Goods and Services Tax – A Quick Overview
Goods an d Services Tax – A quick overview
There has been a lot of discussion in the political and economic circles about Goods and Service Tax or GST as it is called. Some call it ‘Brahmastra’ of the Indian Economy. In this blog we give a quick overview of what this GST is.
In very simple terms, GST is an indirect tax levied when any goods and / or services are sold. To the extent of the GST charged on the transaction value, the government would get that revenue. Today, our tax system is very complex in that there are various types of indirect taxes that are levied on different goods and services. These are as given below:
Central Taxes that are levied:
- Central Excise Duty
- Additional Excise Duty
- The Excise Duty levied under the Medicinal and Toiletries Preparation Act
- Service Tax
- Additional Customs Duty, commonly known as Countervailing Duty (CVD)
- Special Additional Duty of Customs-4% (SAD)
- Cesses and surcharges in so far as they relate to supply of goods and services.
State Taxes that are levied:
- VAT/Sales Tax
- Central Sales Tax (levied by the Centre and collected by the States)
- Entertainment Tax
- Octroi and Entry Tax (all forms)
- Purchase Tax
- Luxury Tax
- Taxes on lottery, betting and gambling
- State cesses and surcharges in so far as they relate to supply of goods and services.
With the introduction of GST, the number of heads under which taxes are levied on goods and service will get significantly reduced. All the above taxes will get subsumed under the overarching structure of GST. In this manner, introduction of GST will significantly transform the indirect tax landscape in India. Amongst the various key benefits that would accrue due to GST, one would be amalgamation on several State and Central taxes into a single tax, thereby removal of double taxation or cascading taxation. Simpler the structure, easier it is to administer and also enforce. This is also likely to result in reduction of overall tax burden on goods and services on the customer. Currently the tax burden on various goods and services is estimated to be around 25% to 30%, which is very high. The average GST rate in the countries across the world where it has got implemented is around 18%.
There are three models of GST as below:
- Central GST
- State GST
- GST at both Centre and State
Given the federal structure in India, we would have GST at both Centre (CGST) and State (SGST). Both CGST and SGST would be levied. For example, if a product have levy at a base price of Rs. 100 & rate of CGST & SGCT are 10% then in such case both CGST & SGST will be charged on Rs. 100 i.e., CGST will be Rs. 10 & SGST will be Rs.10.
So, look at it this way. Say, we buy a detergent cake for Rs. 35 per cake. This would include Excise Duty, VAT or CST, Customs duty on any raw materials if imported etc. Instead of so many heads of taxes, it will get reduced to 2.
For goods and services that move across States, an Integrated GST rate (IGST) would be levied. There would be finer modifications to the actual levies. Except for a few items, most goods and services would be brought under the GST. Liquor and fuel may be kept out of GST. Time will tell. There is likely to be no distinction in tax rates between goods and services.
Worldwide, over 150 countries have adopted GST, which is considered a simple tax system. India is very close to implementing it. Let us hope it happens by April 2016, despite the many challenges associated with it. With the introduction of GST, goods that as of now subject to both State and Central taxes will see a net reduction in tax which will lead to a positive impact on consumer demand. Supply chains would get restructure and redesigned, resulting in simplified operating models for companies and improvement in revenues and margins. GST could also result in a reduction in inventory costs and improved cash flows.
There would be challenges of implementing GST from the technology perspective. It is proposed to set up a not-for-profit, Non-government Company called Goods and Services Tax Network (GSTN). GSTN would be jointly set up by both Central and State Governments and will provide IT infrastructure and services for all stakeholders.
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