Goods & Services Tax (GST): What is GST in India? Indirect Tax Law Explained


What is GST in India?

Goods and Services Tax (GST) represents a significant reform in India’s tax landscape. It is an all-encompassing indirect tax regime introduced to streamline and unify the complex taxation system prevailing before its implementation. GST, which came into effect on July 1, 2017, has replaced a myriad of indirect taxes like excise duty, value-added tax (VAT), service tax, and more. This transformative tax reform aims to create a more efficient, transparent, and accountable taxation structure for the entire country.

Under the GST framework, the taxation structure has been simplified by amalgamating multiple taxes into a single tax. It operates on the principle of “One Nation, One Tax,” ensuring consistency in tax rates and procedures across states. This shift not only enhances tax compliance but also facilitates ease of doing business by eliminating tax barriers that existed before.

The Journey of GST in India

The journey towards implementing GST in India was a lengthy and collaborative effort. The concept of GST was first introduced in 2000 when a committee was formed to draft the law. It took several years of discussions, deliberations, and negotiations between the Central and state governments to reach a consensus. In 2017, the GST Bill was passed in both houses of Parliament, marking a significant milestone in India’s economic reforms.

Implementing GST required extensive preparation, including creating a robust IT infrastructure, educating taxpayers, and aligning businesses with the new tax structure. On July 1, 2017, the GST Law finally came into force, transforming India’s taxation system and marking a new era in economic governance.

Objectives Of GST

GST was introduced with objectives that aimed to address various issues within the existing tax system and pave the way for a more efficient and transparent taxation framework. Some of the key objectives of GST are:

One Nation, One Tax: GST seeks to create a unified tax system across the country, replacing the patchwork of state and central taxes. This simplifies tax administration and reduces complexities for businesses operating across state boundaries.

Subsuming Indirect Taxes: The GST framework amalgamates multiple indirect taxes, making the tax structure more streamlined and eliminating the cascading effect of taxes on the cost of goods and services.

Eliminating Cascading Effect: One of the major advantages of GST is the elimination of the cascading effect, also known as “tax on tax.” Under the previous system, taxes were levied on taxes paid earlier in the supply chain. GST allows for seamless input tax credit, ensuring that taxes are only levied on the value added at each stage of the supply chain.

Curbing Tax Evasion: GST introduces stricter compliance measures and technology-driven processes. This reduces the chances of tax evasion and fraudulent practices. The use of technology, such as e-invoicing and online return filing, enables real-time tracking of transactions, making it harder for businesses to evade taxes.

Expanding Taxpayer Base: GST’s comprehensive approach to taxation has increased the taxpayer base by including businesses that were previously outside the tax net. This broadening of the tax base enhances revenue collection for the government.

Digital Ease: GST’s digital infrastructure simplifies tax-related processes. All procedures are conducted online, from registration to return filing and refund applications, reducing paperwork and enhancing efficiency.

Enhanced Logistics: GST has positively impacted logistics and distribution systems. The removal of interstate checkpoints and the introduction of e-way bills have improved the movement of goods across the country, reducing transit times and costs.

Promoting Competitive Pricing and Consumption: Uniform GST rates have led to competitive pricing, reducing regional disparities and increasing consumption. This has also contributed to higher tax revenues for the government.

Advantages Of GST

The implementation of GST has brought forth several advantages that have positively impacted businesses, taxpayers, and the overall economy:

Elimination of Cascading Effect: GST eliminates the cascading effect of taxes, as input tax credit can be availed for taxes paid on inputs. This reduces the tax burden on the end consumer and makes goods and services more affordable.

Streamlined Processes: The entire process, from registration to return filing and claiming refunds, has become digital. This has streamlined tax administration and increased transparency.

Uniform Tax Rates: GST ensures consistent tax rates across the country, reducing the confusion caused by varying state-level taxes. This simplifies compliance for businesses operating in multiple states.

Wider Tax Base: GST’s comprehensive approach has expanded the taxpayer base, bringing informal and unorganised sectors into the formal economy. This contributes to higher revenue collection.

Boost to Manufacturing and Export: With input tax credits available at every stage of the supply chain, manufacturing becomes more competitive. Exporters benefit from zero-rated taxation on exports, enhancing competitiveness in the global market.

What are the components of GST?

GST operates through a three-tier tax structure:

Central Goods and Services Tax (CGST): CGST is levied by the Central Government on intra-state supplies of goods and services. It replaces taxes like excise duty and service tax that were previously levied by the Central Government.

State Goods and Services Tax (SGST): SGST is collected by the state governments on intra-state supplies. It replaces state-level taxes like VAT and entertainment tax.

Integrated Goods and Services Tax (IGST): IGST is applicable to inter-state supplies of goods and services. It is collected by the Central Government but shared between the exporting and importing states.

This three-tier structure ensures a harmonised tax system encompassing intra-state and inter-state transactions.

Tax Laws before GST

Before the implementation of GST, India had a complex tax structure with multiple indirect taxes levied at various stages of the supply chain. These taxes led to a cascading effect where taxes were levied on taxes, increasing the cost of goods and services. This intricate tax system posed challenges for businesses, resulted in inefficiencies, and hindered economic growth.

How Has GST Helped in Price Reduction?

One of the prominent advantages of GST is its role in reducing the overall price burden on consumers. Under the previous tax regime, taxes were levied on taxes, leading to a cascading effect and higher prices. GST’s input tax credit mechanism allows businesses to claim credit for taxes paid on inputs. This credit is passed on through the supply chain, ultimately benefiting the end consumer with reduced prices.

The elimination of the cascading effect ensures that taxes are only levied on the value added at each stage of production and distribution. This streamlined approach prevents the double taxation that occurred earlier, leading to price reductions. This price reduction has a direct positive impact on consumer purchasing power and contributes to increased consumption, benefiting both businesses and the overall economy.

In conclusion, GST represents a landmark reform that has transformed India’s tax structure. Its objectives, including eliminating the cascading effect of taxes, promoting a unified tax system, and enhancing tax compliance, have led to widespread benefits. The journey of GST, from its inception to implementation, showcases the government’s and stakeholders’ collaborative efforts in ushering in a new era of economic governance. As India continues to evolve under the GST regime, the benefits of simplified taxation, reduced prices, and increased compliance are expected to drive sustained economic growth and prosperity.