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Chapter 1 What Is GST
Chapter 1 What Is GST
Chapter 1 What Is GST
Chapter 1
What is GST?
Module 1
From Europe to the rest of the world, the Goods and Service tax quickly spread and becoming
what has been described as an unparalleled tax phenomenon. This is the most important event
in the evolution of tax structure in the last half of the 20th century. Thus, due to its
overwhelming popularity and its undeniable appeal in its pure form, GST has applied around
the world to the different degrees. GST provides a continuous chain of set off from the
original producer’s point and service- provider’s point up to the retailer’s level, and thus,
eliminates the burden of tax cascading. Further, it subsumes various Central and State taxes
which were not covered by State VAT and CENVAT. In that way, GST give relief to the
Central and States level as well as to trade, industry and agriculture. Beside this, GST provides
more comprehensive and wide coverage to tax set-off.
Further, Indian economy is getting more and more globalized. In recent times, number of Free
Trade Agreements (FTAs) has been signed, which will allow imports into India duty free or at
very low duties. Hence, there was need to have a nation- wide simple and transparent system
of taxation to enable the Indian industry to compete not only internationally, but also in the
domestic market. Integration of various Central and State taxes into a GST system makes
it possible to give full credit for inputs tax collected. GST being a destination-based
consumption tax based on VAT principle, will also greatly help in removing economic
distortions caused by present complex tax structure and will help in development of a common
national market. This is the essence of GST, and that is why GST is not simply VAT plus
service tax but an improvement over the previous system of VAT and disjointed service tax.
The introduction of GST along with prudent accounting policies, transparency and supported
by a robust electronic controls will bring down the peak rates of taxation and enhance revenue
growth. In simple words, introduction of the Value Added Tax (VAT) at the Central and the
State level has been considered to be a major step – an important breakthrough – in the sphere
of indirect tax reforms in India. If the VAT is a major improvement over the sales tax system,
then the Goods and Services Tax (GST) is indeed a further significant improvement –
the next logical step – towards a comprehensive indirect tax reforms in the country.
On the reading of the same, it can be said that the various issues may it be contemporary or
emerging with time, which earlier system of Indirect Taxes in India was suffering with. To
overcome those issues and making Indian economy more vibrant and competitive, we were
required a change through new GST regime. The aim of the new taxation regime discussed
in short as under:
(a) No cascading of taxes
(b) Reduced compliance cost
(c) Seamless flow of credit
(d) Less wastage of time and effort to comply
(e) Few number of taxes
(f) Transparent and corruption free
(g) Supportive to compete at domestic and International Market
(h) Buoyancy in tax collection both for Central and State
(i) Tax impact on inflation should be minimal
* IGST =18%
In the above example the CST is levied on the amount inclusive of Excise Duty
and this is cascading of tax which is proved below:
CST on Price (Inclusive of Excise Duty (2% of 123.75) 2.475
CST on the A’s Price (2% of 110.00) 2.20
Tax Cascading 0.275
“For CST, there is no availability of credit of Rs. 2.475 paid on the
transactions in present structure.”
In the above example, taxes were levied twice on the amount of Rs. 400 out of the total bill of
Rs. 1000 known as double taxation which is prevalent in the earlier tax structure and leads to
higher payment of tax by assesse. Under the Goods and Service tax, there is a single levy with
two components applicable simultaneously. Hence, it helps in eradicating the double taxation
issue. Another illustration of double tax can be software, where though simultaneous
liabilities were not prescribed in any law, still, since no clarity was available for exact nature
of activity both to the Central and State tax Authorities used to levy duties on the transaction
related to software. To explain further, in case of maintenance job under Works Contract, where
both the elements of service and sale of goods were involved, Service tax was levied on
70%, whereas VAT at State level ranging from 80% to 100% amounting to even taxation on
170% value on a transaction of Rs. 100/-.
Under GST, double taxation would get minimized as there are HSN based classification of each
taxable supply and will attract CGST and SGST without much doubt of being ‘goods’ or
‘services’ as the rates for the ‘Taxable Supply of Goods’ as well as ‘Taxable Supply of Services’
would be same.
