Indirect Tax prior to GST and after GST

Introduction

As we all know that India is a socialist, democratic and republic country. India is a Quasi-federal with a parliamentary system of government. The federal structure comprises of central and state government.

The primary source of revenue is the levy of tax only. To maintain economic growth, the tax is considered to be the most important source of revenue for the government.

A tax is a compulsory financial contribution imposed on a person by a government in order to fund government funding and various public expenditure. As tax is paid by the person for availing services provided by the government for themselves. The tax is a mandatory payment because a failure to pay or evasion of or resistance of taxation is punishable by law.

In India, the constitution is supreme and all laws are subordinate to it.

Taxation is the only tool to achieve growth and economic development in the long run of any country.

Before GST there are number of taxes in the country which is termed as indirect tax. Government facing problem in the multiplicity of tax.

The idea of “ONE NATION ONE TAX” was put ahead by Former Prime Minister Late Shri Atal Bihari Vajpayee who stood up by framing a committee to draft a bill in 2000.

Provision of taxation under the Indian Constitution

The power to impose and collect tax emerges from the constitution of India.

Article 246:  This Article states that the Parliament may make laws for the whole of India or any part of the territory of India, the State legislature may make laws for whole or part of the State. It is provided in Schedule 7 with three lists.

Article 248: Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List. Such power shall include the power of making any law imposing a tax not mentioned in either of those Lists.

Article 265: This article states that no tax shall be levied or collected except by authority of law.

The power to levy Goods and Services Tax (GST) has been conferred by Article 246A of the constitution which was introduced by the Constitution (101st Amendment) Act, 2016
Indirect Tax (prior GST)

There was separate legislation made for separate levy of tax. Indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax. The intermediary later files a tax return and forwards the tax proceeds to the government with the return. 

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There were many indirect taxes levied by both the state and the centre. States mainly collected taxes in the form of Value Added Tax (VAT). Every state had a different set of rules and regulations.

Inter-state sale of goods was taxed by the centre. The indirect tax such as entertainment tax, VAT, octroi and local tax etc. was levied together by centre and state. These led to a lot of overlapping of taxes levied by both centre and state government.

Before the implementation of GST, the structure of indirect tax levy in India was :-

For example:- when goods were manufactured and sold, excise duty was charged by the centre. Over and above the excise duty, VAT was also charged by the state. It led to a tax on tax effect, also known as the cascading effect of taxes.

List of indirect tax in the pre GST regime

1. State VAT
2. Purchase tax
3. Central excise duty
4. Entertainment tax
5. Luxury tax
6. Central sales tax
7. Entry tax
8. Taxes on lotteries, betting and gambling.

CGST, SGST, and IGST have replaced all the above taxes.

GST ( Goods and Services Tax)

“Any tax on supply of goods or services or both except taxes on supply of the alcoholic liquor for human consumption”.

The year 2017 will always be remembered as the year which saw the implementation of the biggest and most important reform since Independence—the Good and Services Tax.

 GST is known as the Goods and Services Tax.

  • It is an indirect tax which has replaced many indirect taxes in India such as the excise duty, VAT, services tax, etc.
  • The Goods and Service Tax Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017.

GST is levied on the supply of goods and services. GST is a single domestic indirect tax law for the entire country.

The GST journey began in the year 2000 when a committee was set up to draft law. It took 17 years from then for the Law to evolve. In 2017, the GST Bill was passed in the Lok Sabha and Rajya Sabha. On 1st July 2017, the GST Law came into force.

Components of GST

There are 3 components of GST i.e.

  • CGST ( It is a tax collected by the central government on intra-state sale i.e. transaction within Haryana)
  • SGST (It is a tax collected by the state government on intrastate sale i.e. transaction within Haryana)
  • IGST (It is a tax collected by the central government for an inter-state sale i.e. Haryana to Delhi).
Comparative study between the prior indirect tax regime and present GST

Before GST, there are numbers of taxes levied by both centre and state government which may led to multiplicity of taxes on the tax payer.

Multiplicity of taxes:
  1. The indirect taxation system encompasses both the centre and state to levy indirect taxes on goods and services which was previously arbitrary and unfair as compared from the present GST system.
  2. The central government used to impose taxes on the following – Income tax, Basic custom duty, service tax, central excise.
  3. State governments used to levy taxes like VAT, stamp duties, land revenue, state excise duty and other local taxes.
  4. There were multiple indirect taxes which were to be borne by the manufacturing units as input tax and finally by the end consumers.

If we see the current taxation system i.e. GST has subsumed the majority of taxes which were previously imposed in the name of vat sales tax, central sales tax etc and as such India witnesses a single unified structure of taxation regime which is much more clear, apparent and feasible. The number of taxes shifted into GST.

A manufacturer who makes biscuits buys flour, sugar and other material. The value of the inputs increases when the sugar and flour are mixed and baked into biscuits and value continuously increased with each stage.

