Blog Details

Author - Advocate Bharath Madakari and Associate Debasmita Patra

Goods and Services Tax (‘GST’) was established in India in July 2017, which replaced several indirect taxes that were previously levied on the citizens of the country. This is one of the most significant reforms in India’s tax structure in decades. The primary objective behind incorporating such form of taxation is to eliminate double taxation, cascading from the manufacturing level to the consumption level.

Traditionally the tax system in India has been complicated due to the number of indirect taxes imposed on the sale of a single product. Thus, GST was brought in with the motive of providing a simple and clear taxation system to create a more transparent environment for business to operate within.

Though the Constitution (122nd Amendment) bill was passed in 2016 (after incorporation of recommended amendments) and the same has been enacted as Constitution (101^st Amendment) Act 2016 after receiving of assent of Hon’ble President of India in September 2016. Thereafter, the Central Government enacted 4 GST Acts after received of assent of Hon’ble President on 12th April 2017 –

•    Central GST Act (CGST);

•    State GST Act (SGST);

•    Union Territory GST Act (UGST);

•    The GST (compensation to states) Act.

GST, as a destination based tax, replaces the previous Central and State taxes and duties such as Excise duty, Service Tax, Value Added Tax (VAT), Central Sales Tax, etc. The pre-GST period witnessed tax implications on the value of goods and margin at every stage of the production process. This result in a higher amount of total taxes paid carried down to the end consumer in the form of higher costs for goods and services. The GST system gives an advantage to the consumer by levying destination based taxes on products or services. For instance, if a product is manufactured in Delhi and sold in Assam, the GST will be levied and payable by the consumer located in Assam only. There are certain merits that GST possess, which include wider tax bases that aid in lowering the tax rates and eliminating classification disputes:

•   Rationalizing the tax structure and simplifying compliance procedures;

•   Eliminating multiplicity of taxes and their cascading effects;

•   Automating compliance procedures to reduce errors and increase efficiency;

• Harmonizing center and state tax administration, which would reduce duplication and compliance costs;

• Reducing hassles and expenses by replacing other taxes;

• Also improving competitiveness for trade and industries;

There are 3 kinds of taxes applicable to this system:

1. Central GST (CGST) – levied and collected by the Central Government on an intra-state supply;

2. State GST (SGST) – levied and collected by the respective State Government on an intra-state supply;

3. Integrated GST (IGST) – levied and collected by the Central Government on all inter-state supply and import of goods and services from outside India;

The growth of GST in India economy, today, can be scrutinized in a 5-fold specter:

Firstly, the Central Sales Tax (CST) for inter-state trade, which was added to the value of goods, was struck down. The Integrated GST regime has been providing credit facility for inter-state trade.

Secondly, 17 indirect taxes have been clubbed together and collectively eliminated after the elimination of GST except for petroleum and alcohol and related products that do not come into the purview of GST.

Thirdly, entry tax or Octroi duty at the inter-state check posts often led to delays and malpractices, thereby adding to costs. Abolition of the same has brought down transportation time and cost to the minimum.

Fourthly, the aim of making India a common economic market has been fulfilled by lifting off State VAT with different rates in different states. In the post GST era, the tax levied on any particular product stays the same across the country.

Lastly, the GST framers and founders aimed at having equitable growth of the industry across the country. While states like Gujarat and Karnataka were highly industrialized, other states like Bihar, Odisha, Uttar Pradesh, and West Bengal lagged behind. The destination specific nature of GST ensures equal accrual to all states. The destination consumption states will get extra revenue from IGST, besides their SGST. This would, in turn, result in such states having more revenue, which is hoped to be utilized in their development.

There are challenges that the GST regime continues to face in the effective implementation of a unified tax system with several other glitches to be fixed. Several instances of accumulation of unpaid tax refunds have been found which cause liquidity crunch for exporters, thereby threatening the survival of many, especially in the tea and textile sectors. For small operators, high costs of compliance related to return filing remains a big concern. Significant changes have also been found in the institutional mechanism of the GST Council which is likely to emerge as a significant battleground for fiscal federalism in India, inflicted with all sorts of political lobbying by vested interests.

Now that it has been two years already, all the skepticism regarding the efficiency and effectiveness of the Goods and Services Tax is quite low. Though it all started with panic and confusion and everyone was busy dealing with its ‘teething’ problems, GST, now, can be referred to as a mechanism with a short-term pain aiming at a long-term gain.