essential goods and could be high for precious/luxury items.

Benefits of GST Bill implementation:

1. The tax structure will be made lean and simple
2. The entire Indian market will be a unified market which may translate into lower business costs. It can facilitate seamless movement of goods across states and reduce the transaction costs of businesses.
3. It is good for export oriented businesses. Because it is not applied for goods/services which are exported out of India.
4. In the long run, the lower tax burden could translate into lower prices on goods for consumers.
5. The Suppliers, manufacturers, wholesalers and retailers are able to recover GST incurred on input costs as tax credits. This reduces the cost of doing business, thus enabling fairer prices for consumers.
6. It can bring more transparency and better compliance.
7. Number of departments (tax departments) will reduce which in turn may lead to less corruption
8. More business entities will come under the tax system thus widening the tax base. This may lead to better and more tax revenue collections.
9. Companies which are under unorganized sector will come under tax regime.

Challenges for implementing Goods & Services Tax system:

1. The bill is yet to be tabled and passed in the Parliament.
2. To implement the bill (if cleared by the Parliament) there has to be lot changes at administration level, Information Technology integration has to happen, sound IT infrastructure is needed, the state governments has to be compensated for the loss of revenues (if any) and many more.
3. GST, being a consumption-based tax, states with higher consumption of goods and services will have better revenues. So, the co-operation from state governments would be one of the key factors for the successful implementation of GST.