Union finance minister Arun Jaitley on Monday introduced four bills on the Goods and Services Tax (GST) in the lower house of parliament, paving the way for the government to launch the landmark tax reform.
The bills introduced are the Central GST Bill, the Integrated GST Bill, the Union Territory GST Bill, and the GST (Compensation to States) Bill.
The state assemblies will also have to pass the State GST bill before the new tax system can be rolled out later this year.
So let us understand what does the Goods and Service Tax mean and what is the rationale behind it being introduced as major tax reform in the Indian economy.
Goods and Services Tax
Goods and Services Tax (GST) is a proposed system of indirect taxation in India merging most of the existing taxes into single system of taxation. It was introduced as The Constitution (One Hundred and First Amendment) Act 2016. The GST is administered & governed by GST Council and its Chairman is Union Finance Minister of India Arun Jaitley.
GST would be a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India, to replace taxes levied by the central and state governments.
The GST is an indirect tax which means that the tax is passed on till the last stage wherein it is the customer of the goods and services who bears the tax. This is the case even todayfor all indirect taxes but the difference under the GST is that with streamlining of the multiple taxes the final cost to the customer will come out to be lower on the elimination of double charging in the system.
How is GST Levied
GST will be levied on the place of consumption of Goods and services. It can be levied on :
Intra-state supply and consumption of goods & services
Inter-state movement of goods
How is GST applied
GST is a consumption based tax. It is based on the “Destination principle.” GST is applied on goods and services at the place where final/actual consumption happens.
GST is collected on value-added goods and services at each stage of sale or purchase in the supply chain. GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services.The manufacturer or wholesaler or retailer will pay the applicable GST rate but will claim back through tax credit mechanism.
Central taxes that the GST will replace
# Central Excise Duty
# Duties of Excise (medicinal and toilet preparations)
# Additional Duties of Excise (goodsof special importance)
# Additional Duties of Excise (textiles and textile products)
# Additional Duties of Customs (commonly known as CVD)
# Special Additional Duty of Customs (SAD)
# Service Tax
# Cesses and surcharges in so far as they relate to supply of goods or services
State taxes that the GST will Subsume
# State VAT
# Central Sales Tax
# Purchase Tax
# Luxury Tax
# Entry Tax (all forms)
# Entertainment Tax (not levied by local bodies)
# Taxes on advertisements
# Taxes on lotteries, betting and gambling
# State cesses and surcharges
Benefits of GST Bill implementation
The tax structure will be made lean and simple
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.
It is good for export oriented businesses. Because it is not applied for goods/services which are exported out of India.
In the long run, the lower tax burden could translate into lower prices on goods for consumers.
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.
It can bring more transparency and better compliance.
Number of departments will reduce which in turn may lead to less corruption
More business entities will come under the tax system thus widening the tax base. This may lead to better and more tax revenue collections.
Companies which are under unorganized sector will come under tax regime.