GSTTaxation

Why GST Was Introduced in India?

Read this blog for a clear understanding of the history of Goods and Services Tax, its introduction, its components, and its importance. You will also get accurate information on how GST works.

The beginning of the concept of the Goods and Services Tax (GST) in India was in the year 2000, and it was finally implemented in 2017. It has four bills that relate to the forming of the Act. The aim of the GST Act is to level out the services and goods all across the nation. 

The historical move of implementing GST gave India a significant indirect tax reform. The various different taxes that were levied at the state and the centre were clubbed into one tax that was named GST. The foremost benefit was the removal of double taxation or cascading taxation. This initiative paved the way for a single national market.  

If we look at the benefit of the GST for the consumer, the reduction will be significant on the tax burden that currently stands between 30% and 25%. Because of its transparent and self-policing nature, GST is easy to administer. 

When was GST Introduced in India? 

GST was implemented in India on 1 July 2017 after the Parliament passed the Goods and Service Tax Act on 29 March 2017.

Meaning of GST 

why gst was introduced – GST is a single indirect tax on all goods and services that has replaced the other indirect taxes previously imposed on goods and services. For example, Value Added Tax (VAT) and excise duty. On 29 March 2017, Parliament passed the Goods and Service Tax Act: https://reg.gst.gov.in/registration/. Later, on 1 July 2017, GST came into effect and was introduced across India. 

Before the introduction of GST, the taxation system in India lent itself to various problems. GST Registration Process was introduced to provide relief from these problems. GST: 

  • Subsumed majority of the indirect taxes
  • Removed the cascading effect of taxes
  • Stopped evasion of taxes
  • Increased taxpayer base
  • Provided online procedures to increase the ease of doing business
  • Made the distribution system and logistics better
  • Promoted consumption and competitive pricing.

Different Types/ Components of GST 

In India, four different types of GST have been implemented:

  • Integrated Goods and Services Tax (IGST)
  • State Goods and Services Tax (SGST)
  • Central Goods and Services Tax (CGST)
  • Union Territory Goods and Services Tax (UTGST).

Under each version of GST, the rate of taxation is different. 

The following table provides the difference between each type of GST at a glance. 

GST Type Benefitting Authority Priority of Tax Credit Use Collecting Authority Applicable Transactions (Goods and Services) Governing Act
CGST Central Government CGST IGST Central Government Intrastate – Within a Single State CGST Act
SGST State Government SGST     IGST State Government Intrastate – Within a Single State SGST Act
IGST Central Government and State Government IGST     CGST Central Government Interstate – Between a State and a Union Territory or Between Two States IGST Act
UGST / UTGST Union Territory (UT) Government UTGST     IGST Union Territory (UT) Government Within one single UT UTGST Act

Importance of GST 

GST is levied on goods and services that are sold for consumption domestically. This tax is part of the final price of the good or service, and the final consumer needs to pay it when purchasing. The seller passes the collection to the government. Generally, GST is taxed at one rate all throughout the country.  

The following list provides some of the important advantages of GST.

  • Price reduction: Traders and manufacturers do not need to include taxes in their production cost, due to which the cost of production will decrease
  • Reduction in procedural costs and compliance requirements: GST lends itself to decreasing compliance maintenance load and does away with the need to maintain separate records for IGST, SGST, and CGST.
  • Implement Unified GST: While dual GST has been implemented in India, it will lead to a Unified GST, the Indirect Taxes method
  • Increase GDP growth by 100-200 bps or (1 to 2%): Due to GST providing a uniform structure of taxation, it will encourage cheaper and faster goods movement all over the nation
  • Attract foreign investment: GST will display to foreign investors the ability created to support business.

Use our GST calculator to determine the exact amount of GST to be paid before registering for GST.

How the Goods and Services Tax Works 

GST has managed to remove most of the indirect taxes levied by the State and Central governments. 

GST Rates 

GST provides a 4-tier tax structure for all services and goods to be used for the calculation of applicable GST on a specific good or service. The 4 tax rates are 5%, 12%, 18%, and 28%. GST is exempt for several goods and services. The GST rate for precious metals, such as silver and gold, is 3%. 

Input Tax Credit 

Input tax credit enables manufacturers and service providers to offset their input costs when they pay their output tax.  

Let us take an example. 

Consider that a manufacturer’s output tax adds up to 2,000. The manufacturer has paid an input tax of ₹800 when making the purchase. Now, the manufacturer’s liability for GST will be 1,200 (2,000 – 800). The compliance required is that the invoices need to match the claim so that the manufacturer can benefit from the credit facility. 

Export and Import GST 

On the import of goods, the IGST component of GST is applicable. This is because an import is seen as being an inter-state transaction. Besides the IGST that is applicable in this case, the import of goods also attracts additional customs duties. On the other hand, there is no tax liability in the case of the export of goods/ services. Yet, exporters are allowed the advantage of an input tax credit. 

India’s Adoption of the Goods and Services Tax 

The Goods and Services Tax (GST) is a consumption tax or an indirect tax that is imposed on the supply of services and goods. GST is a destination-based, multistage, comprehensive tax. 

Destination-based: Unlike previous taxes that were collected from the point of origin, GST is collected from the point of consumption.  

Multi-staged: While GST is applicable at each step of the process of production, it is refunded to all parties at the various stages of production other than to the final consumer  

Comprehensive: It subsumes nearly all indirect taxes (besides some state taxes). 

Conclusion

The importance of GST implementation can be seen in the many advantages that it brings to the taxation system in India. It is a major step forward in significantly reforming India’s indirect taxation system. The bringing together of various state and central taxes under a single tax enables the removal of double taxation, and this lends itself to creating a common national market. 

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