Common National Market for the Products: Under the earlier tax structure there were
various taxes levied by the State Governments at various rates. This differentiation in tax
rates in states resulted in different prices of a single product in different states of the country.
For example, if we purchase bread in Delhi, its price is Rs. 20 but for other State its price may
be Rs. 19. This price difference may have couple of reasons. Apart from varied cost structure,
different taxes and variation of tax rate may be the reasons for the same. In GST, though there
are four rates of taxes, but for a particular product rate of CGST and SGST is uniform across
the country. Say, the rate of necessity item like wheat, rice etc., the rate of SGST and CGST is
same across the country.
No Entry Tax in GST regime will save Cost and Time: Since the Goods and Service tax
has subsumed entry tax as well, it not only act for the cost saving but also a time saver for the
business community especially for the transport sector. Due to entry barrier/check post
mechanism to collect entry tax at each State level, transport vehicles had to wait on an average
5-7 hours on the road at the time of Inter-state travel. Certain study reports for these tax
formalities in India revealed that when a transport vehicle is moving around 240 Kilometer in
day, countries adopted GST achieving more than 400 kilometer journey, which will not only
save substantial time but also cost coupled with travel time, wear and tear of vehicle,
preservation of perishable goods and so on. In regime of GST, entry tax subsumed into main
levy and there are no entry barrier. Tax rates under the GST are being finalized keeping in view
of kitty of entry tax lost by States and thus, vehicle are free to move from one State to another.
Further, in the earlier scenario credit of entry tax is available only in few States which was further
enhancing the cost of production, whereas in GST regime subsumation of entry tax into main
levy enables the buyer to claim the set off of entire IGST paid for output liabilities of IGST,
CGST and SGST.
Goods and Services become Competitive: Under the earlier format of taxation there
were number of tax issues which result in increase of cost of production, such as cascading of
taxes, double taxation, no input tax credit of certain taxes e.g. Central Sales tax, which make
the goods and services uncompetitive both in the domestic as well as in the international market.
Under GST, all these issues are being taken care and with efficient allocation of resources,
goods and services are expected to get more competitive advantage which would give a boost
to the Indian products in international market.
Input Tax Credit Chain: If there is a chain of transaction and tax levy on each point of
transfer with Input Tax Credit (ITC) of tax paid on previous limb then this would reduce the
© TAXO Academy | Study Material Chapter 1: What is GST? Page 5 of 10
cost of production and this is what exactly is expected under the new GST regime. If tax
paid at each stage would be available as ITC for the other stage, then it will also help in
reducing the cost of goods and services for the final consumers. An illustration can better
explain the concept:
GST Regime:
Purchase Services
This chain will help in reducing the tax burden for the M/s ABC in this example. There were
various transactions in which input tax credit was not available for the tax paid on input
which then added to the cost and makes it expensive for the consumer. This non availability
also leads to the increase in tax burden of the producer and manufacturer.
o Interstate Transactions: In earlier regime, in most of the cases Input Credit chain broke in
case of Inter-state transactions. In GST there is be a national levy and Input Credit chain in the
Inter-state transaction would not break. Under GST, Integrated GST is levied on Inter-state
transactions and the credit of the same is available for the payment of tax on the next stage
of transfer
Under the GST regime, Inter-state sales transactions between two dealers would be cost
comparable with stock transfers/branch transfers. According to the Act passed by parliament,
Centre would levy IGST (which would be weighted average mean of CGST plus SGST across
states) on all Inter-state transactions of taxable goods and services. The Inter-state seller will
pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on
his purchases. Similarly, the importing dealer will claim credit of IGST while discharging
his output tax liability in his own State for CGST and SGST. This will result in Inter-state sales
transaction becoming tax neutral when compared to Intra-state sales. India would become one
single common market no longer divided by state borders.
o Input Tax Credit to all: In the earlier Central VAT (CENVAT) the value addition at the
level below the stage of manufacturer was not included which keep the benefits of the
comprehensive Input Tax Credit and Service tax set off out of the reach of the dealers but the
new taxation structure covers all the levels of production and distribution under the scope.