Tax calculation in earlier regime
     ActionCost(Rs)Tax rate (10%)Invoice total (Rs)
Manufacturer10001001100
Warehouse repacks at 20013001301430
Retailer advertises 40018301832013
TOTAL16004132013
Tax calculation in GST regime
ActionCost (Rs.)Tax rate (10%)Tax liability to be depositedInvoice total (Rs.)
Manufacturer10001001001100
Warehouse repacks at 2001200120201100
Retailer advertises 600 rs.1800180601980
TOTAL1800 1801980

The final value of the biscuit reduced from Rs.2013-Rs.1980.By the implementation of GST, cost of product reduced as compare to previous indirect taxation system.

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Burden of tax:

In the previous taxation regime, the burden of tax is on the taxpayer was considerably high and increased with each stage. The introduction of GST significantly brought a change by reducing the tax burden an making it more integrated and centralized. It is also more crystal clear that the burden in an equitable manner upon the manufacturer and the consumer.

Cascading effect:

It means both central and state government levy tax on the same good. Former levy tax on the manufacture of goods and the later levy VAT on the sale of very same goods. It boosted inflation. Whereas GST will overcome the problem of tax cascading through Input Tax Credit Mechanisms and the ultimate burden of taxes to be paid would be on the consumer of Goods and Services.

Integrated market system:

Indirect taxation prior GST was a hindrance to the integrated market system because India despite one nation couldn’t develop into the national market due to invisible barriers of central sales tax, VAT etc Whereas current taxation system i.e. GST, its main aim is to make India a common market with common tax (ONE NATION ONE TAX) and removes the barriers thus paving the way for an integrated economy at the national level.

During the pre-GST regime, the turnover disclosed by the taxpayer under the direct tax law and indirect tax law differed which gave way to tax evasion. The GST number is linked with PAN issued by the income tax department which has established a relationship between direct taxes and indirect taxes and will help to reduce tax evasion 

 

Pros and Cons of the current GST structure:

The Goods and Services Tax aims to reduce the number of indirect taxes and unify the Indian market.

There are many pros and cons of Good and Services Act (GST) as follows:-

Advantages:
  1. GST aims to reduce corruption and tax evasion in India.
  2. GST has brought together a number of indirect taxes under one umbrella.
  3. Simple and easy online procedure.
  4. Companies with a turnover up to Rs.75 lakhs under the GST taxation process can benefit from composition schemes and pay only 1% tax on their turnover. This will help them follow a simplified taxation process.
  5. GST has reduced taxes on certain goods by 2% and others by 7.5%, such as Smartphones and cars.
  6. Tax evasion is minimized.
  7. It reduces corruption and sales without receipts.
  8. Removing the cascading effect of the tax.
  9. Common national market.
  10. Annual sales turnover limits for indirect tax under GST
  11. Advertisement

It means that the turnover limit for registration under GST are higher, which exempt the small traders from paying GST.

Disadvantages:
  1. The higher tax burden on SME’s:- Earlier the small and medium enterprises had to pay excise duty only on a turnover that exceeded Rs. 1.5 crore every financial year. However, under the GST administration, a business whose turnover exceeds Rs.40 lakhs is liable to pay GST.
  2. Petroleum products don’t fall under the GST slab.
  3. Insurance premiums have become more expensive.
  4. GST transaction fees within the financial sector have become more expensive increasing from 15% to 18%.
  5. As GST was introduced on July 1, 2017, in the middle of the financial year 2017. This created difficulty on businesses to shift to a new tax regime immediately.
  6. Initially, three returns had to be filled every month. This called for a lot of work and deep understanding of multiple forms which required the small business owner to hire tax professionals and also larger companies had to change their accounting software and train employees to get used to the change. This future added to the cost.
  7. Blockage of working capital:- Working capital is the essence of every business. Implementation of GST has led to shortening of available funds in the hands of a business. Even the traders are facing issue in claiming their transitional refund due to procedural difficulties.
  8. Some retail products currently have only a four per cent tax on them. After GST, garments, and clothes could become more expensive.
Obstacle faced in relation to current GST structure

The introduction of Goods and Services Tax (GST) is one of the biggest tax reforms for India. GST is not just a tax change but it will benefit the economy as a whole and have a far-reaching impact on businesses.

A. The big challenge in GST could be integrating the small and medium enterprises.

  1. GST makes the entire process from invoicing to tax payment entirely online.
  2.  The invoice creation under GST-1 will be online and the approval by the client under GST-2 will also be online.
  3.  Once it is approved, it becomes GST-3 for tax records.
  4. Most small and medium enterprises may not have the technical savvy to adapt to this massive change. 

B. The second biggest challenge for GST is IT sector.

  1. As per the GST law, many items used in the IT industry like Printer, photocopying, fax machines and ink cartridges will now attract GST at the rate of 28% as opposed to the previous 18% tax rate.
  2. The IT companies will have to arrange the hardware and software to make their systems in compliance with GST. This will increase the infrastructure cost and affect business capability, especially for small businesses and startups.
  3. In the previous taxation system in the IT industry, there was a single point of taxation, i.e. the central service tax, and also one point of registration. However, in the GST regime, there are now 111 points of taxation. So, now the companies will have to deal with the States as well as the Centre separately, which is likely to increase the compliance cost. 

