GST Implementation: Avoiding cascading effects of Indirect taxes

Goods and Service Tax (GST) is a very significant step in ushering reforms in the indirect tax system in India. GST abolished various indirect taxes throughout the country and introduced the system of one nation one tax.

GST amalgamated all the indirect taxes levied by the central and state government into one single indirect tax throughout the country.

GST implementation reformed the taxation system by allowing input tax credits for consumers in a unified regime.

What is GST in India?

GST is a destination-based tax levied on every value addition in the supply of goods and services. The Goods and Services Tax Act introduced GST on 1st July 2017.

GST eliminated the cascading effect of indirect taxation by abolishing various indirect taxes such as services tax, VAT, excise duty, among others.

GST has three tax components:

• Central Goods and Services Tax (CGST),
• State Goods and Services Tax (SGST),
• Integrated Goods and Services Tax (IGST).

In the case of intra-state transactions on Goods and services, only CGST and SGST are applicable. In the case of inter-state transactions on Goods and services, IGST is applicable. CGST, SGST, and IGST are governed under their respective acts.

• CGST- The central goods and Services Tax act, 2017
• SGST- The respective GST Acts
• IGST- Integrated Goods and Services Tax Act, 2017.

History Of GST

The GST Act was enacted on 1st July 2017 in India. This process of introducing the tax regime was first deliberated in 2000 by then prime minister Atal Bihari Vajpayee’s government.

The government set up a committee to draft the legislation on GST. A task force was set up in 2004 for enhancing the tax regime.

In 2006, the Central Government proposed the GST implementation from 1st April 2010, and in 2011, the Constitution Amendment Bill was passed to enable the introduction of the GST law.

The Standing Committee of the parliament initiated a discussion on GST in 2012 and submitted its report on GST in 2013. The GST bill was introduced in 2014 in Parliament, and the bill was passed in Lok Sabha in 2015 but not passed in Rajya Sabha. The GST implementation came into effect after the parliament passed the amended GST law in 2016.

Four supplementary bills on GST were passed by both the houses of parliament and received presidential assent in 2017.

Tax structure before GST

Before GST, the taxation regime consisted of indirect taxes levied by central and state governments. Every state had their own set of rules and regulations for the calculation of tax rates. States collected VAT taxes by the states.

The centre levied the tax on the inter-state sale of goods, and this tax was called the Central State Tax (CST).

Both the central and state governments levied indirect taxes, and the overlapping of taxes between both governments was notable.

For example, the centre charged the excise duty when goods were manufactured and sold. Over and above the excise duty, states also charged VAT. This phenomenon led to a tax on tax effect, that is, the cascading effect of taxes.

In the pre-GST regime, various indirect taxes were levied. The following list incorporates the indirect taxes in the pre-GST regime:

• Central Excise Duty
• Additional Duties of Excise
• Duties of Excise
• Special Additional Duty of Customs
• Additional Duties of Customs
• State VAT
• Central Sales Tax
• Purchase Tax
• Luxury Tax
• Entertainment Tax
• Taxes on lotteries, betting, and gambling

However, the introduction of the GST regime led to abolishment of all taxes.

The following goods are not under the ambit of GST:

• Petroleum crude
• High-speed diesel
• Motor spirit (commonly known as petrol)
• Natural gas
• Aviation turbine fuel
• Alcoholic liquor for human consumption

What is the GST return?

A GST return contains all sales, purchase, income, or expense details that a taxpayer must file with the tax administrative authorities. Tax authorities use it to calculate net tax liability.

Under GST, a registered dealer should file GST returns that include the following:

• Purchases
• Sales
• Output GST (On sales)
• Input tax credit (GST paid on purchases)

Objectives of GST

The objectives of GST are as follows:

‘One Nation, One Tax’

The introduction of the GST regime eliminated various indirect taxes under the previous tax regime.

