The ABC of GST

What is GST?

The Goods and Services Tax (GST) is expected to be the most significant tax, or more so, business transformation reform in the fiscal history of India. It is likely to impact prices, business processes, investments and profitability in all segments of the economy.

GST is a comprehensive tax levied on manufacture, sale and consumption of goods and service at a national level. Under GST there will be no difference between goods and services. Only the final consumer will bear the tax on value addition at every stage from producer/service provider to the retailer. It tries to eliminate indirect taxes and mitigate cascading or double taxation issues and leads to a common national market, with elimination of state boundaries.

Evolution of GSTGST STory

GST is a need of the hour

The need to implement GST arises from the inherent complexity in the existing tax system in India. GST is needed to simplify the existing complex tax structure; minimize the cascading effects of double taxation, streamline interstate transactions and make doing business in India easier for Indian as well as multinational companies (MNCs).

Why is GST needed?

GST Needed

Why GST since VAT is there?

GST is a destination-based consumption tax (similar to VAT). VAT was implemented first in 2005. Despite the success of VAT, there are still certain shortcomings in its structure, both at the center and the state level.

Shortcomings of VAT

shortcomings vat

GST framework global scenario

India plans to implement a dual GST system where central GST (CGST) and state GST (SGST) can be levied on taxable value of a transaction.

  • More than 140 countries have already implemented GST
  • Majority of the countries have single GST
  • Standard GST rate in most countries ranges between 15%–20%
  • All sectors taxed with very few exceptions/exemptions
  • Full tax credit on inputs
  • Canada and Brazil have dual GST

The existing taxes will be subsumed under CGST or SGST; however, there are a few exemptions.

Tax structure under GST

tax structure gst

Direct taxes, such as income tax, corporate tax and capital gains tax will not be affected by GST.

Implementation of GST aims to have a pan-India tax rate; however, it is still a long way before India reaches that stage. Under the proposed dual system, both Center and states will continue to levy taxes on goods and services. The tax rates will be mutually agreed upon by both the Center and states, and will fall within the decided range. The businesses will have to pay taxes to separate accounts for CGST and SGST.

In case of interstate transactions, interstate-GST (IGST) will be levied; the Center would levy IGST, which would be CGST plus SGST. The interstate seller will pay IGST on value addition; the seller will get full credit on input tax under IGST, CGST and SGST, as applicable. The Center will collect IGST from the seller state and transfer it to the buyer state.

Quick facts about GST

quick facts

In our next week’s article, we will focus more on the impacts of GST on various stakeholders. For more on GST, please check out our webpage

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