All about GST - What, When and How

The introduction of GST is being seen as second major tax reform after 1991. GST is in the limelight again and everyone wants to have a talk about it. Under this article, I have tried to summate basics of GST. Have a good read.

What is GST?

GST is the abbreviated form of Goods and Service tax.

It is a new tax regime to be implemented under which “single taxation” system would come into effect. This system would abolish all indirect taxes and only GST would be levied.

Around 125 countries have already implemented GST. Most of these follow unified GST system unlike the dual methodology (tax levied by both state and centre) proposed in India.

Reasons for change

Change in existing tax structure is indispensable. There is need to get through the older regime and adopt a simpler, better and more effective tax structure in order to pave way for more transparent and efficient tax structure and at the same time allow foreign companies to come and manufacture in India.

Present laws are so complex and diverse in nature that entities need more administration, consultation and in turn more costs.

Tax structure

GST would have 2 components

- Central goods and service tax (CGST)

- State goods and service tax (CGST)

Duties which would be merged under CGST are:

- Excise duties

- Service tax

- Custom duty

Duties which would be merged under SGST:

- Sales tax

- Entertainment tax

- Taxes on lottery, gambling etc

- Other state taxes

Benefits

- Transparency in transaction

- Simpler tax structure

- Lower business costs

- More exports

- Foreign investors

- Lower tax rate on essential commodities

Tax rate

The GST rate is still to be decided. It is presumed that rate would somewhere between 16-20%. Furthermore,

- Lower rate is proposed for necessary goods

- Standard rates for goods in general

- Higher rate for precious goods

The tax rate would be aggregated to include both CGST and SGST payable for transaction.

Export / Import

Exports would be tax free

GST would be levied on all imports. As GST is based on destination principle, the tax revenue shall be shared by the state where imported goods or services are consumed.

Exclusions

Exemption to small traders is provided on basis on annual turnover.

Certain items such as Petroleum, alcohol and tobacco products have been excluded from GST regime.

These are expected to be taxed under existing laws.

Issues

Presenting a tax is one thing and implementing the same is other, with latter being a massive task.

Even after passing of the bill by parliament, implementation would require huge administration changes, adequate IT, clarification w.r.t. issues in interpretation of laws etc.

Moreover, there would be resistance to change among states as they would fear that the revenues from state taxes would take a hit.

Thanks for reading

Himanshu Kalra