What is GST And Why Was It Introduced in India?

The Goods and Services Tax (GST) is an indirect tax levied on the supply of goods and services in India. It is a comprehensive, multi-stage, destination-based tax that has subsumed almost all the indirect taxes in the country, except for a few state taxes.

GST was introduced in India on July 1, 2017 through the implementation of the One Hundred and First Amendment to the Constitution of India by the Government of India.

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Understanding GST.

GST is levied at every step in the production process, but is meant to be refunded to all parties in the various stages of production other than the final consumer. Goods and services are divided into five different tax slabs for collection of tax: 0%, 5%, 12%, 18% and 28%. However, petroleum products, alcoholic drinks, and electricity are not taxed under GST and instead are taxed separately by the individual state governments, as per the previous tax system.

There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on gold. In addition, a cess of 22% or other rates on top of 28% GST applies on several items like aerated drinks, luxury cars and tobacco products. Pre-GST, the statutory tax rate for most goods was about 26.5%, Post-GST, most goods are expected to be in the 18% tax range.

GST has replaced the following taxes that were earlier levied and collected by the Centre:

• Central Excise Duty
• Duties of Excise
• Additional Duties of Excise
• Additional Duties of Customs
• Special Additional Duty of Customs
• Service Tax

At the state level, the following taxes have been subsumed into GST:

• State VAT
• Central Sales Tax
• Purchase Tax
• Luxury Tax
• Entry Tax (All forms)
• Entertainment Tax
• Taxes on advertisements
• Taxes on lotteries, betting, and gambling

India has adopted a dual GST model, meaning that taxation is administered by both the Union and State Governments. Transactions made within a single state are levied with Central GST (CGST) by the Central Government and State GST (SGST) by the State governments.

For inter-state transactions and imported goods or services, an Integrated GST (IGST) is levied by the Central Government. GST is a consumption-based tax/destination-based tax, therefore, taxes are paid to the state where the goods or services are consumed not the state in which they were produced.

Why Was GST Introduced in India?

The idea of moving towards the GST was first mooted in 2000 during the then Prime Minister Atal Bihari Vajpayee’s government. An empowered committee headed by Asim Dasgupta, the then Finance Minister of West Bengal, was set up to design a GST model. In 2003, the Kelkar Task Force on indirect tax had suggested a comprehensive GST based on VAT principle.

A proposal to introduce a national GST by April 1, 2010 was first mooted in the Budget Speech for the financial year 2006-07. Since the proposal involved reform/ restructuring of not only indirect taxes levied by the Centre but also the States, the responsibility of preparing a Design and Road Map for the implementation of GST was assigned to the Empowered Committee of State Finance Ministers (EC).

The GST journey began in the year 2000 when a committee was set up to draft law. It took 17 years from then for the Law to evolve. In 2017, the GST Bill was passed in the Lok Sabha and Rajya Sabha. On 1st July 2017, the GST Law came into force.

There were several reasons why the GST was introduced in India:

1. Simplification of the Tax Structure.

Before GST, the Indian taxation system was a complex web of indirect taxes that were levied by the central and state governments separately. There were multiple taxes like VAT, service tax, excise duty, luxury tax, entertainment tax etc. which made compliance very difficult.

GST has subsumed more than a dozen indirect taxes into one, thereby simplifying the tax structure and making compliance easier for businesses. A unified tax system has reduced the cascading effect of taxes, i.e. tax on tax, providing relief to the end consumer.

2. Reducing Tax Evasion.

The previous system of taxation was plagued by tax evasion and avoidance due to the complexity of the tax structure. With multiple taxes and a lack of transparency, it was easier for businesses to find loopholes and evade taxes.

GST has brought in more transparency and accountability in the tax system. The online filing of returns and the input tax credit mechanism has made it difficult for businesses to evade taxes. The GST system encourages voluntary compliance and has widened the tax base.

3. Boosting Economic Growth.

The introduction of GST was expected to provide a significant boost to the Indian economy. By simplifying the tax structure and reducing compliance costs, GST has made it easier for businesses to operate and expand.The removal of cascading taxes has reduced the cost of production, making goods and services cheaper for consumers. This has led to an increase in demand and consumption, thereby boosting economic growth.

GST has also made India a common market by removing inter-state barriers to trade. The seamless flow of goods and services across states has improved logistics and supply chain efficiency, reducing costs for businesses.

4. Increasing Revenue for the Government.

GST was introduced with the objective of increasing the tax revenue for the government. By widening the tax base and improving compliance, GST has the potential to significantly boost government revenue.

The GST Council, which is the governing body for GST, has been empowered to make recommendations on tax rates, exemptions, and other issues related to GST. This has ensured that the revenue interests of both the central and state governments are protected.

Impact of GST on the Indian Economy.

The introduction of GST has had a significant impact on the Indian economy. While there have been some challenges in the implementation process, the overall impact has been largely positive.

Positive Impact

1. Simplified Tax Structure: GST has replaced the multiple indirect taxes with a single tax, making compliance easier for businesses.
2. Reduced Tax Burden: The elimination of cascading taxes has reduced the tax burden on consumers, making goods and services cheaper.
3. Increased Efficiency: The seamless flow of goods and services across states has improved logistics and supply chain efficiency, reducing costs for businesses.
4. Boost to Manufacturing: GST has provided a boost to the manufacturing sector by reducing the cost of production and making Indian goods more competitive in the global market.
5. Increased Tax Revenue: GST has the potential to significantly boost government revenue by widening the tax base and improving compliance.

Challenges

1. Complexity and Compliance Burden: GST has a complex structure with multiple tax slabs and increased compliance requirements, which has been a challenge for businesses, especially SMEs.
2. Technical Glitches: The GST portal has faced technical glitches, making it difficult for businesses to file returns and claim input tax credit.
3. Inflationary Pressures: The implementation of GST led to a temporary increase in prices due to the change in tax rates and structure.
4. Uneven Impact on Sectors: While some sectors like manufacturing and logistics have benefited from GST, others like real estate and textiles have faced challenges in adapting to the new tax regime.

Despite these challenges, the overall impact of GST on the Indian economy has been positive. The simplified tax structure, reduced tax burden, and increased efficiency have provided a boost to economic growth and development.

Conclusion.

The introduction of GST in India was a historic reform that has transformed the indirect tax system in the country. By subsuming multiple taxes into a single tax, GST has simplified the tax structure and made compliance easier for businesses. The elimination of cascading taxes has reduced the tax burden on consumers and made goods and services cheaper.

GST has also provided a boost to economic growth by improving logistics and supply chain efficiency, reducing costs for businesses, and making Indian goods more competitive in the global market. While there have been some challenges in the implementation process, the overall impact of GST on the Indian economy has been largely positive.

As the GST system stabilizes and the challenges are addressed, it is expected to provide a significant boost to the Indian economy in the long run. The increased transparency and accountability in the tax system will encourage voluntary compliance and widen the tax base, leading to higher revenue for the government.

The success of GST in India will depend on the effective implementation and continuous reform of the system. The GST Council will need to work closely with businesses and stakeholders to address their concerns and make necessary changes to the system. With the right policies and reforms in place, GST has the potential to transform India into a unified market and boost economic growth and development in the country.

C.K. Gupta

Hello, I am C.K. Gupta owner of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.