and Service Tax (GST)
GST Stands for Goods and
Services Tax (GST). The Act was passed in the Lok Sabha on 29th March,
2017 and it came into effect from 1st July, 2017. It was termed as “One Nation
One Tax”. GST was introduced as The Constitution (101st Amendment)
Act 2017 following the passage of Constitution 122nd Amendment Bill.
It is an Indirect Tax applicable throughout India which replaced multiple taxes
like Service Tax, Vat Tax etc levied by Central & State Governments of
India. In place of VAT, Service Tax etc the Government has come up with Central
GST & State GST. India has chosen the Canadian model of
dual GST. The first country to implement GST was France in 1954.
How does GST work?
take an example, suppose a manufacturer buys raw material from a vendor. He
needs to pay a VAT (Value Added Tax-12.5%) along with the cost of the product.
The manufacturer incurs some cost to produce the product. He then adds some
profit to it and sells it to wholesaler. The wholesaler again needs to pay tax
(VAT+Excise Duty=12.5%+12.5%=25%) on the product. The wholesaler again adds
some profit on the product before selling the product to the retailer. The retailer
again needs to pay VAT (12.5%) for this product. Then he adds some profit
margin and again sells it to customers. For the same product before reaching
customers hands multiple taxes are levied and the cost of the product increases
say the manufacturer after adding his profit sells the product to the wholesaler
at Rs.150. The wholesaler then sells the product to the retailer at Rs.165 after
adding a profit margin of 10%. The retailer again adds 10% as profit which
makes the cost of the product Rs.181.5 and a 12% CGST + 12% SGST is added to
this product which makes the cost of the product stand at Rs.227.67. So, by the
implementation of GST the cost of the product can be reduced. Before GST, tax
on tax was calculated and tax was paid by all the purchasers including the
final consumer. But GST is payable at the final point of consumption. The
taxation on tax is called the Cascading Effect of Taxes.
History of GST in India
and Services Tax (GST) was first proposed in 1999 during a meeting between the then
Prime Minister of India Shri Atal Bihari Vajpayee along with his economic
advisory panel, which had included 3 former RBI governors, Shri IG Patel, Shri
Bimal Jalan and Shri C Rangarajan. Vajpayee set up a committee headed by the
then Finance Minister of West Bengal, Shri Asim Dasgupta in order to design a
GST model. After the 2004 general elections, during the Congress-led UPA
government, the then Finance Minister Shri P Chidambaram in February 2006
continued to work on the same project and proposed a GST rollout by the 1st
April 2010. Then, in 2014, when the NDA government was re-elected into power at
the centre, the GST Act was passed in the Lok Sabha on the 29th March,
2017 and finally it came into effect from 1st July, 2017.
Comparison of GST in other countries
The Indian GST case is made
for tax collection, reduced corruption, easier inter-state movement of goods
etc. France was the first country to implement GST for reducing tax evasion.
Since then, about 160 countries have implemented GST with some countries setting
a dual-GST model. India has chosen the Canadian model of dual GST.
However, the one big
difference between the Indian model of GST and in other countries is the dual
GST model. Many countries in the world have a single unified GST system. Countries
like Brazil and Canada have a dual GST system wherein GST is levied by both the
central and state governments. In India, a dual GST is proposed whereby a
Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST)
will be levied on the taxable value of each and every transaction of supply of
goods and services.
GST – IT enabled
For the implementation of
GST in the country, the Central and State Governments have jointly registered
Goods and Services Tax Network (GSTN) as a not-for-profit, non-Government
Company established to provide IT infrastructure and services to Central and
State Governments, tax payers and for other stakeholders. The key objectives of
GSTN are to provide a standard and uniform interface to the taxpayers, and
shared infrastructure and services to Central and State/UT governments.
1. Life gets simpler as GST will replace 17 indirect tax
levies and compliance costs shall also fall.
2. Revenue will get a boost as input tax credit will
encourage suppliers to pay taxes.
3. A common market.
4. Increased efficiency in Logistics.
5. Investment boost in the case of capital goods as input
tax credit is not available.
6. Boost for E-Commerce sector, freeing up online state
7. Make in India will get a boost since manufacturing shall
be more competitive with GST addressing cascading of tax, inter-state tax, high
logistics costs and fragmented market.
8. Also, imports would get more protection as GST
provides for appropriate countervailing duty.
9. Less developed states will get a lift- The current 2%
inter-state levy means that production is kept within a state. Under the GST
national market, this can be dispersed, creating opportunities for others
states as well.
1. Increased costs due to software purchase.
2. Being GST-compliant has some costs attached to it.
3. GST will mean an increase in operational costs for the
4. GST came into effect in the middle of the financial
year and so it will lead to disruption in the accounting procedures.
5. GST is an online taxation system and so all the risks
associated with the online arena come into play.
