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Indian Prime Minister Atal Bihari Vajpayee formed a committee to draft the GST Bill in 2000. The UPA government introduced the Bill in Lok Sabha in 2012, and the NDA government reintroduced the Bill after many changes in 2014. Parliament's two houses passed the Bill later in the year 2017.GST in India brought about a paradigm shift in how businesses work and has helped to minimise the confusion surrounding the tax system. Other than just simplifying the tax structure, other merits of GST include a reduction in tax evasion and the tax burden on businesses and a boost to the logistics sector by eliminating unnecessary procedures at each stage.GST is levied on the supply of goods and services. GST Law is a comprehensive, multi-stage, destination-based tax levied on every value addition. It is a single domestic indirect tax law for the entire country. Also read: How Does GST Work in India?
4 important features of GST
The following are the main features of GST:
1. Single indirect tax in GST
GST has been introduced as a single, unified tax reform that has eliminated other indirect centre and state taxes, like Central Value Added Tax, Special Additional Duty of Customs, Service Tax, and VAT and converted them into a single tax. The elimination of these taxes has not only made compliance easier for businesses but has also helped make many goods and services more affordable for consumers.
2. Input Tax Credit System in GST
One of the most prominent GST features is the input tax credit. If a manufacturer or service provider has already paid input tax on a purchase, the same can be deducted from their total output tax liability. The input and output invoices must match to take advantage of the tax credit. This helps remove the cascading tax effect or the traditional 'tax-on-tax' regime. Moreover, it also helps in reducing tax evasion.
3. GST composition scheme
SMEs with an annual turnover of up to Rs. 1 crore or Rs. 75 lakh in specified states can also voluntarily opt for the composition scheme. With this scheme, businesses can pay a fixed GST rate of 1% on their turnover. However, such businesses can then not use the input tax credit benefit. A business must select whether to use the composition scheme or the input tax credit feature.
4. Four-tier tax structure in GST
GST has a 4-tier tax structure of 5%, 12%, 18%, and 28%. All goods and services can only be taxed as per this tax structure. Many essential commodities, such as food items, do not have any GST. Improved transparency and cheaper goods and services are two of the biggest advantages of this 4-tier structure.GST has revolutionised how businesses pay taxes by streamlining the complex web of taxes into a comprehensive multi-stage system that includes all the components in the supply chain and supports businesses at each step of value addition.
Importance of GST
Here are some key points highlighting the significance of GST:
- Unified Market: GST transforms India into a common national market by dismantling state-level entry taxes and barriers. This boosts inter-state trade, reduces logistics inefficiencies, and enhances business efficiency.
- Enhanced Competitiveness: GST streamlines the taxation system across states, creating a level playing field for businesses across regions. This promotes healthy competition, boosts manufacturing, and encourages businesses to optimise their supply chains.
- Higher Compliance: The technology-driven GST system encourages higher compliance rates among taxpayers. With online filing and transparent processes, it becomes more difficult for businesses to evade taxes.
- Improved Input Tax Credit: GST allows businesses to claim an input tax credit on taxes paid at earlier supply chain stages. This mechanism reduces the tax burden on businesses and prevents tax cascading.
- Boost to Economic Growth: By promoting efficiency, reducing tax barriers, and enhancing trade, GST contributes to economic growth. It attracts investment, creates jobs, and stimulates overall economic activity.
- Formalisation of Economy: GST incentivises businesses to operate within the formal economy due to the transparency and compliance requirements. This helps in widening the tax base and curbing black money.
- Government Revenue: GST provides a more stable and predictable source of revenue for both the central and state governments. It facilitates effective revenue planning and expenditure management.
- Harmonisation of Tax Rates: GST aims to standardise tax rates across goods and services, reducing complexity and confusion for taxpayers and ensuring a more consistent tax structure.
Types of GST
Under GST, businesses must register and collect taxes based on their taxable supplies. The importance of GST is levied at each stage of the supply chain, with the final consumer bearing the tax burden. It is a streamlined indirect tax system that replaced India's previous multi-tiered tax structure.The Goods and Services Tax (GST) has four types: 1. Central GST (CGST) 2. State GST (SGST) 3. Integrated GST (IGST) and 4. Union Territory GST (UTGST) Also read: Tax Systems Before GST and After GST?
Benefits of GST
GST benefits consumers, the government, businesses, and industries. Here are a few advantages of the Goods and Services Tax:
- Simple compliance
The GST regime in India is built on a solid and comprehensive IT system. To make compliance simple and transparent, all taxpayer services, including registration, payment, returns, and more, are accessible to citizens online.
