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The Goods and Services Tax (GST) is being called the biggest indirect tax reform since India’s independence. The Finance Minister has described it as the road to economic integration of the country.

But…What is GST? How is it different from the present indirect tax regime? Let us break it and try to analyse it.

GST intends to levy a uniform tax on goods and services across the country. Currently, the taxation system is not a uniform one in as much as different states levy different taxes at different rates. The tax will absorb most of the indirect taxes at the central and state level and break the fiscal barriers between the states.

India is not the first country to levy a uniform tax like GST. Most of the countries of the world levy a comprehensive tax like GST in one way or other. France was the first country to introduce GST in 1954.

It will have dual structure and will be levied concurrently by both state and central government. The tax will be composed of a Central GST and a State GST-which will be legislated, levied and administered by the respective levels of government. There will be another type of tax which will cater to inter-state transactions-Integrated Goods and Services Tax (IGST).

Before the introduction of Value Added Tax (VAT), the government levied excise duty at both inputs and output. This meant that double-taxation was a regular affair. The tax payable was first paid on inputs and was subject to taxation again at the output level. The manufacturers faced this conundrum for each intermediate good in process. This „tax on tax‟ led to cascading of taxes. This problem was sought to be addressed by the VAT regime under which tax paid on the inputs is deducted from the tax payable on the output produced. Similarly, sales tax also had a cascading effect through the distribution chain. All states have now adopted the concept of VAT for state sales tax.

The states are also being incentivized by granting them full compensation for the first three years for any kind of revenue loss they make after the introduction of GST.

The idea is to subsume all indirect taxes under a single tax based on value added tax regime. It will apply to both goods and services without any differentiation between both of them. The GST will be collected at the stage of consumption. The tax payable on inputs is deducted from the tax payable on the output. This is done to prevent cascading of taxes. (A cascading tax is levied at each stage of the production cycle up to the point of being sold to the final consumer.)

Hence, after the GST Bill becomes law, there will be only three indirect taxes- Central GST, State GST and IGST. Alcohol for human consumption has been exempted from the purview of GST. Applicability to five petroleum products has also been deferred. These products are petroleum crude, high-speed diesel, petrol, natural gas, aviation turbine fuel.

The rates of tax and other such elements will be recommended by a GST Council. This council shall consist of Union Finance Minister, Union Minister of State for Revenue, and state Finance Ministers. Even though the final tax burden on an individual will be lower than the present burden, the tax base and number of tax payers is expected to increase. This will increase tax collection, reduce compliance costs and reduce economic misgivings being caused by the present system of inter-state variations in taxes.

By simplifying the tax structure, the companies will be given an additional advantage of paying only one general rate of tax. This will reduce their compliance costs substantially.

Further, the rate of compliance will also increase exponentially. An entity will be given the deduction on its payable taxes only when the suppliers or those at the lower stage of production cycle have paid their taxes. This will ensure that buyers will ensure that their suppliers have paid their taxes.

The country’s economic planning and taxation policies will also be participative since the GST Council will have adequate representation from both Centre and State.