Salient Features of GST Act in India

Let’s read this article on Salient Features of GST Act in India…

Presented by Aakriti Yadav-

What is GST in India?

GST, an indirect tax, was recommended by Vijay Kelkar task force (2004) for the implementation of Fiscal Responsibility and Budget Management (FRBM) Act. In 2014- 2016, the Government of India introduced 122nd Constitutional Amendment Bill 2014 in the 16th Lok Sabha. Ultimately it passed and became 101st Constitutional Amendment Act 2016.

All India GST would mean the biggest revolution in India’s indirect tax structure since Independence.

GST Council Composition

GST Council includes the Finance Minister as the Chairman and the Union Minister of State for Finance. They constitute one-third of voting power in the council. While each state government including union territory with legislature (Jammu and Kashmir, Delhi and Puducherry) can nominate one minister to GST Council. One of them will be selected as the vice-chairman of GST Council. They have two-third of voting power.

Salient features of GST Act

• The final draft of GST bill introduced Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST) and Integrated Goods and Services Tax (IGST). On intra-state supply of goods and services, Union levies CGST whereas State/Union Territories without legislature levies SGST/UTGST. While in case of inter-state supply of goods and services IGST is levied.
• GST would subsume various indirect taxes of the centre and states also many cesses were subsumed under GST.
• Centre and state shall share the tax in equal proportion under GST regime.
• GST is a destination-based tax on the final consumption of goods and services. So that whenever a commodity is sold or service provided, GST shall be imposed and revenue will be shared between centre and state.
• The heart of GST is Input Tax Credit (ITC) at each stage, from the first stage of raw material to the final consumer so that at each state tax is paid only on the value addition.
• As a major precondition laid down, the centre shall compensate the state government for the period of five years. In 2022 this deadline is extended.
• All transactions are reported and recorded via the Goods and Services Tax Network (GSTN) portal which will bring transparency to the transactions.
•  A reverse charge mechanism has been introduced. It is a method under which a commodity bought from an unregistered supplier will require the producer to pay tax on their own which will be credited back after verification by the government. 

GST Related Organisations

Group of Ministers- These committees are set up by GST Council to look into specific issues from time to time.

GSTN Network- Goods and Services Tax Network is a not-for-profit private limited company that was set up under the Companies Act. This company runs the GSTN online portal, where the suppliers register themselves, pay their GST, claim input tax credits, etc. 

States Indirect Taxes that are Subsumed under GST

State Value Added Tax (VAT) which was imposed on sales of goods, advertisement tax on hoarding banners, entertainment tax on Cinema, live performances etc. are the States’ indirect taxes subsumed under GST.

Advantages of GST

It would have several merits as follows:

• GST covers both goods and services, with standard rates, and a minimal number of cess and surcharges.
• It will substantially bring down the cascading burden of multiple indirect taxes imposed by the centre and state which will be borne by the final consumers.
•  As cascading burden comes down it will bring down prices, control inflation, and increase consumption and demand. As demand goes up, the investment will also go up, production will increase leading to an increase in GDP. It will promote the Indian market as a manufacturing hub.
• It will also increase the competitiveness of the Indian industry and lead to an increase in exports.
• It will integrate the Indian economy with the rest of the world as more than 160 countries have GST or national level VAT.
• It will also bring rationalisation of indirect tax structure, reduce tax evasion and increase tax to GDP ratio, and ensures a better audit trail for the government.
• More buoyancy in economic activities due to simplification of the tax structure.
• Giving benefits to Make in India by bringing import duty into the structure of rationalizing Countervailing Duties (CVD) and special assessment duty to compensate domestic manufacturers for imported raw material. Thus encouraging Ease of Doing Business.

Disadvantages of GST

• Fall in the collection in the revenues of States.
• Inconvenience to small traders since many small traders are not proficient with computer digital payments GST creates inconvenience to them and forces them to hire full-time accountants raising their cost of operations.
• Structure of GST is followed by international standards as there are seven rates in India while in most countries there is one single rate or at best 2-3 rates. Thus high rates and multiple slabs create problems for the taxpayers.
• This rate structure is also irrational in many products as the same category of products attracts different rates i.e. on packed and unpacked goods.
•  This rate structure also leads to inverted tax structure in some instances i.e. rates are higher on inputs than on final goods.
• GST is claimed to be a self-polishing tax which will bring down prices not only because of reduced cascading burden but also due to input tax credit and yet anti-profiteering clause.
• Keeping out alcohol, petroleum products and electricity tax from the GST means it is an imperfect side of GST.
• GST  being a destination based tax implies that high consumption states may benefit more than low consumption states which widened imbalances among states.

Impact of GST on Sectors of Economy

• Impact of GST on  Manufacturing

In the short run adjustment cost will be higher due to transfer from one regime to another, increased cost of compliance, and uncertainty due to lack of stable rate specially for industries like luxury automobiles which face higher tax rate now as compared to the previous regime.

In sectors like textiles and leather goods, there is large presence of unorganised sectors, cottage industries and micro-units. This means that many of them will be below the threshold limit which would help in growing faster without any tax obstacle but on the other hand, it can create losses to businesses as large firms will outsource their production only to those small firms which are registered under GST to avoid Reverse Charged Mechanisms.

• Impact of GST on Services

In case of service sector, a revised tax rate can push the price upwards. In the medium term, both industries and services are allowed input tax credit which will reduce actual tax burden and also incentivise the formalization of services.

In the long run, if the government can resolve contradiction of the tax system by increasing tax base and reducing tax rate, with higher formalization both revenue and growth will remain high. 

Way Forward

1. GST being completely technological driven implies that a strong infrastructure is a precondition of GST.
2. The use of modern technology such as Artificial Intelligence, Geo-tagging, Biometric Authentication, etc. can bring more efficiency and transparency into the system and will provide ease to high-risk taxpayers.
3. There should be a clear demarcation between game of skill and game of chance under the GST regime. The game of chance such as casinos and online gaming with betting must be taxed at full value of the consideration.
4. Low rate GST should be levied on enivironment resilient goods such as electric vehicles and ethanol blending products, etc.
5. Virtual Digital Assets including cryptocurrency and products such as Nicotine Polacrilex Gum used in smoking should be charged higher GST.
6. The trust and cooperative federalism between states and the Union government must be strengthened inside the GST Council. Thus it must respect and uphold the true spirit of fiscal federalism and constitutional federalism.

Conclusion

Undoubtedly, GST will be an ideal tax in any country as it not only subsumes various indirect taxes but also reduces cascading burdens. However, its success depends on how efficiently it is implemented. 

Indeed the introduction of GST is truly a game-changer for the Indian economy as it has replaced multi-layered, complex indirect tax structure with a simple, transparent and technology-driven tax regime. Therefore, it may create difficulty in the beginning but will develop a robust blueprint in the long run and will help the Indian economy to grow at a much faster rate for achieving a 5 trillion target.

 

Thank you, for reading this article on Salient Features of GST Act in India.

 

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