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Key Highlights
- GST was introduced in 2017, subsuming various forms of indirect taxes.
- GST has broadened the tax base, improved transparency, and promoted ease of doing business, thereby strengthening the Indian economy and increasing government revenues.
- GST has replaced a complex web of indirect taxes, which has reduced confusion and compliance burden for businesses.
- GST allows seamless input tax credit across the supply chain and removes the “tax on tax” effect lowering the overall value of goods and services.
The introduction of the goods and services tax (GST) on July 1, 2017, marked one of the most significant tax reforms in Indian history.Designed as a “one nation, one tax” system, GST aimed to replace the multiple indirect taxes levied at the central and state levels, streamlining taxation and enhancing economic efficiency by creating a uniform tax regime across the country.GST helps to eliminate the cascading effect, simplify taxation and boost compliance. It has resulted in transformative changes to consumers, businesses, and government revenues alike. This article explores the benefits of GST, discusses the various taxes it replaced, and provides insights into why GST is considered a milestone in the economic reforms of India.
What is GST?
Goods and services tax (GST) is a form of indirect tax levied on all goods and services sold or rendered for domestic purposes. The tax amount is added to the total price of the product or the service. GST is structured into five tax slabs — 0%, 5%, 12%, 18%, and 28% and is collected in four forms. The IGST (integrated tax) is shared by the Centre and states on inter-state transactions, CGST is collected by the Central Government, SGST is collected by state governments, and UTGST is collected by the union territory governments. Also Read - Find out the meaning of the GST composition scheme
Advantages of GST
Here are the key benefits of ‘One Nation, One Tax’:
Elimination of the Cascading Effect
The GST is a comprehensive indirect tax which brings indirect taxation under one umbrella, removing the ‘tax on tax’ burden. Before the introduction of GST, taxes were levied on already-taxed goods or services. GST eliminates the cascading effect by allowing seamless input tax credits and lowering the overall tax load, benefiting both businesses and consumers.
Simplified and Easy Compliance
GST has consolidated and subsumed several indirect taxes into a single system, easing the compliance process significantly. This has especially benefited small and medium enterprises (SMEs), which now have reduced paperwork and fewer legal complexities.
Uniformity of Tax Rates and Structures
GST has harmonised indirect tax rates and structures nationwide, increasing certainty and ease of doing business. This uniformity creates a fairer, more transparent business environment, irrespective of the choice of place of doing business.
Improved Competitiveness
The GST improves competitiveness for trade and industry by reducing transaction costs and improving transparency. Greater operational efficiency and trust among stakeholders help to drive profitability, sales and market expansion. Implementation of GST and dismantling of interstate check posts are considered as one of the crucial steps to improve the competitiveness of India’s manufacturing sectors.
Gain to Manufacturers and Exporters
By merging central and state taxes, allowing input tax credit , and phasing out CST, GST reduces the cost of locally manufactured goods and services, thereby benefiting the manufacturers and exporters. This supports exports and boosts the global competitiveness of Indian products and services.
Higher Revenue Efficiency
GST has enhanced the efficiency of the collection of tax, boosting revenues for both central and state governments.
Reduction in Overall Tax Burden
The input tax credits paid at each stage can be claimed at the next stage of value addition, making GST fundamentally a tax only on the value added at each step. The final consumer will have to bear only the GST charged by the last dealer in the supply chain, claiming the set-off benefits at all the previous stages. GST decreases and lowers the average tax burden, translating to decreased production costs and, in many cases, lower consumer prices.
Reduced Tax Evasion
GST is equipped with a robust IT infrastructure. Its streamlined and digitised framework strengthened transparency, reducing corruption and curbing tax evasion.
Simpler Administration
The GST is easier not only for consumers and businesses but also for the government to administer. The streamlined indirect taxation system has decreased the administrative overheads, making tax management more efficient and cost-effective for all stakeholders. Also Read - Know how GST is different from the previous tax structure
Taxes replaced by GST
The implementation of the goods and services tax (GST) has led to the replacement of various taxes that were previously imposed. The taxes replaced by GST at the central level and state level are summarised below:
| Central Taxes Replaced by GST | State Taxes Replaced by GST |
| Service Tax | State VAT |
| Central Excise Duty | Purchase Tax |
| Central Sales Tax | State Sales Tax |
| Surcharges And Cesses | Surcharges And Cesses |
| Excise duty levied under the Medicinal & Toiletries Preparation Act | Entertainment Tax (Other than those levied by local bodies) and Taxes on Advertisement |
| Additional duties of Customs (CVD and SAD) | All forms of Entry Tax |
| Additional duties of Excise levied under Textiles and Textile Products | Luxury Tax |
| Additional duties of excise | Taxes on lottery, betting & gambling |
How Does GST Eliminate the Cascading Effect or ‘Tax on Tax’?
