Explore the economic reform of Goods and Services Tax (GST) in India, its impact on businesses, tax administration, and key provisions under the GST regime.
Since its implementation, GST has been a controversial topic in the context of the Indian tax administration. The goods and Services tax is the biggest and most significant economic reform in Indian history since independence. The modern system of taxation requires transparency, simplicity, fairness, adequacy, and effectiveness. The basic objective behind the implementation of GST was to introduce one consolidated tax for one nation. GST revamps the prior system of indirect taxation. If we talk about the old tax system prior to GST, our old India was economically fragmented. There were many kinds of indirect taxes such as sales tax, luxury tax, wealth tax, service tax, customs duty, excise duty, VAT, Octroi tax, and many more. GST, on the other hand, brings uniformity to the country’s tax system. GST acts as a common window for tax collection by the government.
Prime Minister stated in his speech, “GST will not only ease the process of doing business but will also improve the way of doing business”. With the help of effective tax administration and simplification in the filing of GST returns, it is evident that there is the ease in doing business both from tax compliance and business perspective. GST eliminates the cascading effect which was a major drawback in the indirect taxation system in the pre-GST period. The federal administrative structure followed by the country allowed both the Central and State governments to levy taxes separately on the different stages starting from the stage of production to consumption. 1st July 2017 is the history-creating date for India as GST was implemented on this date and the old tradition of “Tax upon tax” ended. Now, all the indirect taxes are integrated and there is equitable distribution of tax burden on the manufacturing and the service sector.
What were the disparities in the indirect taxation system in the pre-GST period?
The previous framework of indirect taxation suffered from many shortcomings. The various indirect taxes being levied were not mutually exclusive. The cascading effect of taxes is one of the vital drawbacks. The central government levied custom duty, excise duty, service tax, and Central Sales Tax (CST); the State Government and Local bodies charged VAT/sales, entry tax, state excise, property tax, agricultural tax, and octroi. There could be numerous possible transactions that come under the ambit of two or more of these taxes. Moreover, the value of the second tax was calculated on the value arrived at by adding the value of the first tax. This leads to very complex tax computation and eventually leads to a cascading effect on the cost of goods and services.
GST reform helped the Indian economy to bring harmonization in tax imposition at the stage of production, distribution, and consumption of goods and services.
Being a destination-based tax, GST is levied only at the final stage of consumption and not on the various points starting from manufacturing to retail outlets. That is how the slogan of “One nation, one tax, one market” stands apt. The GST system removes the economic distortions and gives rise to the idea of the common national market.
When GST was introduced, GST consolidated numerous indirect taxes. It was significant to ensure that a registered business smoothly transitions to GST. So, taxpayers were allowed to carry forward the closing balances of tax credits earned in the pre-GST regime, which could be utilised against their GST Liability. Tax payers were needed to file Form TRAN-1 before 27th December 2017 if they want to carry forward their Input Tax Credit. However, major issue which was faced by taxpayers was rejection of transitioned credit claimed by taxpayer giving rise to many filed petitions before High Court and Supreme Court due to non-satisfaction of taxpayers.
Various new terms are also introduced before us for keeping a track on the business revenue of taxpayers and also for the ease of tax compliance burden. This includes E-invoicing and E-way Bill mechanism. E-invoicing is introduced in July 2019 in a phased manner for reporting of all Business to Business (B2B) transactions and it results in standardisation, inter-operability, auto-population of invoice details in GST Return and reduction in dispute among parties. On the other hand, E-way Bill mechanism ensures that goods transported comply with the GST provisions. E-way bill is effective mechanism introduced from April 2018 for tracking the movement of goods and tax evasion.
Goods and Services are divided into five different tax slabs for collection of tax i.e. 0%, 5%, 12%, 18% and 28%. The Indian government has classified several goods and services as exempt goods and services from GST point of view. Some of the exempted goods under GST in India are Food grains, edible fruits, non-frozen and non-processed vegetables, flour, charcoal, handloom fabrics, raw silk, wool (non-processed), Books, kites, organic manures and handmade musical instruments. Some of the GST exempted services are agricultural services, services provided by government and other diplomatic missionaries, educational services, medical services, Judicial services, services provided by organizers for business exhibitions held outside India, services provided by Libraries, recognised sports body, slaughterhouses. The goods that are kept outside the circumference of GST include Alcohol for human consumption and Petrol and petroleum products (petroleum crude, high speed diesel, motor spirit (petrol), natural gas, aviation turbine fuel).
Usually, it is the duty of the taxpayer who supplies goods or services to pay the tax on the supply made. But, what would happen if the supplier is unregistered but the recipient of goods or services is registered? In such a case, he recipient of goods or services has to pay the tax liability for the goods purchased or services rendered under RCM (Reverse Charge Mechanism).
Under RCM, chargeability of taxes gets reverse. As the supplier is unregistered under GST, so registered recipient would be liable to discharge the GST liability under RCM and recipient needs to do self-invoicing for the purchase made.
Time has now come to look back with appreciation and pride on what has been achieved by us over the last 5 years. The Prime Minister, while addressing the joint session of parliament on the midnight of 30th June/1st July 2017 described GST as “Good and Simple Tax”. It would be absolutely fine to state that we are ready to face the upcoming challenges of uncertain future, GST rules and laws would be formed by concerned authorities keeping in mind the interests of small and emerging businesses as well and looking ahead for even brighter GST journey in India.
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About the Author
The author is Ruchika Bhagat, FCA helping foreign companies in setting up and closure business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants is a well-established Chartered Accountancy firm founded in the year 1997 with its head office at New Delhi.
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