The Goods and Service Tax (GST) 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.
Benefits of GST
For Central and State Governments
- Simple and Easy to administer: Because multiple indirect taxes at the central and state levels are being replaced by a single tax “GST”. Moreover, backed with a robust end-to-end IT system, it would be easier to administer.
- Better control on leakage: Because of better tax compliance, reduction of rent-seeking, transparency in taxation due to IT use, and an inbuilt mechanism in the design of GST would incentivize tax compliance by traders.
- Higher revenue efficiency: Since the cost of the collection will decrease along with an increase in the ease of compliance, it will lead to higher tax revenue.
For the Consumer
- The single and transparent tax will provide a lowering of inflation.
- Relief in overall tax burden.
- Tax democracy that is luxury items will be taxed more and basic goods will be tax-free.
For the Business Class
- The ease of doing business will increase due to easy tax compliance.
- Uniformity of tax rate and structure, therefore, better future business decision-making and investments by the corporates.
- Removal of cascading effects of taxes.
- Reduction in transactional costs will lead to improved competitiveness.
- Gain to the manufacturers and exporters.
- It is expected to raise the country’s GDP by 2% points.
What is the Principle of GST?
- The Centre will levy and collect the Central GST. CGST subsumes the below given central taxations and levies.
- Central Excise Duty
- Services Tax
- Central Sales Tax
- Excise Duty
- Additional Excise Duties Countervailing Duty (CVD)
- States will levy and collect the State GST on the supply of goods and services within a state.
- SGST subsumed the following state taxations.
- Luxury Tax
- State Sales Tax
- Entry tax
- Entertainment Tax
- Levies on Lottery
- The Centre will levy the Integrated GST (IGST) on the interstate supply of goods and services, and apportion the state’s share of tax to the state where the good or service is consumed.
- The 2016 Act requires Parliament to compensate states for any revenue loss owing to the implementation of GST.
What is GST Compensation?
- The Constitution (One Hundred and First Amendment) Act, 2016, was the law that created the mechanism for levying a nationwide GST.
- Into this law, there is a provision to compensate the States for loss of revenue arising out of implementation of the GST. The adoption of the GST was made possible by the States ceding almost all their powers to impose local-level indirect taxes and agreeing to let the prevailing multiplicity of imposts be subsumed under the GST.
- While the States would receive the SGST (State GST), and a share of the IGST (Integrated GST), it was agreed that revenue shortfalls arising from the transition to the new indirect taxes regime would be made good from a pooled GST Compensation Fund for five years that is set to end in 2022.
- This corpus in turn is funded through a compensation cess that is levied on so-called ‘demerit’ goods. The computation of the shortfall is done annually by projecting a revenue assumption based on 14% compounded growth from the base year’s (2015-2016) revenue and calculating the difference between that figure and the actual GST collections in that year (as spelled out in Section 7 of the GST (Compensation to States) Act, 2017).
- For the 2020-21 fiscal year, the revenue shortfall has been anticipated at ₹3 lakh crore, with the Compensation Fund expected to have only about ₹65,000 crores through cess accruals and balance to pay the compensation to the States.
What is the GST Council?
- Article 279A – GST Council to be formed by the President to administer & govern GST. Its Chairman is the Union Finance Minister of India with ministers nominated by the state governments as its members.
- The council is devised in such a way that the center will have 1/3rd of voting power and the states have 2/3rd.
- The decisions are taken by 3/4th majority.
Reforms Brought About by GST
- Creation of a common national market: By amalgamating a large number of Central and State taxes into a single tax.
- Mitigation of cascading effect: GST mitigated the ill effects of cascading or double taxation in a major way and paved the way for a common national market.
- Reduction in Tax burden: From the consumers’ point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods.
- Making Indian Products More Competitive: The introduction of GST is making Indian products more competitive in the domestic and international markets owing to the full neutralization of input taxes across the value chain of production.
- Easier to administer: Because of the transparent and self-policing character of GST, it would be easier to administer.
Challenges Of GST
- SCGT and CGST input credit cannot be cross-utilized.
- Manufacturing states lose revenue on a bigger scale.
- High rate to tax to compensate the revenue collected now from multiple taxes i.e. High Revenue Neutral Rate.
- The reduction in the fiscal autonomy of the States.
- Concerns raised by banks and insurance companies over the need for multiple registrations under GST.
- The levy of additional cess.
- The capacity of State tax authorities, so far used to taxing goods and not services, to deal with the latter is an unknown quantity.
- The success of GST depends on political consensus, technology, and the capacity of tax officials to adapt to the new requirements.