The multiplicity of taxes at the State and Central levels has ensued in a multifarious indirect tax structure that is ridden with hidden costs for the trade and industry. Firstly, there is no uniformity of tax rates and structure across States. Secondly, there is a cascading effect of taxes due to 'tax on tax'. No credit of excise duty and service tax paid at the stage of manufacture is available to the traders while paying the State level sales tax or VAT, and vice-versa. Further, no credit of State taxes paid in one State can be availed in other States. Hence, the prices of goods and services get artificially inflated to the extent of this 'tax on tax'.
The proposed dual GST envisages taxation of the same taxable event, i.e., supply of goods and services, simultaneously by both the Centre and the States. Therefore, both Centre and States will be authorized to levy GST across the value chain from the stage of manufacture to consumption. The credit of GST paid on inputs at every stage of value addition would be available for the discharge of GST liability on the output, thereby ensuring GST is charged only on the component of value addition at each stage. This would ensure that there is no 'tax on tax' in the state.
GST will simplify and harmonize the indirect tax regime. It is expected to reduce cost of production and inflation in the economy, thereby making the trade more competitive, domestically as well as internationally.
One of the main objective of Goods & Service Tax(GST) would be to eliminate the double taxation i.e. cascading effects of taxes on production and distribution cost of goods and services. The exclusion of cascading effects i.e. tax on tax till the level of final consumers will significantly improve the competitiveness of original goods and services in market which leads to beneficial impact to the GDP growth. Introduction of a GST to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative. Integration of various taxes into a GST system would make it possible to give full credit for inputs taxes collected. GST, being a destination-based consumption tax based on VAT principle.
What is GST?
Goods & Services Tax is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition. To understand the concepts under this definition the basic term to start with is 'Multi-stage', there are multiple steps an item goes through from manufacture or production to the final sale. Buying of raw materials is the first stage then second stage is production or manufacture then there is the warehousing of materials next comes the sale of the product to the retailer and in the final stage, the retailer sells to the end consumer – the product, completing its life cycle.
Goods and Services Tax will be levied on each of these stages, which makes it a multi-stage tax.
Assuming that a manufacturer wants to make a sweater. For this he must buy wool. This gets turned into a sweater after manufacture. So, the value of the wool is increased when it gets woven into a sweater. Then, the manufacturer sells it to the warehousing agent who attaches labels and tags to each sweater. That is another addition of value after which the warehouse sells it to the retailer who packages each sweater separately and invests in marketing of the sweater thus increasing its value.
GST will be levied on these value additions – the monetary worth added at each stage to achieve the final sale to the end customer.
Model of GST
• The GST shall have two components: one levied by the Centre (referred to as Central GST or CGST), and the other levied by the States (referred to as State GST or SGST). Rates for Central GST and State GST would be approved appropriately, reflecting revenue considerations and acceptability.
• The CGST and the SGST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services.
• Cross utilization of ITC both in case of Inputs and capital goods between the CGST and the SGST would not be permitted except in the case of inter-State supply of goods and services (i.e. IGST).
The Centre and the States would have concurrent jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre.
Benefits of GST
• Reduces transaction costs and unnecessary wastages
• Eliminates the multiplicity of taxation
• One Point Single Tax
• Reduces average tax burdens
• Reduces the corruption
• Simpler online procedure under GST
• Lesser number of compliances
Impact on Small Enterprises/ Entrepreneurs:
GST also has an optional scheme of lower taxes for small businesses with turnover between Rs. 20 to 50 lakhs. It is called the composition scheme. It has now been proposed to be increased to 75 lakhs. This will bring respite from tax burdens to many small businesses.
Higher threshold for registration
Tax Threshold Limits
Excise 1.5 crores
VAT 5 lakhs in most states
Service Tax 10 lakhs
GST 20 lakhs
As per the current VAT structure, any business with a turnover of more than Rs. 5 lakh (in most states) is liable to pay VAT (different rates in different states). Similarly, for service tax, service providers with turnover less than Rs. 10 lakhs are exempted.
Under GST this threshold has been increased to Rs. 20 lakhs thus exempting many small traders and service providers.
GST is the most logical steps towards the comprehensive indirect tax reform in our state. GST is leviable on all supply of goods and provision of services as well combination thereof. All sectors of economy whether the industry, business including Govt. departments and service sector shall have to bear impact of GST. All sections of economy viz., big, medium, small scale units, intermediaries, importers, exporters, traders, professionals and consumers shall be directly affected by GST… One of the biggest taxation reforms the Goods and Service Tax (GST) is all set to integrate State economies and boost overall growth. GST will create a single, unified market to make the economy stronger. Experts say that GST is likely to improve tax collections and Boost economic development by breaking tax barriers through a uniform tax rate. Under GST, the taxation burden will be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimizing exemptions.
Author is Advocate, Delhi High Court