India has been the under an indirect tax structure since independence. This creates avoidable complications. However, with the Constitution (122nd) Amendment Bill, one of the biggest reforms in the tax structure of India was observed. The Goods and Services Tax, also known as GST, came into existence and was rolled out across the nation.
Breaking down GST
GST is primarily a consumption based tax which has different stages of execution. Applicable on a national level, GST is levied upon sale, manufacture, and consumption of goods & services at a national level. In other words, GST replaces all the indirect taxes levied by the state and central government. The applicable tax system comprises of:
- State GST (SGST), which is levied by the state.
- Central GST (CGST), which is levied by the Centre.
- Integrated GST (IGST), which is levied by the Centre on the supply of goods and services across a state(s).
The Indirect Tax Structure
Prior to the GST being implemented, an indirect tax system was followed in the nation. Goods and services were taxed separately, and VAT (Value Added Tax) was levied at the manufacturing stage as well as the sales stage in the form of excise duty and sales tax respectively. Several features were representative of the Indirect Tax Structure:
- Several Indirect Taxes were not included in central and state VAT.
- Variable tax rates across products and states.
- The tax base is comparatively narrow due to varying rates of interest.
- Complex tax compliance as a multiplicity of laws and their provisions are to be followed.
The GST is a simplified tax structure which has replaced different indirect taxes applicable on products and services in India. Previously, while there were separate laws to levy taxes, (for example, Central Excise Act, 1944, and State VAT laws), there is a single law as GST subsumed various taxes levied. In GST system of taxation, the tax is collected on final consumption. The representative features of the GST are:
- All indirect taxes are applicable under one tax.
- The unified tax rate is applied to all goods and services.
- A wider tax base due to large-scale application.
- Tax compliance is easier as only one law needs to be followed.
On November 3, 2016, a 4-tier GST tax structure was announced, under which 5, 12, 18, and 28 percent tax would be levied across the portfolio of products and services. While the rate of 5 percent would be levied for common utility items, the standard rate of 12 and 18 percent would be levied under the GST regime and would be rolled out from April 1, 2017.
The GST has ensured that a single CGST rate is applicable, while a uniform SGST rate is levied across all the states. GST is expected to significantly reduce the tax burden as all taxes are integrated. It splits the burden equitably between manufacturing and services. GST subsequently reduces the cost burden upon the end-consumer. Under the indirect tax system, certain taxes became a part of the costs charged. This approach is neglected under the GST, hence, minimizing the costs.
GST has also offered both the Centre and the State an additional control to make law on GST. Additionally, GST is applicable at the final level of consumption, hence it brought greater transparency and a corruption-free tax administration.