3rd April 2017
As a consumer, one must be aware of what we are being charged and what goes out of our pocket while making any payment. The most important factor affecting our withdrawals is Goods and Services Tax (GST). But do we all know what GST really is all about?
GST is a comprehensive indirect tax, which will be levied on the manufacture, sale, and consumption of goods and services. It will be applicable to the whole of India. This tax will replace all the central and state government taxes. The introduction of GST will be a significant reform of the indirect tax structure of India. Under the GST method, all the central and state government tax will be merged into a single tax that will reduce cascading or double taxation effect. GST will be levied at each stage of sale or purchase of goods and services throughout India based on the input tax credit method. Under this method, all the GST registered business will be eligible to claim the tax credit. The main aim to introduce GST is to abolish all indirect taxes and only GST would be levied. Every person who is providing or supplying services is liable to charge for the GST.
Pending since a long time, GST bill has been passed in June 2016 in RajyaSabha. With the approval of GST bill in RajyaSabha, India is now closer to witnessing GST as a reality in recent times to come. Still drafting and finalization of GST law is no less than a herculean task in itself. Model law provides that the GST will replace all the service tax, entertainment tax, luxury tax completely whereas some central excise and state value-added tax laws, which would also be subsumed shall continue to apply to some specified goods namely petroleum, alcohol, and tobacco. Current draft bill provides the broad framework of how GST legislation would look like and operate. Various tax rebates, exemptions, abatements etc., which are currently being provided under the current tax structure is missing under the draft model. The model law is a combination of existing indirect laws namely central excise, customs, service tax and VAT. It will be helpful to know the current tax situation to understand the importance of GST.
Current tax structure in India
There are two types of tax in India direct tax and indirect tax. A direct tax is a tax, which is directly levied on a person and collected from the same person for example income tax. On the other hand, indirect tax is a tax, which is indirectly collected. Indirect tax is levied on one person and collected from another person for example sales tax. We can also classify the tax structure in India on the basis of imposition. Some taxes are imposed by the central government and in some cases, states have sole power to levy and collect the tax. For example service tax, customs duty, service tax, and excise duty is levied and collected by the central government value added tax, stamp duties and land revenues and state excise taxes are levied and collected by the state government.
One of the main objectives of taxation regime is to avoidance of "taxation over taxes" or cascading effect. Removing of a cascading effect is important to reduce deadweight loss i.e. slump in a total surplus of supply. The cascading is caused due to a levy of a variety of taxes by state and union government. It has raised the tax burden on Indian products because of which Indian products are not able to compete in international market.
GST will mitigate the cascading effect in a major way and will pave the way for a common unified national market. This means that they will not be a “tax on tax” situation, which is currently applicable when goods are moved from one state to another.
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