Benefits of Goods and Service Tax

The goods and services tax is a value-added tax levied on most goods and services sold for domestic consumption. The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services. The GST compliance rating is a score given by the government to a business so that other businesses can see how compliant they are with the tax department. The primary motive behind introducing the GST compliance rating is to encourage taxpayers to complain and file GST returns on time.

GST is the most ambitious and remarkable indirect tax reform in India’s post-Independence history. Its objective is to levy a single national uniform tax across India on all goods and services. GST has replaced several Central and State taxes, made India more of a national integrated market, and brought more producers into the tax net. Improving efficiency can add substantially to growth as well as government finances. Implementing a new tax, encompassing both goods and services, by the Centre and the States in a large and complex federal system, is perhaps unprecedented in modern global tax history.

GST is a tax on goods and services with a comprehensive and continuous chain of set-off benefits up to the retailer level. It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set off, through a tax credit mechanism, the GST paid on the purchase of goods and services. Ultimately, the burden of GST is borne by the end-user (i.e. Final consumer) of the commodity/service. 

As per the 2016 GST regime, Union Territory Goods and Service Tax (UTGST) was also introduced to account for all the taxations in the Union Territories of India. The power to make any changes in the GST law is in the hands of the GST Council. The GST Council is headed by the Finance Minister. One hundred and one first amendment act, 2016 introduced the GST in India in July 2017. 

What is GST and how does it work?

GST stands for Goods and Services Tax. It is an indirect tax which was introduced to replace a host of other Indirect taxes such as value-added tax, service tax, purchase tax, excise duty, and so on. GST is levied on the supply of certain goods and services in India. It is one tax that is applicable all over India. On July 1st2017, the goods and services tax was implemented in India. But, the process of implementing the new tax regime commenced a long time ago.

How does it work?

• Manufacturer: The manufacturer will have to pay GST on the raw material that is purchased and the value that has been added to make the product.

• Service Provider: Here, the service provider will have to pay GST on the amount that is paid for the product and the value that has been added to it. 

• Retailer: The retailer will need to pay GST on the product that has been purchased from the distributor as well as the margin that has been added.

• Consumer: GST must be paid on the product that has been purchased.

Proposed benefits of GST

The implementation of GST is expected to bring in various benefits as discussed below:

1. Dynamic common market: GST would make India a dynamic common market and result in the generation of positive externalities. Ensuring uniformity of indirect tax rates across the country will substantially improve the ease of doing business.

2. Elimination of cascading effect: Under GST, the provision of seamless input tax credit across transactions will avoid tax cascading, eliminate double taxation and improve resource allocation. 

3. Efficiency: Subsuming all major indirect taxes will result in the removal of inefficient taxes. With a single tax to be paid, manufacturers will become more competitive and this could lead to growth in exports.

4. Reduced compliance costs: Harmonisation of tax rates and laws along with seamless input tax credits and a sound IT infrastructure is expected to lead to reduced compliance costs. As all the taxpayer services like registrations, payments, returns, etc. will be available online, the compliance process would become simpler.

5. Reduction in tax evasion: Uniform rates of taxation would reduce the incentive for tax evasion by eliminating rate arbitrage opportunities between neighboring states and between intra-State and inter-State sales.

6. Benefits to consumers: The final price of goods is expected to be lower due to the seamless flow of input tax credit between the manufacturer, retailer, and supplier of services. The average tax burden on companies is likely to come down which is expected to reduce and hence benefit the consumer.

Structure of GST and its Explanation

As per the newly implemented tax system, there are 4 different types of GST:

1. Integrated Goods and Services Tax (IGST)

2. State Goods and Services Tax (SGST)

3. Central Goods and Services Tax (CGST)

4. Union Territory Goods and Services Tax (UTGST)

• Integrated Goods and Services Tax (IGST): The Integrated Goods and Services Tax or IGST is a tax under the GST regime that is applied to the interstate (between 2 states) supply of goods and/or services as well as on imports and exports. The IGST is governed by the IGST Act. 

For instance, if a trader from West Bengal has sold goods to a customer in Karnataka worth Rs.5,000, then IGST will be applicable as the transaction is an interstate transaction. If the rate of GST charged on the goods is 18%, the trader will charge Rs.5,900 for the goods. The IGST collected is Rs.900, which will be going to the Central Government.

• State Goods and Services Tax (SGST): The State Goods and Services Tax or SGST is a tax under the GST regime that is applicable on intrastate (within the same state) transactions. In the case of an intrastate supply of goods and/or services, both State GST and Central GST are levied. However, the State GST or SGST is levied by the state on the goods and/or services that are purchased or sold within the state. It is governed by the SGST Act. 

For instance, if a trader from West Bengal has sold goods to a customer in West Bengal worth Rs.5,000, then the GST applicable on the transaction will be partly CGST and partly SGST. If the rate of GST charged is 18%, it will be divided equally in the form of 9% CGST and 9% SGST. The total amount to be charged by the trader, in this case, will be Rs.5,900. Out of the revenue earned from GST under the head of SGST, i.e. Rs.450, will go to the West Bengal state government in the form of SGST.

• Central Goods and Services Tax (CGST)

Central Goods and Services Tax CGST is a tax under the GST regime that is applicable on intrastate (within the same state) transactions. The CGST is governed by the CGST Act. The revenue earned from CGST is collected by the Central Government. For instance, if a trader from West Bengal has sold goods to a customer in West Bengal worth Rs.5,000, then the GST applicable on the transaction will be partly CGST and partly SGST.

• Union Territory Goods and Services Tax (UTGST)

The Union Territory Goods and Services Tax or UTGST is the counterpart of the State Goods and Services Tax (SGST) which is levied on the supply of goods and/or services in the Union Territories (UTs) of India. The UTGST applies to the supply of goods and/or services in Andaman and Nicobar Islands, Chandigarh, Daman Diu, Dadra, Nagar Haveli, and Lakshadweep. The UTGST is governed by the UTGST Act.

GST Compliance

Taxpayers registered under goods and services tax must comply with its rules and regulations. To monitor how compliant businesses are with the GST regulations, the government has introduced the GST compliance rating wherein taxpayers are given a compliance rating score. The compliance rating can have a wider impact, affecting everything from your tax refunds to partnering with suppliers. The primary motive behind introducing the GST compliance rating is to encourage taxpayers to be compliant and file GST returns on time.

The score in the GST compliance rating ranges from a scale of zero to 10, with 10 being the best and zero being the worst. According to the GST Act, the government can assign a score to anyone who is registered under GST. According to the GST Network (GSTN) CEO Prakash Kumar, every taxpayer will start from a level-playing field and from thereon will be rated based on their GST compliance over time. 

Conclusion

GST stands for Goods and Services Tax. It is an Indirect tax which was introduced to replace a host of other Indirect taxes such as value-added tax, service tax, purchase tax, excise duty, and so on. GST is levied on the supply of certain goods and services in India. It is one tax that is applicable all over India. The government has introduced a GST to smoothen tax processes and bring businesses into the formal economy.