C.  The third biggest challenge faced is “place of supply

  1. Earlier the taxation of the IT service providers was carried out only from one location the head office of the company.
  2. Under GST,  a ‘place of supply’ provision has been introduced which brings the need of various billing in the case of single contract services where the delivery is happening from multiple offices of the same activity.
  3. For this, the IT companies will have to register in those states as well where there customer and clients reside.

D. The government introduced the unique matching concept for taxpayers to claim the input tax credit. However, due to technical challenges, the matching concept could not be achieved.

GST tax slab for different goods:-
5% GST Tax slab Items12% GST Tax Slab Items18% GST Tax Slab Items28% GST Tax Slab Items
1. SugarGheeBiscuitsSunscreen
2. TeaButterTyresDye
3. Cashew nutsFruit JuicePower banksTabacoo
4. Pizza breadAlomondsCakesWallpaper
5. AgarbattiPacked coconut waterPastriesPan masala
6. Domestic LPGFruitsSoupsCement
7. MedicinesNutsSuitcaseBidis
8. Postage stampsPicklePastaYachts
9. Unbranded namkeenMurabbaChoclatesDishwasher
10. CoffeeJamChewing gums 
11. Frozen vegetablesJellyBranded garmentsVending machines
12.CoalFrozen meat productsSoapAerated water
13. Skimmed milk powderNotebooksHair oilAircraft for personal use
14. Packed paneerUmberallaShampooAutomobiles
15. RuskHandbagsCurry pasteHair clippers
16. Edible oilsWodden frame for paintingDeodrantsWaffles and wafers coated with choclate
Impact of the GST Structure in the long run:-

Goods and services Tax “Short term pain and long term gain”

GST the biggest tax reform in India founded on the notion of “one nation, one market, one tax” is finally here. 

For the short term, It has led to the removal of multiple taxation regimes and cascading tax effects. Due to the lower burden of taxes, overall costs have decreased with subsequent increase in production. This is also gradually reducing the burden on the end consumer. Black money, fraudulent practices and tax evasion have reduced, especially E-way billing in more control and transparency.

World Bank chief economist said that GST will boost the India economy in long run.

“I know people get immediate concerns about what will be the effect on prices, but that’s a one time effect. The long-run effect is extremely beneficial,” Basu said in Kolkata.
As the cascading effect disappears, inflation will reduce, thus leading to a positive consumer outlook. 

As the tax revenue rises, the fiscal deficit would improve.

This is expected to attract more FDI investments and help growth in exports.

It will have a long-term impact on the country’s

  • GDP growth,
  • ease of doing business
  • expansion of trade and industry
  •  “MAKE IN INDIA” initiative.

 Most importantly, it will be significant in establishing and promoting honest business practices, which will propel India towards becoming a significant economic power.

Shifting a pen-and-paper economy like India to a completely digital platform is a good start.

Talking about the long-term benefits, it is expected that GST would not just mean a lower rate of taxes, but also minimum tax slabs.

It has been decided by the government to put in place an IT-grievance redressal mechanism to address the difficulties faced by a section of taxpayers owing to technical glitches on the GST portal. In this regard, GST Council has delegated powers to an IT-grievance redressal committee to approve and recommend to the GSTN the steps to be taken to redress the grievance and provide relief to the taxpayer.

Input Tax Credit

It is the tax paid by the buyer on purchase of goods or services such tax which is paid at the purchase when reduced from liability payable on outward supplies.

A manufacturer pay tax on final product (output) =    Rs. 450

                             Tax paid on purchase (input)   = (-) Rs. 300

                            Tax deposit    =  Rs. 150

Because tax is already paid at the final product, so person can claim input claim of Rs. 300

Conclusion

In nutshell, GST is a game-changer tax legislation and has helped the country in attracting foreign investments.

In my opion, GST will be beneficial for the nation as compare to previous indirect regime which include various taxes such as VAT, excise duty etc. Now all this taxes are paid as one tax called as GST. GST removed ‘tax on tax’ by bringing the concept of input tax credit that can be claimed at each stage by the seller. After the implementation of GST there are different tax slab rates for different goods and services. It can be said that GST is pain in short term and gain in the long run. Government work for the betterment of society and provide better and good services to the citizen of India. There are many pros and cons of GST as we discussed above. GST give clear transparency to every transaction. There is also a less corruption in the country.

The corona virus pandemic severely affected economy in the last few months. The Goods and Services Tax (GST) revenue collection was impacted by nationwide lockdown.

Revenue secretary said that the shortfall in the tax collection was estimated at 2.35 lakh crore, for fiscal 2021.

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Seema

BBA LLB, 5th Year, Chandigarh University

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