• The single tax system ensured ease of paying tax on the goods and services they availed without the hassle of various tax burdens.
• Every state is bound by the GST for levying  taxes. Tax compliance is improved in this system as the taxpayer does not have to comply with multiple return forms and deadlines.
• E-way bills and e-invoicing for reporting transactions regulate the transportation of goods.
• GST implementation proposed a unified system for compliance with the indirect tax regime.

Subsume indirect taxes in India

Before GST implementation, indirect taxes such as services tax, value-added tax, central excise duty, additional duties on excise and customs, were levied on availing goods and services. When the state government levied some of these taxes, the central government levied other taxes.

The introduction of GST unified all the significant indirect taxes into one tax and reduced the compliance burden of taxpayers.

Eliminate the cascading effect of taxes

The GST implementation improvised the tax administration in the country. The primary objective of the GST was to eliminate the negative effect of indirect taxes.

Before GST implementation, various indirect taxes were imposed for taxpayers to claim input tax credits. Taxpayers were not allowed to make claims of the tax credits of one tax against the other.

For example: A taxpayer cannot claim tax credits on central excise duties against the VAT payable during the sale.

The tax is levied on the net value of the goods increasing at each stage of the supply chain. Therefore, this measure ensures hassle-free flow of goods and services in the supply chain.

Curb tax evasion

GST was brought to curb tax evasion on the supply of goods and services. With the enactment of GST legislation, tax compliance in India has become stringent.

Fake bills were regularly raised to evade tax. Therefore, to keep this practice in check, the taxpayer was allowed to claim input tax credits only on invoices uploaded by their concerned suppliers.

GST, a centralised indirect tax, is under the surveillance of central agencies, ensuring effective implementation of GST.

The E-invoicing system has played an efficient role in curbing tax evasion and mitigated tax fraud to a large extent.

Increase the taxpayer base

The objective of GST was to increase the taxpayer base in India, and stringent GST implementation increased the taxpayer base in the country.

GST is a consolidated tax levied on both goods and services without a threshold limit for the registration of various taxpayers.

Many unorganised sector businesses and MSMEs complied with the GST regime by registering themselves. This increase in the taxpayer base ultimately leads to increased government funds.

Ease of doing business

Earlier, taxpayers used to go through a hectic filing process before tax authorities. Most of the tax assessment and offline refund processes were prone to clerical mistakes. The GST brought the system online and reduced the number of documents for filing.

GST contributed to the ease of doing business in India and simplified taxpayer compliance considerably.

Improved logistics and distribution system

The GST regime made the logistics and distribution system more feasible by mitigating the need for multiple documentation previously needed in the supply of goods.

GST implementation enhanced the supply chain of goods and services by reducing the time consumption in such supply.

The e-way bill and e-invoice system benefited the transit of inter-state goods and services and reduced warehouse and transit costs.

Promote competitive pricing and increase consumption

Before GST implementation, the prices of goods and services in the Indian market were higher than their counterparts in the global market because of various indirect taxes on goods and services. The variance in value-added tax (i.e. VAT) led to purchase imbalance between these states.

GST enactment aimed to mitigate these cascading effects of the indirect tax regime and  reduced the prices of goods by levying a single tax, which increased its consumption.

The increase in consumption enhanced revenues. Such unified indirect tax led to competitive pricing across the country and on the global front. The increase in revenue will lead to the development of the country.

How does it work?

Let us discuss the operation of GST:

• Manufacturer: The manufacturer must pay GST on the raw material purchased and the value added to make the product.
• Services Provider: The services provider will have to pay GST on the amount paid for the product and the value added to it. However, the tax that the manufacturer has paid can be reduced from the overall GST that must be paid.
• Retailer: The retailer must pay GST on the product purchased from the distributor and the margin added. However, the tax that the retailer has paid can be reduced from the overall GST that must be paid.
• Consumer: GST must be paid on the product purchased.

Conclusion

GST is a multi-stage comprehensive tax levied on the sale and purchase of inter-state or intra-state goods and services. The tax administration became stringent with the GST implementation throughout the country. The regulation in the GST regime led to ease of doing business.

The increase in government revenue due to the increase in the number of taxpayers led to the initiation of development projects by the government and the country’s overall development.