The Rajya Sabha has cleared a constitutional amendment to bring about a system of Goods and Services Tax (GST) in India. It is perhaps the most important economic reform that has happened during Narendra Modi’s government. Tax structure in India is very complex and most of common people don’t understand it. You will be surprise to know that there is “tax on tax” like structure prevailing in Indian economy. We pay direct and indirect taxes on most of the product we buy from the market. Some of the tax we are aware about is service tax and VAT which are direct tax. But we don’t know the other taxes like excise duty and central sales tax.
Let’s understand the current scenario. There are two authorities which collect tax i.e. Central Government and State Government. Both of them have some exclusive area where they can levy tax. For example, most commonly known income tax is exclusive domain of central government and known as direct taxes. While VAT is a state government’s domain. It is known as indirect taxes and are levied on manufacture of goods etc. Let’s take an example of buying a shoes from the retail outlet. As we all know that product we purchase first needs to be manufactured somewhere before it reaches to the shop from where you intent to buy.
In this case the central government levies indirect taxes called central excise at the factory gate. Going forward the product, reaches to the retail shop from where a consumer buys it. At this stage state government levies value added tax (VAT- tax on consumption). In this example we have two taxes – tax at the factory gate on production which adds to the cost of shoes and tax on consumption which adds to the purchase price.
Here if you notice – there is tax on tax structure. Manufacturer pays excise tax at the factory gate which adds to the cost of the product and over that amount again VAT is calculated which has some portion of excise duty. The another challenge is states have exclusive domain on consumption tax (VAT) they treat goods coming from other state as “imports”. For above example, shoe is manufactured in Delhi so central excise duty would have paid in Delhi on manufacture and reaches to the retail shop in Gujarat, Since the product is manufactured in Delhi and sold in Gujarat, an “export” tax called central sales tax is collected by Delhi government.
As you can see, states and central government have some exclusive domain where they can levy taxes. There are multiple taxes when transaction happens between two or more states. It increases cost for everyone and ultimately end consumer has to bear the burden.
What is GST?
Goods and Services Tax (GST) is an indirect tax reform which aims to remove tax barriers and creates common single market. Since the GST bill is approved, tax barrier between state and central government will be removed. This will benefit consumers by reduction of taxes and clarity of taxes. Today consumer have no idea about how much taxes s(he) paid on most of the product. Consumer can see only direct tax levy on purchase bill but he doesn’t have any idea about indirect taxes which is included in the purchase price. Roughly consumers are paying 25% of taxes on purchase of product. With GST implementation, consumer will have clarity on exact tax in the purchase bill as all taxes will be collected at the point of purchase. Secondly, consumer will not have to pay “tax on tax” as barrier between state and central government will be removed.
Benefits of GST
The four slab tax structure with 6%, 12%,18% and 26% with lower tax for essential products and higher tax for luxury products is agreed by GST council. Essential items including food will have zero per cent tax. Lowest tax of 6% will be common use items and highest tax slab will be applicable on the product which are in 30% tax bracket right now. Tobacco, luxury cars will have additional cess over and above the highest tax slab. Collected revenue from this cess will be used for compensating state government for any losses of revenue during the first five years of GST implementation. Finance Minister Mr. Arun Jaitley said around 50000 crore would be needed to compensate revenue loss to the state government due to GST roll out.
This change in the tax regime would transform India’s economy and is expected to boost the revenue through better compliance and transparency to consumers. GST is likely robe implemented from 1st July 2017.
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