The Goods and Services Tax(1): An Introduction and Features

There have been many debates on the topic of rationalization and simplification of tax structure in India. This is said to be one of the key factors which would play a major role in the accomplishment of the task of ensuring “Ease of doing business” in the Indian economy, which in turn is crucial for the surge of investments (especially the FDIs) in the country.

Today, the taxation system of India has the following roadblocks:

  • Multiplicity of taxes.
  • Cascading effect of taxes, that is, tax on the already taxed entity.
  • Complex procedures for complying to the taxation norms.

These negativities are a major cause of tax evasion due to lesser compliance willingly or mistakingly. So, in order to rationalize the current taxation system, the above factors need to be addressed.

How GST would ensure weaning away of the above negativities?

  • It is a pan-Indian taxation system and so brings about a uniformity in the taxation structure.
  • A number of taxes, both the central and the state ones, are subsumed under the GST. This also ensures uniformity as a single tax rate would be imposed in on a set of goods and services all across India.
  • Thus, it is a leap forward in establishing a single national market.

Major features of the Constitution(122nd Amendment) Bill, 2014(though Qs & As)

Which taxes will be subsumed under the GST?

  • The following are the taxes which will be subsumed under the umbrella of GST:
    • Central taxes:
      • Central Excise duty
      • Additional Excise.
      • Service Tax.
      • Additional Customs duty or Countervailing duty(an import tax to avoid dumping, that is, export of extremely cheap goods by a country to outcompete the domestic markets.)
      • Special Addition duty of customs.
    • State taxes:
      • State VAT or so-called Sales tax.
      • Octroi tax (a tax imposed by local authorities in the process of intra-state trade).
      • Entertainment tax.
      • Purchase tax.
      • Luxury tax.
      • Taxes on lottery, betting and gambling.

(Note: details of each tax could be covered in a separate article of Taxation if you want).

What is the dual system of GST?:

  • Dual system : Two taxes namely, Central GST(CGST) and State GST(SGST) will be imposed.
  • With this system in place, both the centre and the states will get a share in the revenue generated due to the imposition of GST.
  • Imposed on : every transaction on goods and services except the goods and services exempted from the ambit of GST(exemptions will be decided by a GST Council setup under the bill–>we will discuss about this in the next article).

This image shows the manner in which the dual system of GST works:

Image Courtesy: Press Information Bureau.

The above figure explained:

  • 1st stage–>Producer(here, Timber maker)–>producer—>cost of his goods(see the box named Tax invoice A)= Rs.100–>both the taxes(CGST & SGST)@10%==> Rs. 10 each.
  • 2nd stage–> Furniture maker–>here value addition takes place—> cost becomes Rs.200. Here comes an important point that : “why only Rs.10 as tax when the cost is Rs.200”:
    • As we know, GST will be imposed as VAT–>thus, only on value addition–>in this case, value addition was only worth Rs.100–>so tax on value addition(@10%)= Rs.10–> the “Input tax credit ” which is the credit(recieved by the one who has added value through inputs) for tax paid on input does nothing but applies the principle of VAT.
  • 3rd stage –>Furniture retailed–>similar to the 2nd stage–>cost= Rs.300–>value addition = Rs.100 (previous value after addition to the inputs from producer was Rs.200)–>thus, tax paid will be Rs.10 each under CGST and SGST.
  • One thing to be noted here is that the goods sold at the 2nd and 3rd stage would be at Rs.240 and Rs.360 only as mentioned in the invoice box, although–>value added+ tax = Rs.120 (rest 20 was given to the respective persons as input credit)–> This will be a profit to the person.

 

This is the end of the first article of the GST series.

A few more features of the GST bill(comprehensively covered), advantages/disadvantages, challeges in implementation among others will be covered in the upcoming series of articles.

 

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