1. Need for GST
Under the pre-GST regime, multiple taxes were being levied on the same supply chain by the Central and State Governments.
Further, tax system on goods and services was facing the following difficulties:
- Taxes levied by Central Government were not available as set off against the taxes levied by State For example, Excise Duty was not adjustable against VAT. Further, VAT was levied on the portion of Excise duty included in the price of goods. Credit of CST levied by Union Government was not available. Thus, it all became part of the cost of business.
- Rate of CST being different from VAT created a tax arbitrage which was exploited.
- Certain taxes levied by the State Governments were not allowed as set off for payment of other taxes levied by State Governments.
- Different VAT laws, in force in different parts of the country, had divided the nation into separate economic spheres.
- Tariff and non-tariff barriers such as octroi, entry tax, check posts, etc., hindered the free flow of trade throughout the country.
In view of the aforesaid difficulties, the certain taxes have been subsumed (absorbed) in a single tax called the goods and services tax (GST) which has been levied on supply of goods or services or both at each stage of supply chain starting from manufacture or import and till the last retail level.
2. Benefits of GST
The introduction of Goods and Services Tax on the 1st of July 2017 was a very significant step in the field of indirect tax reforms in India. It is one of the biggest taxation reforms in the history of Indirect Taxes in India postIndependence. It is one indirect tax for the whole nation, which has made India one unified common market. It is a single tax on the supply of goods and services, right from the manufacturer to the consumer.
The new legislation i.e. GST will simplify and harmonise the indirect tax regime in the country. It is expected to reduce the cost of production and inflation in the economy, thereby making the Indian trade and industry more competitive, domestically as well as internationally. It is also expected that introduction of goods and services tax will foster a common or seamless Indian market and contribute significantly to the growth of the economy. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an inbuilt mechanism in the design of goods and services tax that would incentivise tax compliance by taxpayers. The goods and services tax will broaden the tax base and result in better tax compliance due to a robust information technology infrastructure.
Thus, the main aim of GST is to integrate state economies and boost overall growth by creating a single, unified Indian market to make economic stronger.
(A) Benefits for business and industry
(i) Reduction in multiplicity of taxes
As already discussed above, there were many taxes levied by both Central and State Governments on goods or services or both. Further, different VAT laws in force in different parts of the country had divided the nation into separate economic spheres.
GST is one indirect tax for the whole nation, which has made India one unified common market. GST will ensure that indirect tax rates and structures are common across the country, thereby increasing the certainty and ease of doing business. Thus, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.
(ii) Removal of cascading of taxes
Taxes levied by Union Government were not available as set off against the taxes levied by State Governments, such as Excise Duty was not adjustable against VAT. Further, VAT was levied on the portion of Excise duty included in the price of goods. Credit of CST levied by Union Government was not available. Thus, it all became part of the cost of business which led to cascading of taxes.
By introduction of GST, there will be removal of cascading of taxes. A system of seamless tax-credits throughout the value chain, and across boundaries of States, would ensure that there is no cascading of taxes. This would reduce hidden costs of doing business.
(iii) Improved competitiveness
Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.
(iv) Easy compliance
A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all tax payer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.
(v) Gain to manufacturers and exporters
The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central States Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.
(B) Benefits for Central and State Governments
(i) Simple and easy to administer
Multiple indirect taxes at the Central and State levels are being replaced by GST. Backed with a robust end to end IT system, GST would be simpler and easy to administer than all other indirect taxes of the Centre and State levied so far. Further, there will be reduction in compliance costs as there will be no requirement of multiple record keeping.
(ii) Better controls on leakage
GST will result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders. Thus, uniform SGST and IGST rates will reduce the incentive for tax evasion.
(iii) Higher revenue efficient
GST is expected to decrease the cost of collection of tax revenues of the Government, and will therefore, lead to higher revenue efficiency.
(iv) Boost to Foreign Investment and “make in India” campaign
A unified common national market will boost Foreign Investment and “Make in India” campaign
Besides the above, there will be boost to export/manufacturing activity, generation of more employment, leading to reduced poverty and increased GDP growth. Further, improvement of the overall investment climate in the country will benefit the development of states.
(C) Benefits for the consumer
(i) Simpler tax system
Due to multiple indirect taxes being levied by the Centre and State with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country were laden with many hidden taxes. Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.
(ii) Reduction in prices of goods and services due to elimination of cascading
Since, there would be only one tax from the manufacturer to the consumer, the cascading effect of the taxes will be eliminated and it will lead to reduction in prices of goods and services.
(iii) Relief in overall tax burden
Because of efficiency gains and prevention of leakages, the overall tax burden on most commodities will come down, which will benefit consumers.
(iv) Uniform prices throughout the country
Since the rate of Central and State goods and service tax will be same throughout the country, the prices of goods and services shall be uniform throughout the country.