Goods and Services Tax is the new unified, multi-stage and consumption based tax levied on manufacture, sale and consumption of Goods and Services at national level to replace all the existing national and state tax systems like VAT, Service Tax, Excise Duty, etc. It is expected to remove the cascading effect of tax-on-tax which is prevalent presently. It is applicable to you if you are into Manufacturing, Trade, E-commerce or Services.
Goods and Service Tax is set to become one of the biggest fiscal reform India is going to witness. All businesses, SMEs are going to get impacted because of this paradigm shift in the indirect tax regime. Policymakers have consistently resonated the benefit of a unified taxation system in a federal country like India.
There are many benefits, which are being claimed as a result of Goods and Service Tax law and one such benefit is removal of the cascading tax effect. In simple words “cascading tax effect” means tax on tax. It is a situation wherein a consumer has to bear the load of tax on tax and inflationary prices as a result of it.
GST is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition. Now, GST will be levied at every point of sale. Assume that the entire manufacture process is happening in the state of Rajasthan and the final point of sale is in Karnataka. Since GST is levied at the point of consumption, so the state of Rajasthan will get revenue in the manufacturing and warehousing stages, but lose out on the revenue when the product moves out Rajasthan and reaches the end consumer in Karnataka. This means that Karnataka state will earn that revenue on the final sale, because it is a destination-based tax and this revenue will be collected at the final point of sale which is Karnataka.
Currently, the Indian tax structure is divided into two – Direct & Indirect Taxes. Direct Taxes are levies where the liability cannot be passed on to someone else. An example of this is Income Tax where you earn the income and you alone are liable to pay the tax on it.
In the case of Indirect Taxes, the liability of the tax can be passed on to someone else. This means that when the shopkeeper must pay VAT on his sale, he/ she can pass on the liability to the customer. So, in effect, the customer pays the price of the item as well as the VAT on it so the shopkeeper can deposit the VAT to the government. This means that the customer must pay not just the price of the product, but he/ she also pays the tax liability, and therefore, he/ she has a higher outlay when he buys an item.
This happens because the shopkeeper has paid a tax when he/ she bought the item from the wholesaler. To recover that amount, as well as to make up for the VAT he must pay to the government, he/ she passes the liability to the customer who has to pay the additional amount. There is currently no other way for the shopkeeper to recover whatever he/ she pays from his/ her own pocket during transactions and therefore, he/ she has no choice but to pass on the liability to the customer.
Goods and Services Tax will address this issue after it is implemented. It has a system of Input Tax Credit which will allow sellers to claim the tax already paid, so that the final liability on the end consumer is decreased.
The idea behind having one consolidated indirect tax to subsume multiple currently existing indirect taxes is to benefit the Indian economy in a number of ways:
- It will help the country’s businesses gain a level playing field
- It will put us on par with foreign nations who have a more structured tax system
- It will also translate into gains for the end consumer who not have to pay cascading taxes any more
- There will now be a single tax on goods and services
In addition to the above,
- The GST Law aims at streamlining the indirect taxation regime. As mentioned above, GST will subsume all indirect taxes levied on goods and service, including State and Central level taxes. The GST mechanism is an advancement on the VAT system, the idea being that a unified GST Law will create a seamless nationwide market.
- It is also expected that GST will improve the collection of taxes as well as boost the development of Indian economy by removing the indirect tax barriers between states and integrating the country through a uniform tax rate.
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