Goods and Service Tax (GST) is one of the biggest indirect tax reforms in India. The Government of India introduced and implemented GST with the motto of “One Nation One Tax”. The motto talks about the importance of GST and signifies the government’s intention to comprise all the pre-existing taxes in India (such as VAT, Excise, etc.) into one tax.
The Indian government took the initiative of implementing GST after it’s in France(1954) and its adoption by 160 countries. It leads to the implementation of GST from 1st July 2017. Now, there are many businessmen who despite being in the business are clueless about the finances. The knowledge of finance is helpful even for the people with a non-finance background. This will help them in filing GST.
What is GST?
GST is a destination-based Indirect Tax levied on goods and services manufactured, sold or consumed that consisted of various indirect taxes in India. To completely understand what GST is, we need to understand certain basic concepts of GST. Here are a few concepts,
- GST is a Value Added Tax levied on manufacture, sale, and consumption of goods and services in India. It is levied on a person or entity situated in India.
- Like various indirect taxes, GST offers an in-depth and continuous chain of tax credits from the point of starting the chain. That is, from the producer’s / supplier’s point to the very end of the chain(consumer level). Hence, it involves taxing only the value-added at each point of the chain.
- Being an indirect tax, and since the supplier is, at each stage allowed to take credit for the tax paid on purchases, the burden of the tax would finally be borne by the Final Consumer.
- GST has no cascading effect as it taxes only value-added at each point.
GST consists of the following four acts
- Central Goods and Service Tax Act, 2017
- Integrated Goods and Service Tax Act, 2017
- Goods and Service (Compensation to State) Act, 2017
- Union Territory Goods and Service Tax Act, 2017
Levy of GST
Before understanding the levy of GST, let us understand what is the meaning of “Levy”? – The term Levy means to impose. Hence levy of GST means When is GST charged or chargeable.
The basis for charge/ levy of tax in any taxing statute is the taxable event. The Taxable event attracts levying of the tax. The taxable event in GST is supplying. Under GST,
- CGST(Central Goods and Service tax) & SGST(State Goods & Services Tax)/ UTGST(Union Territory Goods and Service Tax) are levied on all Intra-State Supply of Goods and/ or Services, Whereas.
- IGST(Integrated Goods and Services Tax) is levied on all inter-state supply of Goods and/ or Services.
Hence the Taxable event in GST is the supply of Goods and/ or Service. Further, from the above, it is clear that to understand the levy of GST in a better way, we need to understand a few key terms.
Few key terms
1. Goods and Services
As per Section 2(52) of CGST Act, Goods means every kind of movable property other than
- Money and Securities
- Actionable Claims
- Growing Crops
- Grass and things attached to or forming part of the land which is agreed to be served before the contract of supply.
Further, the meaning of actionable claims can be understood by reading section 2(1) of CGST act with section 3 of Transfer of Property Act, 1882 as a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of immovable property, or to any beneficial interest of movable property not in the possession, eider actual or constructive of claimant, which the civil court recognizes as affordable ground for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.
As per Section 2(102) of CGST Act, Services means anything other than
- Money and Securities
- Actionable Claims
But it includes activities relating to the use of money or its conversation by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
Section 7 of the Central Goods and Service Tax Act, 2017 governs the levy of GST. Section 7 of the Act states the following.
The word supply includes all forms of supply goods or services or both such as sale, transfer, exchange, barter, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
- Importation of services for a consideration whether or not in course of furtherance of business, and
- There is no consideration for the activities specified in Schedule I
- Section 7(1A) – Where certain activities or transactions, constitute of supply per the provisions of section (1), they shall be treated eider supply of goods or supply of services as referred to schedule II.
- Section 7(2) –Notwithstanding anything contained in section (1),
- Activities specified in Schedule III; or
- The Central Government, a State Government or any local authority undertakes such activities or transactions which engage public authorities, as the Central Government notifies on recommendations of the Council.
- Section 7(3)
Subject to Sections (1), (1A) & (2), The Government may on recommendations of the council, specify, by notification the transactions that are to be treated as –
- Supply of goods and not as a supply of service; or
- Supply of service and not as a supply of goods
Analysis of Section 7
- The definition of supply in the section is inclusive. This means that the section does not define the term “Supply” exhaustively this is substantiated by the use of the term such as in the definition.
- Generally speaking, the meaning and scope of taxable supply under GST can be understood under the following parameters-
- Supply should be of goods and or services. i.e. supply of anything other than that will not be taxable under GST example – transfer of securities, transfer of money, etc.