6. Micro Small and Medium Enterprises will have to face a
higher tax burden.
GST Tax Slabs
Impact of GST on the price of goods
FMCG products like Bathing &
Washing soaps, Hair oil, Detergent powder, Tissue papers, Napkins,
Matchsticks, Kerosene, LPG, Agarbatti, Toothpaste etc.
Stationery items like Pens, Books, Pencils
School Bags, Printer, Papers etc.
Healthcare items like Insulin,
X-ray films for medical use, Diagnostic kits Glasses for corrective
spectacles, Medicines for diabetes, cancer etc.
Apparels like Silk, Woollen
fabrics, Khadi yarn, Gandhi caps, Footwears below Rs 500, Apparels up to Rs
Ghee, Cold drinks, Chocolate,
Packaged chicken, Ice cream, Ayurvedic medicines, Movie tickets greater than
Rs 100, AC restaurants, Electronic Home Appliances, Furniture, Cell phone
bill, Insurance premiums, Bank services, credit card services, IPL tickets,
AC train tickets, Business class air travels, Advertising services,
Motorbikes with more than 350 cc engine, Telecom, Hotel room more than Rs
5,000, five-star hotel restaurants etc.
How GST will impact the Indian Economy
1. Network of branches to be registered
Before the implementation of
GST, a bank or NBFC with its branches spread across India could delegate its
compliance on service tax through one a centralised registration. After GST
regulation, these institutions would be required to get a separate tax
registration for each of the states that they operate.
As a destination-based tax, GST
has a multiple stage collection system. As such, the tax is collected at each
stage and the credit of the tax that was paid at the last stage is available as
a set off at the later stage of the transaction. This transfers the tax
incidence to different entities evenly, and helps the industry through better
and improved cash flows with better working capital management.
2. Leveraged and
de-leveraged Input Tax Credit
Earlier, banks and NBFCs had opted
for the reversal of the 50% of the Central Value Added Tax (CENVAT) credit that
they availed against the inputs and input services. Under GST, the 50% of the
CENVAT credit that was availed for inputs, input services and capital goods had
been reversed. This leaves banks and NBFCs with a decreased credit of up to 50%
on capital goods, and in turn raises the cost of capital.
3. Evaluation and adjudication
The impact of GST on banking
services and NBFCs will also be felt in terms of evaluation procedures. Service
tax was assessed by the particular regulators in the state where a branch is
registered. In addition, every branch of the concerned bank or NBFC had to
validate its position for the chargeability in their respective state or
province and provide a reason for utilising the input tax credit in those
The GST assessment will involve
more than one assessing authority, and each of them may have a different
judgement for the same underlying issue. Although such contradictions can
prolong the decision-making process for the financial institutions, the adverse
effects of evaluation by one authority can be offset through decisions made by
Banks in India have been levying
service tax on most transactions enabled by their systems. These include digital
fund transfers, issuance of ATM cards and chequebooks, and ATM withdrawals
beyond a specific limit. With GST on financial services, these services will be
taxed at the rate of 18% instead of the 15% service tax rate that was being
charged earlier. Suppose you withdraw money from an ATM other than your bank’s
ATM after exceeding the free transaction limit. Then you are typically charged
Rs 20 plus a service tax, which then comes to around Rs 23. With the imposition
of GST, this amount shall go up to Rs 23.60.
However, deeper analysis reveals
that such an increase in cost should not be considered a negative GST impact on
financial services sector. In the long run, banks will be able to transfer the
advantage of input tax credit to the customers. Furthermore, services like
fixed deposits and other bank account deposits that were outside the circle of
service tax will continue to remain outside the GST ambit.
A major advantage of GST on
financial services and other sectors is that it is a transparent tax and this has
reduced the number of indirect taxes. It integrates different taxes and ensures
that the tax burden is fairly divided between different entities involved in
the system. Since GST is technology based, the advanced software systems used
in its calculation and filing works will reduce the chances of manual errors
and will lead to better decision making.
Penalty shall be imposed for
avoidance of GST on account of:
1. Any deficiency on the net tax payable.
2. No GST return is made.
3. A GST return is submitted without payment or a lesser
4. Any refund paid to which there is no proper
5. Failure to register.
The introduction of the Goods and Services Tax will be a revolutionary
step in the field of indirect tax reforms in India. By integrating a large
number of Central and State taxes into one single tax, GST is expected to
significantly remove double taxation and make it overall easier for the
industries. For the end customer, the biggest benefit will be in terms of
reduction in the overall tax they have to pay on goods and services.
Introduction of GST will also make Indian products competitive in the domestic as
well as international markets. Lastly because of its transparent character, GST
shall be easier to administer. Once implemented, the proposed taxation system would
hold great promises in terms of sustaining growth for the Indian economy in