Understanding the nuts and bolts of Goods and Services Tax (GST) in India

The Goods and Services Tax (GST) law has gone a step further to see implementation by July 1, 2017 deadline. Indian Parliament approved four supplementary legislations for the historic tax legislation. The Integrated GST Bill, 2017; The Central GST Bill, 2017; The GST (Compensation to States) Bill, 2017; as well as The Union Territory GST Bill, 2017 have been passed despite amendments by Opposition parties. Rajya Sabhatoo followed suit after the tax law was passed in the Lok Sabha. The GST implementation will take place this year.

Finance Minister Arun Jaitley has said that the GST implementation, which would bring in a uniform tax regime in India, would make prices of commodities “slightly cheaper.” Jaitley also added that the GST rates will also be contingent on whether the specific commodity was being used by a common man or somebody affluent. He also said that once the regime is implemented, harassment of businesses by various different authorities would end and in India there will be one rate for one commodity throughout the country.

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Understanding the Goods and Services Tax (GST) and its history

In 1986, Vishwanath Pratap Singh started the tax reform process in India’s indirect tax regime through the introduction of Modified Value Added Tax (MODVAT). After that a number of changes have been made to the basic concept leading the GST to its current form.

The GST would be a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India. It will replace the plethora of different taxes that the Central government and the State government levy separately. Tax would be collected at each stage on basis of the input tax credit method, in which taxes paid in other states can be claimed.SME-GST-3

This would allow GST-registered businesses to claim tax credit to the value of GST they paid on purchase of goods or services in other states as part of their normal commercial activity. Goods and services are not distinguished from one another and are taxed at a flat single rate in a supply chain till they reach the consumer. The administrative responsibility will be with a single authority that will levy tax. Exportswill be zero-rated supply whereas imports will be charged the same taxes as those on domestic goods and services—sticking to the destination principle.

Merging various Central as well as State taxes into one single tax will mitigate cascading or double taxation, thus, it will help in facilitating one common national market. It is expected that the simplicity of the tax structure will lead to better and more efficient enforcement and administration. From the point of view of consumers, the biggest advantage will be reduction of overall tax burden on goods, estimated at 25–30%.

“Today you have tax on tax, you have cascading effect. When all of that is removed, goods will become slightly cheaper,” said Jaitley, talking about the impact of GST on prices. This introduction of GST will be a major step in the direction of reforms of indirect taxation in the country.

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