- Uniformity of tax rates and structures
By ensuring that indirect tax rates and structures are consistent across the board, the GST increases certainty and simplifies business. In other words, irrespective of the company's location, conducting business in the country would be tax-neutral, thanks to the GST.
- Better leakage controls
Another merit of GST is that the robust IT infrastructure it has brought on improves tax compliance. The easy transfer of input tax credits from one level to the next in the stream of value addition makes it possible for the GST to have a built-in mechanism to encourage businesses to pay their taxes on time.
Conclusion
Implementing GST in India has taken a big step toward restructuring indirect taxation. The issue of double taxation has been resolved, and a common national market has been developed by combining many states and central taxes into a single tax.The advantage from the customers' perspective is a decrease in the total tax burden on goods and services. The effective implementation of GST also sends a clear message to foreign investors about India's unrivalled capacity to support enterprises across various industries.
FAQS - FREQUENTLY ASKED QUESTIONS
What are the GST rates in India ?
Businesses with aggregate turnover exceeding a specified threshold limit (currently Rs 40 lakhs for most states and Rs 20 lakhs for special category states) must register for GST. GST rates vary based on the type of goods or services. They are categorised into four main slabs: 5%, 12%, 18%, and 28%. GST replaces a complex web of indirect taxes such as excise duty, service tax, VAT, and others. It brings uniformity, simplification, and transparency to the tax structure. GST applies to most goods and services, except for a few items like alcohol for human consumption, petroleum, and certain types of transactions.
What is the process of filing GST returns ?
Here's an overview of the process of filing GST returns:
Select the Correct Return Form: Identify the applicable GST return form.
Collect Required Information: Gather all relevant information.
Access the GST Portal: Log in to the GST portal using your registered credentials (GSTIN and password).
Select the Return Form: Navigate to the "Returns Dashboard" and select the appropriate return form you want to file.
Fill in the Details: Provide the required information in the return form.
Reconcile with GSTR-2A: Reconcile your purchase details with the GSTR-2A form.
Check Tax Liability and ITC: Calculate your tax liability based on your sales and purchases.
Pay Tax Due (if applicable): If you have a tax liability after adjusting ITC, pay the tax amount using the available payment modes on the GST portal.
Preview and Validate: Preview the return to ensure all information is accurate and complete. Validate the return using the provided validation tools on the portal.
File the Return: Once validated, submit it on the GST portal. After submission, the return is considered filed.
Is GST applicable to services provided by freelancers and professionals ?
Yes. The threshold for mandatory GST registration for service providers is an aggregate turnover of Rs. 20 lakhs in a financial year. However, this threshold may vary for special category states. Additionally, if the turnover exceeds Rs. 10 lakhs, service providers in specified northeastern states must register for GST. Consultants, writers, designers, doctors, lawyers, and other service providers, are called "Suppliers of Services" under GST. Professionals and freelancers must assess their turnover, understand the applicable GST rates for their services, and comply with the registration and filing requirements to avoid fines, penalties and legal issues.
What is the role of the GST Council ?
The Goods and Services Tax (GST) Council is critical in the administration, implementation, and decision-making related to GST. Article 279A of the Constitution established it, and the GST Council is a constitutional body responsible for making recommendations and decisions on various essential GST aspects.
Here are a couple of key roles and functions of the GST Council:
Threshold Limits and Exemptions: The Council recommends the threshold limits for mandatory GST registration regarding turnover and the special category states. It also proposes exemptions for certain goods and services from the purview of GST.
Dual Control of Taxpayers: The Council determines the division of administrative powers and control over taxpayers between the central and state tax authorities, ensuring a balanced and coordinated approach to tax administration.
Why was GST implemented in India ?
The Goods and Services Tax (GST) was implemented in India to significantly improve the country's taxation system and economy. Here are a couple of key reasons that led to the decision to implement GST:
Removal of Cascading Effect: Under the previous tax regime, taxes were levied on taxes at various stages of the supply chain, resulting in a cascading effect where taxes were calculated on top of taxes. GST's input tax credit mechanism allows businesses to claim credit for the taxes paid on inputs, effectively eliminating the cascading effect and reducing the overall tax burden.
Creation of a Single National Market: GST aimed to create a unified national market by eliminating inter-state tax barriers and harmonizing state taxes. It facilitated the free movement of goods and services nationwide without needing multiple state-specific registrations and compliances.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