- Suppliers should make the supply for consideration except when such activities are covered under Schedule III. Or when Central, State Government or Local Authority performs such activities mentioned under section 7(2)(b).
- Suppliers should make the supply in the course or furtherance of business except where such supply in course of importation of services w.r.t. section 7(1)(b)
- Taxable Person should make the supply
- Supply should be Taxable Supply
- Further, there are certain cases wherein transactions are kept out of the scope of GST even though the above-mentioned parameters exist in the transactions, such transactions are covered under Section 7(2) and Schedule III all such transactions together form Negative list.
3. Intra-State Supply
Intra-State Supply involves the location of the supplier and the place of supply of goods and/ or service is in the same state or union territory. These are Intra-State Supply of goods or supply respectively.
4. Inter-State Supply
It is a supply that includes the location of the supplier and the place of supply of goods and/ or service is in (1) two different states or (2) two different union territories or (3) a state and a union territory. These are Inter-State Supply of goods or supply respectively.
Difference Between GST and Other Indirect Taxes
While the Government implemented GST in FY 2017-18, the economy already had various taxes. Many of these taxes were subsumed under GST whereas few of them are still existent and functioning eider fully or partially.
While it is believed that the “One Nation One Tax” regime is paving the path toward a better economy for the country, it is important to address the question-how is this tax structure better than previous tax structures.
How the new structure is different from previous tax structures
1. Broad Scheme
Previously various taxes were levied on various taxable events however under GST only one Tax is levied on various stages as the tax subsumes various taxes existing at the time. This profusely explains the importance of GST.
For example, under an earlier tax structure, Excise would be levied at 12.36% at the time of the manufacturing of goods. After that CST would be levied on Inter-State supply of goods as goods make their way to different states/ union territories. Further state VAT would be levied at various rates as the goods make the way to market.
However, under the GST Tax scheme, only one tax GST would be levied at various stages such as Manufacturing, Intra-state supply, and inter-state supply of goods. This has helped the MSMEs a lot, but they will still have to master the art of sales to truly gain from this opportunity.
2. Tax Rates
Under the previous tax system, different taxes with different rates existed for various taxable events. Moreover, various taxes such as VAT had different rates for the same items in different states.
However, under GST, the tax rates of 5% and 18% cover maximum items. Further, the same rates prevail for the product in all states. No rate variation for the same product is another importance of GST.
3. The Cascading Effect
Under the previous regime, the payment of the output tax liability did not allow the input tax credit. As a result, these taxes formed the cost of the product for the entity and in turn led to the imposition of output tax on the input tax. In brief, this is the cascading effect.
Under GST, since there is only one tax, the input tax credit is available to the supplier at all times. Thus, the lower tax burden on consumers and taxpayers avoids the cascading effect.
4. Concurrent Power
Previously, the Central Government had the power to decide concerning certain taxes whereas the State Government had the power for some taxes. However, under GST, both the Central Government as well as State Government has the powers to make decisions.
Under GST, The Central Government has the power to make decisions w.r.t Inter-State supply and commerce. Importance of GST has value as both the Central and State Government has the power w.r.t Intra-State supply.
Under the previous tax regime, several taxes and different rules for each tax made it difficult to maintain compliance with taxes. However, under GST, the compliance is easy with a single tax and fewer rules. There are various financial literacy programs being organized by the government to help the people in filing their taxes.
6. Transparent Tax Administration
Previously, the tax was broadly levied at two stages. That is the production stage(example Excise) and consumption stage(example VAT). Under GST, the tax is levied on the consumption of goods. The importance of GST is more compelling as it brings better transparency and corruption-free tax administration.
Importance of GST for the Indian Economy
1. Creation of Unified National Market
The importance of GST can also be obvious as it aims at making the country a single market place with common tax rates and procedures. This will remove various barriers. Thus paving the path for an integrated economy.
2. Mitigation of Effects the Cascading Effect
GST subsumes various taxes and allows input credit of taxes paid on purchases for payment of output tax liability. Thus GST is important as it mitigates the cascading effect from the economy.
3. Elimination of Multiple Taxes and Double Taxation
Having subsumed various central and state-level taxes, GST makes business easier. It also helps in addressing issues such as double taxation.
4. Boost to Government Initiatives
GST is important as it will provide a boost to various government initiatives such as ‘Make in India’.
5. The Increment in Government Revenue
The importance of GST is vivid as it is expected to widen the tax base and improve taxpayer compliance. It would further increase government revenue.
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