Understanding GST: Key Points
1. What is GST?
The Goods and Services Tax (GST) is a unified, broad-based indirect tax regime in India that came into operation on July 1, 2017. It substituted a plethora of complex central and state taxes such as VAT, excise duty, and service tax. GST is a consumption tax that is collected on the supply of goods and services with an objective to simplify the tax structure and improve economic efficiency.
2. Structure of GST
GST is a dual system, having two components:
- Central GST (CGST): Charged by the central government on intra-state sales.
- State GST (SGST): Charged by the state government on intra-state sales.
For inter-state sales, the Integrated GST (IGST) is charged, which is controlled by the central government.
This system ensures that the central and state governments both share the revenue.
3. GST Tax Slabs
GST has a multi-level structure with the rates of taxation depending upon the categorization of goods and services. The below-given tax slabs are operational at present:
- 0%: Basic items such as food grains, fresh vegetables, etc.
- 5%: Mass-consumption type of goods such as footwear, household goods, etc.
- 12%: Commodities such as processed foods and selected personal care items.
- 18%: Normal goods and services such as electronics, consumer goods, and selected services.
- 28%: Demerit and luxury goods, e.g., tobacco, aerated beverages, and high-end automobiles.
These slabs guarantee that essentials are taxed at a lower percentage while luxuries are taxed more.
4. Input Tax Credit (ITC)
One of the most useful aspects of GST is the Input Tax Credit system. It enables firms to offset tax paid on inputs with tax received on outputs. For example, if a producer pays GST on raw materials, he can claim an offset against the tax paid while selling the final product, lessening the total tax incidence.
5. One Nation, One Tax
Prior to GST, there were various taxes imposed by the central as well as the state governments. GST streamlines this by providing a single tax system throughout the nation. Firms no longer have to deal with various tax systems for various states. This ‘One Nation, One Tax’ approach allows free movement of goods and services between states without undue tax obstacles.
6. GST Registration
Companies with a turnover of more than a specified amount (Rs. 20 lakhs for most companies, Rs. 10 lakhs for northeastern and hill states) are required to register for GST mandatorily. Registration is done online and is quite simple, although companies are also required to file periodic returns, increasing their administrative burden.
7. Consumer Benefits
For consumers, GST brings transparency in pricing. With the introduction of GST, businesses are required to issue GST-compliant invoices, which makes it easier for the government to track transactions. Moreover, the overall tax burden has been reduced on several goods and services, which has led to lower prices on many products.
8. Benefits for Businesses
Businesses benefit from GST in several ways:
- Simplified Taxation: Since there is one tax structure, companies do not have to maintain multiple taxes or face complicated compliance.
- Increased Efficiency: The Input Tax Credit mechanism allows companies to recover the input tax paid, resulting in cost savings.
- Reduction in Cascading Taxation: Earlier, companies were paying tax on tax (cascading effect), which increased the cost of production overall. GST reduces this problem, resulting in reduced prices for consumers and increased profits for producers.
9. GST and Exporters
Exports under GST are considered zero-rated supplies, which are exempt from tax. This makes it easier for exporters to stay competitive in the international market. They are also able to recover input taxes paid at the time of manufacturing, making international business more convenient.
10. Effect on Small Businesses
GST has positive and negative effects on small businesses. Positively, the tax is more systematized, and it does away with the requirement of a variety of tax registrations and filings. Small businesses also enjoy GST exemptions in case their turnover is less than the stipulated amount. Negatively, the compliance requirement, particularly the requirement of frequent filings and proper documentation, can be a hassle for small business owners who may not have resources or expertise to handle it.
11. Challenges of GST
Though GST has made a major difference, it does come with some challenges:
Challenges of GST
- Compliance Issues: It may be tough for small businesses to meet the intricate filing procedure and book-keeping.
- Technological Hurdles: Online filing mechanism, though efficient, is tough to manage for certain businesses.
- Rate Disparities: The various slabs of taxes have generated debates regarding the level of fairness among some of these rates, as businesses and customers questioned the implications on certain sectors.
- Delay in Refunds: Exporters and companies have also experienced delays in receiving refunds against the input tax paid, posing liquidity problems.
12. GST Council and its Role
The GST Council, which is made up of the central and state government finance ministers, is tasked with recommending on several facets of the GST regime. The council is also responsible for determining tax rates, determining exempted goods and services, and resolving inter-state disputes. It helps ensure that the GST system is sensitive to business and consumer needs.
13. Future of GST
With the evolution of GST, the government is bound to make tax rate adjustments, impose new compliance steps, and make refinements in the system to counter upcoming issues. Initiatives are in process to implement technology to enhance compliance and lessen the administrative load on companies.
Conclusion
GST has been a revolution for India’s tax system, making the tax system simpler, increasing business efficiency, and ensuring transparency. Although it has been challenging, its long-term gains are enormous. As consumers and businesses adapt to the new system, GST can be a driving force for economic growth and development in India.