The term ‘tax on tax’ , also known as the cascading effect of taxes , refers to double taxation where a tax is levied on an amount that already includes another tax. This increases the overall tax burden and inflates the final price of goods and services.GST provides seamless input tax credits (ITC), allowing businesses to offset the taxes they pay on inputs (purchases) against the taxes they collect on outputs (sales). This eliminates the cascading effect and reduces the effective tax cost. Let us take an example to understand this before and after the GST.
| Before the GST regime | After GST |
| A service provider offering services for say, ₹50,000 is charged a service tax of 15%. He/she pays ₹7,500 (₹50,000 * 15%) as service tax. | The same service provider offering services for ₹50,000 pays GST @18% = ₹9,000 Total: ₹59,000 |
| Then, say, he/she buys office supplies for ₹20,000, paying 5% as VAT of ₹1,000 (₹20,000 *5%). | On office supplies of ₹20,000, GST @5% = ₹1,000. |
| Under the old system before GST regime, the service provider cannot claim credit for the ₹1,000 VAT paid on supplies against the ₹7,500 service tax. Total tax outflow = ₹7,500 (service tax) + ₹1,000 (VAT) = ₹8,500. | With GST input tax credit, the service provider can get an offset of the ₹1,000 GST paid on supplies against the ₹9,000 GST collected on services. Total tax outflow - ₹9,000 (GST on services) |
GST - Powering the Growth of the Indian Economy
The GST implementation in India marks a major milestone in the tax reform journey of the country. By replacing multiple central and state-level indirect taxes, GST has simplified the tax structure, created a unified national market and reduced the cascading effect of taxes. It has brought significant benefits, including greater ease of doing business, enhanced competitiveness and stronger tax compliance.While challenges remain, such as limited cross-utilisation of credits, reduced fiscal autonomy for states, and potential revenue impacts for manufacturers. However, the overall impact of GST has been transformative, significantly outweighing these drawbacks and laying a strong foundation for a more robust and efficient taxation system in India.If you run a business, calculate your liability using the GST calculator and pay the applicable taxes. File your returns and contribute to the growth of the economy through GST.
FAQS - FREQUENTLY ASKED QUESTIONS
Which laws and rules govern the implementation of GST in India?
GST in India is governed by the following laws:
Central Goods and Services Tax Act, 2017 (CGST)
Integrated Goods and Services Tax Act, 2017 (IGST)
State Goods and Services Tax Act, 2017 (SGST)
Union Territory Goods and Services Tax Act, 2017 (UTGST)
Additionally, there are rules covering various aspects of GST for the smooth implementation of the Act.
How does GST benefit small businesses?
Small businesses with turnover up to a certain limit can opt for the GST Composition Scheme, which allows them to pay tax at a fixed lower rate and file simpler returns, avoiding the
When was GST introduced in India?
The goods and services tax Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017.
What is the difference between CGST and SGST?
According to the federal structure of India, there will be two components of GST – Central GST (CGST) and State GST (SGST). Some key differences between CGST and SGST are as follows:
CGST
SGST
For the supply of goods and services within a state.
For the intrastate supply of goods and services
CGST is imposed and collected by the Central Government
SGST is imposed and collected by the State Government
The Central Government can share the revenue collected from CGST with the State Governments
The State Governments, however, cannot share the revenue collected from SGST with the Central Government.
What are the taxes which are not covered by GST?
Taxes such as Property Tax and Stamp Duty, Excise Duty on Alcohol, Electricity Duty, Basic Custom Duty and taxes on crude petroleum, diesel, petrol, ATF (aviation turbine fuel) and natural gas are outside the purview of GST.
Why is GST called a location-based tax?
GST is known as a location-based tax as GST is collected based on the place of supply where the goods or services are provided, not where they are produced or supplied. This means the government of the state/union territory in which the good or service is consumed gets the tax revenue.
What is one major drawback of GST despite its benefits?
One major challenge or drawback of GST is the loss of fiscal autonomy for states, as the state governments are now more depended on the central pool of revenue for funds.
Does GST help to improve tax compliance?
The GST is a uniform-based tax system ensuring digital filing, and offering an input tax credit mechanism to encourage better compliance and reduce tax evasion.
What are the advantages of GST over the previous taxation system?
The advantages of GST over previous tax system include elimination of the tax-on-tax effect, uniform tax rates, enhanced competitiveness, and easier movement of goods across states.
How do consumers get the benefits of GST in India?
Consumers benefit from GST through more transparent pricing, potentially lower prices on goods and services and fewer hidden taxes in product costs.
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.
