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The Proposed Goods and Services Tax - GST


  • Perhaps the most prominent political bickering, ever witnessed in the preceding monsoon session of the parliament was on The Goods and Services Tax (GST). Ahead of the commencement of another monsoon session on July 18, the government is once again preparing to leave no stone unturned to reach a compromise with the opposite party, the leading obstacle in the introduction of the GST bill, which is being cited as the biggest tax reform since independence.
     

    What is Goods and Services Tax?

    GST is a value added tax, which is levied when a consumer buys a good or service. It is meant to be a single, all-inclusive tax, which shall include all other smaller indirect taxes on consumption like service tax, sales tax etc. It is expected to merge and streamline the procedure of indirect taxes and make to easier and powerful. The citizen will pay only one merged tax, rather than series of indirect taxes.
     

    Why is there a need of GST?

    One of the primary reason behind the GST is to address the issue of cascading effect of taxes, also known as tax on tax. A simple illustration to this is a sales tax regime. Suppose Mr ‘X’ sells a good to Mr ‘Y’, after charging sales tax on it, subsequently Mr ‘Y’ re-sells it to Mr ‘Z’, after charging sales tax on it. While Mr ‘Y’ was calculating his sales tax liability, he also included the sales tax paid on previous purchase. This is how it becomes a tax on tax.

    The Federal structure of our country had allowed both center and states to levy taxes separately. While Income tax, Excise duty, Service and Central tax (CST), Securities and transaction tax is levied by the center; VAT, Entry tax, State tax, Property tax, Agriculture tax and Octroi is levied by the state government. Many transactions come under the ambit of two or more of these taxes, and the value of second tax is computed by adding the value of first tax to the value of transaction.   

    The cascading effect has made the Indian product less competitive at International Market, increased the adoption of tax-evading practices among corporate sector, built a quagmire of complex tax-rates, laws and elaborate processes and the extra burden on ultimate consumer as the taxes are passed on at every stage to end with the final consumer.
     

    How will The Goods and services tax operate in India?

    Keeping in line with the federal structure of India, GST will operate on a dual platform. A Central Goods and Services (CGST) and a State Goods and Services (SGST). Both CGST and SGST will be levied on the destination principle at mutually agreed rates. In respect of transactions of sale within state, the state shall have two taxes, SGST- which will go to state and CGST- which will go to center. And in transactions of sale outside the state, there will be only one type of tax IGST- which will go to center.
     

    Benefits of GST

    1. Uniformity in computing taxes, by eliminating multiple excise, CST, VAT, service tax calculation.
    2. Fixed rate of tax regime for both goods and services.
    3. Harmonization of tax allocation to center and state, which will reduce duplication and compliance procedure.
    4. Improve tax collection and further India’s economic development by breaking tax barriers between states.
    5. Overall tax burden will be divided equitably between manufacturing and services by increasing the tax base and minimizing exemptions.
    6. Simplify the procedures of taxation and build a transparent and corruption- free tax administration.
     

    Drawbacks of GST

    1. VAT and service tax on some product may become higher.
    2. The major beneficiaries will be big companies, than the small. Since the proposal is that company with turnover less than 10 lacs, will not fall in the ambit of GST. This means that small companies will end up having to pay value added taxes.
    3. The unorganised sector will get affected adversely and lose its competitiveness. There will be fear of higher lay-offs by such small companies.
    4. Currently the states can levy higher taxes on luxury goods and services, once the GST kicks off, all goods and services may end up paying same tax. This would mean the rich who buy luxury goods, may pay less tax and the poor more than they should.

     

    These guides are not legal advice, nor a substitute for a lawyer

    These articles are provided freely as general guides. While we do our best to make sure these guides are helpful, we do not give any guarantee that they are accurate or appropriate to your situation, or take any responsibility for any loss their use might cause you. Do not rely on information provided here without seeking experienced legal advice first. If in doubt, please always consult a lawyer.

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