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Governments all over the world levy different types of taxes on their citizens in order to fund their expenditures. Funds are also needed to provide infrastructural facilities such as roads, national highways, defence, and industrial development. Taxes serve an important purpose of distributing the wealth of the country among the masses, thereby minimising economic disparities. The constitution of India provides the necessary authority to both the central and state governments to levy taxes. Thus, every tax that is levied is backed by an accompanying law passed by the parliament or the state legislature.
Categories of Taxes
Different types of taxes collected by the government fall under two major categories: Direct tax and Indirect tax.
(i) Direct Tax: As the name suggests, it is paid directly to the government by an individual or a legal entity. Examples of direct taxes are Income tax, Capital gains tax, Securities transaction tax, Pre-requisite tax, Corporate tax and so on. The entire revenue from the direct taxes goes to the central government.
(ii) Indirect Tax: It is levied on services and products. These are collected by the seller of the service/product from the buyers and paid to the government. This tax is computed as a certain prescribed percentage of the selling price. Thus, it increases with the increase in the selling price. Previously, a number of taxes formed part of the indirect tax regime. But now, there is now only one indirect tax called the Goods and Service Tax or GST on the applicable goods, which is levied on the supply of goods or services or both. It was implemented through a notification from the Central government on 1st July 2017 throughout India, including the State of Jammu and Kashmir. The revenue from GST is shared between the central and state governments.
GST – A Revolution in India
Liberalisation of the Indian economy had been a milestone in the twentieth century. It has resulted in the Indian economy becoming competitive with its global peers. Similarly, the introduction of GST as a single indirect tax for the entire country is another milestone in the Indian tax system in the twenty-first century. The result is a simplified and transparent indirect tax system, with the entire process being handled electronically.
GST was introduced in India based on the Constitution (101st Amendment) Act, 2016. This Act received the assent of the President of India on 8th September 2016. The central government issued a notification based on which 1st July 2017 became the date from which GST was implemented. Based on article 366(12A), all the goods (except alcoholic liquor consumed by humans) are covered under GST.
GST – Dual Model
Indian GST has a dual model in which tax is imposed both by the central and state governments. The dual GST model consists of the following:
State GST (SGST) | Under the State Goods and Services Tax Act, 2017, SGST is levied and collected by state governments/Union Territories when taxable goods or services or both are supplied within a given state |
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Central GST (CGST) | Under the Central Goods and Services Tax Act, 2017, CGST is levied and collected by the central government when taxable goods or services or both are supplied from one state to another |
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Integrated GST (IGST) | Under the Integrated Goods and Services Tax Act, 2017, a mechanism is created to keep track of goods and services supplied between the states It ensures that the State’s share of tax accrues to that state where the goods and services are finally consumed |
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Decision on the Levy of GST
The decision to levy SGST, CGST or IGST considering the location of the supplier and place of supply depends upon the following:
(i) When the location of the supplier and the place of supply is in the same state, then it is an intrastate transaction. In such a case, both CGST and SGST are levied.
(ii) When the location of the supplier and the place of supply are in different states, then it is an interstate transaction. In such a case, only IGST is levied. Later on, the state where the goods/services are finally consumed receives its share of tax revenue from the central government.
Objectives of GST
(i) The first and foremost objective of implementing GST is to remove the cascading effect. That is the tax on tax which was prevalent in the previous regime.
(ii) The second objective of GST is to remove a multitude of taxes and introduce a unified taxation system for the entire country. Thus, the problem of arbitrary taxes and tax rates in different states has been eliminated.
(iii) The third objective of GST implementation is to levy tax only when value addition is done to a product or a service. Thus, GST is levied at each stage of the transaction-based supply chain.
(iv) The fourth objective of GST is to collect tax at the point where there is final consumption of goods or services. Thus, unlike the previous tax regime, the taxing authority would have suitable jurisdiction.
(v) The fifth objective of GST is to ensure transparency. Here, both the supplier and receiver of goods or services (with a prescribed annual turnover) must compulsorily register under the GST regime. The tax filing and returns under GST are automated through the electronic mode based on the information and communication technologies.
Conclusion
GST has had a huge impact on both small and large businesses. Now without any fear or favour, businesses can file their tax returns. This will eliminate the need to hide their turnover and get away without paying taxes. The removal of the cascading effect of taxes will lower the cost of production. Lower cost of production would give a fillip to demand, thereby increasing the supply of goods and services. GST will increase the ease of doing business, making India a global manufacturing hub. In a nutshell, GST is compatible with the government schemes of ‘Make In India’ and ‘Startup India’.
