What is GST and what is its impact?

In the biggest tax reform since the Independence, the Goods and Services Tax Bill (GST) was finally passed in the Rajya Sabha on Wednesday. In a rare show of solidarity, Congress and the Government along with all the other parties except AIADMK voted for the GST bill.

The GST will have two components, Central GST (CGST) and the State GST (SGST) in keeping with the federal structure of our country. The GST will subsume all indirect taxes currently levied, including excise duties and service tax. It will be levied on consumption rather than production.

What is GST?

The Goods and Services Tax is an all-inclusive indirect tax on manufacture, sale and consumption of goods and services throughout India, which will replace taxes levied by the Central and State governments. At present there are a multitude of taxes like luxury tax, VAT, excise duty, central sales tax, entertainment tax and lottery taxes that are levied by central and state governments, GST will replace all these taxes.

Issues with the current system

At present the state and central government levies taxes at each level of goods manufacture or service delivery. For example, a shirt manufacturer will have to pay Excise Duty to the central government at his factory, when this product finally reaches the consumer, he will end up paying Value Added Tax (VAT). In case the shirt is exported to another state, then an Export Tax will have to be paid.

What will be GST’s Effect?

• GST will ensure that annual GDP growth goes up by 2 percentage points.
• Tax collection in the current scenario is jumbled and confusing, which poses as a big hurdle for businesses. With GST, the regime would become simpler and more convenient.
• Consumers end up paying “tax on tax” in case of goods exported to different states. With GST, no such taxation will happen.
• Tax will be collected at the point of consumption, hence all state and central taxes will be included in the final price. This transparency will ensure that government will not be able to raise taxes indiscriminately without public awareness and reaction