Goods and Services Tax (GST) is an indirect tax which was introduced in India on 1 July 2017 and was applicable throughout India which replaced multiple cascading taxes levied by the central and state governments. The GST is governed by a GST Council and its Chairman is the Finance Minister of India.
The Current Indirect tax regime is quite complex. Central and State Governments levy a large number of taxes such as Central Excise duty, Service Tax, VAT, Purchase Tax, Central Sales Tax, Entry Tax, Local Body Taxes, Octroi, Luxury Tax, etc. Each of these is an independent tax with separate compliance requirements and differing provisions. This creates complexity and makes it difficult for the taxpayers to adhere to the legal requirements. The different tax systems are also not interconnected, which provides various avenues for tax evasion. To simplify this tax regime, the Goods and Services Tax (GST) was implemented across India from 1st July 2017.
The government has brought GST in act to improve the collection of taxes as well as boost the development of Indian economy by removing the indirect tax barriers between states and integrating the country through a uniform tax rate. GST will lead at one stroke to removal of inter-state economic barriers, thereby creating a common national market.
Tax on tax was calculated and tax was paid by every purchaser including the final consumer. The taxation on tax is called the Cascading Effect of Taxes. GST avoids this cascading effect as tax is calculated only on the value add at each transfer of ownership.
Components of GST:
There are 3 applicable taxes under GST: CGST, SGST & IGST
(i)CGST: Collected by the Central Government on an intra-state sale (Eg: Within State)
(ii) SGST: Collected by the State Government on an intra-state sale (Eg: Within State)
(iii) IGST: Collected by the Central Government for inter-state sale (Eg: Tamil Nadu to Karnataka)
Benefits of GST:
◉ Composition scheme for small business
◉ Defined treatment for e-commerce
◉ Higher threshold for registration
◉ Increased efficiency in logistics
◉ Lesser compliances
◉ Online simpler procedure under GST
◉ Regulating the un-organized sector
◉ Removing cascading tax effect
“The Goods and Services Tax has revolutionized the Indian taxation system. The GST Act was passed in the Lok Sabha on 29th March, 2017, and came into effect from 1st July, 2017.”
A dealer in Tamil Nadu sells goods to a consumer in Tamil Nadu worth Rs. 10,000. The GST rate is 18% : comprising CGST of 9% and SGST of 9%.
In such cases, the dealer collects Rs. 1800 and of this amount, Rs. 900 will go to the Central Government and Rs. 900 will go to the Tamil Nadu government.
Now, let us assume the dealer in Tamil Nadu had sold the goods to a dealer in Karnataka worth Rs. 10,000.
The GST rate is 18% comprising of only IGST. In such case, the dealer has to charge Rs. 1800 as IGST. This IGST revenue will go to the Central Government.
Consider goods manufactured in Tamil Nadu and are sold to the final consumer in Karnataka. Since Goods & Service Tax (GST) is levied at the point of consumption, in this case Karnataka, the entire tax revenue will go to Karnataka.