Wisdom Crux

Goods and Service Tax: Major Tax Reform

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[Volume 2, Issue 8] – August, 2017

Author – Ankit Tiwari, B.B.A.LL.B, Sharda University.

Abstract

Goods and Service Tax is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level. One of the biggest taxation reforms in India is all set to integrate state economics and boost overall growth. Currently, companies and businesses pay a lot of indirect taxes such as VAT, service tax, sales tax, entertainment tax, and luxury tax. Once GST is implemented, all these taxes would cease to exist. There would be only one tax and that too at national level, monitored by the central government. The Goods and Services Tax will indeed be a significant improvement towards a comprehensive tax reform in India. Integration of goods and services would give India a world class tax system and improve tax collection. It would end distortions of differential treatments of manufacturing and service sector. Goods and Service Tax also improves government fiscal health as tax collection system would become more transparent, making tax evasion difficult[ref] Ministers, T.E.,(2009) first discussion paper on goods and service tax in India, New Delhi [/ref]. In this research paper an attempt is made to study the concepts of Goods and Service Tax and its impact on Indian.

Introduction

Tax policies play an important role on the economy of the country. The main source of revenue for the government in India is the tax. Direct and indirect taxes are the two main sources of tax revenue. When the impact and incidence falls on the same person it is called direct tax. When the impact and incidence falls on different person that is when the burden can be shifted to other person it is called indirect tax. The indirect tax system is currently mired in multi layered taxes levied by central and state government at different stages of supply chain such as excise duty, octroi, central sales tax (CST) and value-added-tax (VAT), among others. First Indirect Tax reforms occurred in India when the Modified Value Added Tax (MODVAT) is introduced for select commodities in 1986 to replace the Central Excise Duty. The other reforms are introduction of service tax in 1994, decision to introduce VAT in 1999, introduction of constitution amendment bill on GST in 2011[ref] Garg, Girish (2014)”Basic concept and features of GST in India” [/ref].

Goods and services tax (GST) is the most ambitious and biggest tax reform plan which aims to stitch together the common market by dismantling the fiscal barriers between states. It is a single national uniform tax levied across India on all goods and services. In GST, all the indirect taxes are subsumed under a single regime. GST will put an end to multiple taxes levied on different products, starting from the manufacturing source to end consumer. GST works on the fundamental principle of “One Country One Tax[ref] http://blogs.timesofindia.indiatimes.com/cashflow/gst-demystified/ [/ref].

Why GST in the place of present regime

In the present regime there are separate laws for separate levy like excise duty, custom duty, central excise tax and value added taxes. The point about the indirect taxes is that there tends to be a bewildering array of then. They tend to ‘cascade’ with taxes levied on several inputs that have already been taxed, along with inputs to those inputs. It leads to a high cost and inefficient tax structure prone to evasion and revenue leakage. The tax reforms started in 1980’s to avoid tax-on-tax and the cascading of the rates. At the central level MODVAT later termed as ‘Cenvat’ which allowed credit of tax paid on inputs and capital goods upto the manufacturing stage. Despite these reforms significant reforms, significant cascading remains in place. For instance, Cenvat remains confined to the manufacturing stage and does not extend to distribution chain beyond the factory gate. Or, while input tax credit of cenvat or additional custom duty paid on goods is now available to service provider paying service tax, they are not able to set-off state VAT and other state taxes paid on their purchase. Hence there is a pressing need for the modern integrated goods and services tax, with tax payable only on the value added at each stage of output and set- offs available along the value chain, both at central and state level. The GST culminates the 25 year of indirect tax reforms, and boosts the efficiency of taxation, improve tax buoyancy and brought an integrated market nationally[ref] http://blogs.economictimes.indiatimes.com/figuringout/why-we-need-gst/ [/ref]. The four GST slabs have been set at 5%, 12%, 18% and 28% for different goods and services. The integration of law in GST is expected to reduce the tax burden on the tax payers compared to the present system of the indirect taxes[ref] GST IN INDIA: an overview by Dr. R. Rupa  E-ISSN NO : 2454-9916 VOLUME 3 ISSUE 2[/ref].

Working of GST in India

The GST is based on the same concept as VAT. Here, set offs are available in respect of taxes paid in the previous level against the GST charged at the time of sale. The GST model has some aspects which are as follows:

Components: GST is divided into two components, namely, Central Goods and service tax and State Goods and Service Tax.

