Goods and Service Tax (GST)

Goods and services tax is is a single comprehensive indirect tax levied on the supply of goods and services, right from the manufacturer/ service provider to the consumer.

It is an umbrella tax that has subsumed various indirect taxes like excise duty, service tax, VAT, entry tax, luxury tax etc.

It is a multi-stage (imposed at different steps of the production process), destination-based tax that is levied on every value addition.

Goods and services are divided into five different tax slabs for collection of tax – 0%, 5%, 12%, 18% and 28%. However, petroleum products, alcoholic drinks, and electricity are not taxed under GST.

GST: Launch

• It is operational from 1 July 2017 and July 2022 marked 5 years since India’s initiation of GST.
• 101st Constitution Amendment Act was enacted to facilitate the GST. The amendment added Article 246A to the Constitution, giving the legislatures of the Union and the States the authority to pass laws pertaining to the Goods and Service Tax.
• The CGST Act (Central), UTGST Act (Union Territories), and SGST Act (State) were subsequently passed to implement GST.

GST: Features

• It is a destination-based consumption tax with facility of Input Tax Credit in the supply chain.
• It is applicable throughout the country with one rate for one type of goods or service.
• It has subsumed (replaced) many Central and State taxes and cesses:
  • These include Central taxes like: Central Excise Duty, Service Tax, Central Sales Tax, Cesses like Krishi Kalyan Cess (KKC) and Swachh Bharat cess (SBC).
  • State taxes like: VAT/Sales Tax, Entry Tax, Luxury Tax, Octroi, Entertainment Tax, Taxes on Advertisements, Taxes on Lottery /Betting/ Gambling, State Cesses on goods etc
  • 5 petroleum products have been kept out of GST for the time being but with passage of time, they will get subsumed in GST.
• State Governments will continue to levy VAT on alcoholic liquor for human consumption.  Tobacco and tobacco products will attract both GST and Central Excise Duty.
• Under GST, there are 6 (six) standard rates applied i.e. 0%, 3%,5%, 12%,18% and 28% on supply of all goods and/or services across the country.

GST vs Old tax regime

• Pre GST tax regime-imposed taxes not on the value added at each stage but on the total value of the commodity or service with minimal facility of utilisation of Input Tax Credit (ITC).
• The total value included taxes paid on intermediate goods or services amounting to cascading of tax.
• Under GST, the tax is discharged at every stage of supply and the credit of tax paid at the previous stage is available for set off at the next stage of supply of goods.
• It is thus effectively a tax on value addition at each stage of supply.

GST : Benefits

• Parity in taxation across the country and extend principles of ‘value- added taxation’ to all goods and services.
• It has replaced various types of taxes and cesses, levied by the Central and State/UT Governments.
• GST has simplified the multiplicity of taxes on goods and services.
• The laws, procedures and rates of taxes across the country are standardised.
• It has facilitated the freedom of movement of goods and services and created a common market in the country.
• It has also reduced the overall cost of production, which will make Indian products/services more competitive in the domestic and international markets.
• Compliance will also be easier as all tax payment related services like registration, returns, payments are available online through a common portal.
• It has expanded the tax base, introduced higher transparency in the taxation system, reduced human interface between Taxpayer and Government and is furthering ease of doing business.

GST: Impact

• State resources are decreasing: The implementation of the GST regime, as well as a rise in state participation for Centrally Sponsored Schemes (CSSs), had placed the state’s finances at risk.
• The share of State GST collection [including GST compensation receipts] in the majority of States in the Gross State Domestic Product [GSDP] does not show strong growth since 2017 compared to pre-GST era.
• Increasing reliance on the Centre: States’ reliance on the Centre for revenue has grown.
• Revenue generation capacity: Leaving a few exceptions, such as petroleum products, property tax, and alcohol excise, most indirect taxes have been subsumed under GST regime. This has eroded the ability of states to raise their own revenues.
• Shortfall in devolution: There have been significant differences in the mount of GST compensation owed and actually paid by the centre.
• Specially Uttar Pradesh, Bihar and Jharkhand received less amount, whereas these are the states  that need greater fiscal support.

GST and Cooperative federalism:

The Goods and Services Tax (GST) has strengthened the Indian federation by allowing smooth input tax credit even when supply chains cross state lines.

• The GST compensation problem has been settled to the satisfaction of the states, with the Centre incurring special borrowing to cover the compensation owed.
• The government has extended the deadline for the imposition of the GST compensation cess by nearly four years, to March 31, 2026.
• The GST Council has made majority decisions based on consensus.
• Since the 10th FC, the state’s share has steadily increased until the 14th FC, when it devolved 42%. As more tax income is collected, the devolution will increase.

GST: Concerns

• The present structure is complicated with 4 major rates (5%, 12%, 18% and 28%).
• Special rates on rare and semi-precious stones and metals, as well as a cess on ‘demerit’ and luxury items ranging from 15% to 96% of the tax rate, have greatly complicated the tax.
• Multiple rates complicate the tax system, cause administrative and compliance problems. It creates inverted duty structure and lead to classification disputes.
• GST is the most important source of revenue for states, and any revenue uncertainty will have a significant negative impact on public service delivery.
• Many people, including the 15th Finance Commission, have pointed out that the compensation plan of applying 14% growth on base year revenue for the first five years was far too generous.

GST: A way ahead

• A new Approach towards States: The Centre could try to be more accommodating towards States’ concerns and fiscal dilemmas under the guidance of NITI Aayog.
• The GST Council should also meet more frequently to promote the fiscal federalism conversation in the country.
• Many pending reforms require the Centre to work more cohesively with States. It will take India’s economy forward and lift those left behind – land, labor markets as well as the agrarian sector.

Related articles:

1. Five Years of GST: Achievements, Challenges and Way Ahead