Rates: Rates charged across all the states and central level is uniform along with the regulation of the GST council.

Input Tax Credit: The facility of Input tax credit at central level is available in respect of CGST. In other words the ITC of the central goods and services tax shall not be allowed to set off against the State Goods and Services Tax and vice versa.[ref] Ehtisham Ahamad and Satya Poddar (2009), “Goods And Service Tax Reforms and Intergovernmental consideration in India”, Asia Research Centre”, LSE,2009 [/ref]

Compensation To states

For maximum of 5 years union will compensate states for the revenue losses arising out of GST implementation and the compensation will be made on the recommendation of the GST council

The GST Council

It was setup by the President under article 279-A and is chaired by the finance minister. It constitutes union minister of state in charge of revenue and minster in charge of finance and taxation or of any other field nominated by the state governments. The 2/3rd representatives are from state and remaining 1/3rd from union. The decision of the council is made by 3/4th majority of votes cast and quorum of council is 50%[ref] Girish Garg, (2014), “Basic Concepts and Feature of Goods and Service Tax In India” [/ref]. The council will make recommendations on

  1. Taxes, Surcharges, cess of central and state integrated in GST
  2. Goods and Services which may be exempted from GST
  3. Interstate commerce – IGST- proportion of distribution between state and center
  4. Registration Threshold limit for GST
  5. GST floor rates
  6. Special rates during calamities[ref] www.taxguru.in/goods-and-service-tax/goods-services-tax-gst-2.html [/ref]

Advantages of GST

Under GST regime the burden of taxation will be allocated fairly between manufacturing and services via lower tax rates resulting in increased tax base and minimized exemptions. It removes the cascading effects of taxes and helps in establishing common national market.

IGST – Effective Logistics

In the old indirect tax system central sale tax are paid on interstate commerce of goods .2% standard rate of CST are levied and distributed to the exporter state as it is the origin based tax. In current GST tax regime IGST is levied on interstate commerce and supply of both goods and serviced. Due to this an effective logistics system is established which is preventing tax dodging by big corporates.

Ancillarization

In the old system of indirect tax regime all big corporates want to produce each and everything in house just to reduce the CST and cascading effect of tax. But in GST there is no CST and cascading effect which leads to outsourcing and which will increase the division of labour and because of this specialization will increase in future which will further help in reducing the cost of production which in turn will help in reduced price of the domestic goods.

Single Base Computation

With the introduction of GST cascading effects of the taxes will not exist and there is a single base for computation of taxes for both the central and state Government. As per CRISIL[ref] CRISIL report on GST 2014 [/ref] recent report GST is the best reckon for fiscal consolidation as there is not much scope to cut government expenditure in India.

Simple Tax Structure

As multiple indirect taxes of state and central government on goods and services are replaced by single unified taxation GST, the tax structure is much simpler and easier to interpret. The reduction in the accounting complexities for businesses is making the manufacturing sector more competitive and is estimated to boost the economy by 1-2%.

Other advantages

  1. GST is structured to simplify the current indirect taxes by removing of multiple taxes .It creates India as a single market
  2. It taxes goods and services at the same rates so many disputes are eliminated on the tax matter
  3. The procedural cost is reduced due to uniform accounting namely, CGST, SGST, IGST have to be maintained for all types of taxes

Disadvantages

  1. Dual control on every business by central and state government leading in increase of compliance cost
  2. VAT and Service tax on some products may become higher than the current levels
  3. State may lose autonomy to change their tax rates
  4. Manufacturing states would lose big revenue

Conclusion

Tax policies play an important role on the economy through their impact on both efficiency and equity. A good tax system should keep in view issues of income distribution and, at the same time, also endeavors to generate tax revenues to support the government expenditure on public services and infrastructure development. The ongoing tax reform of moving to goods and services tax is going to impact the national economy, International trade, firms and the consumers. There has been a good deal of criticism as well as appraisal of the proposed taxation system. It is considered to be a major improvement over the previous taxation system. The new tax is a significant breakthrough and the next logical step towards a comprehensive indirect tax reform in the country. GST is not simply VAT plus service tax, but a major improvement over the previous system of VAT and disjointed service tax. The implementation of GST in the Indian framework to benefits which were untouched by the previously existing taxation system and would surely help in economic development. GST will usher in the possibility of a collective gain for industry, trade, agriculture and common consumer as well as for the central and state Government.