Tax is a mandatory financial charge or levy imposed by a government on individuals, businesses, or other entities to fund public expenditures and services. Taxes are collected to support the functioning of the government and provide public goods and services such as infrastructure, education, healthcare, defence, and social welfare programs. In this article, let us discuss two types of taxes, direct taxes and indirect taxes. In this article let us get idea about Goods and Services Tax.

What is Goods and Services Tax (GST)?

According to Article 366 (12A) of Constitution of India, goods and services tax means a tax on supply of goods or services, or both, except taxes on supply of alcoholic liquor for human consumption.

• GST is a value added tax levy on sale or service or both.
• GST is a destination based consumption tax.
• GST offers comprehensive and continuous chain of tax credit.
• GST where burden borne by final consumer.
• GST eliminate cascading effect of tax.
• GST brings uniform tax structure all over India.

Characteristics of GST

The Goods and Services Tax (GST) is a comprehensive indirect tax system introduced in India under the 101st Constitutional Amendment Act of 2016. It replaced various central and state taxes with a single tax on the supply of goods and services, aiming to create a unified national market. Below are the key characteristics of GST:

• Dual Tax System: GST in India operates as a dual tax system, where both the central government (CGST) and state governments (SGST) levy taxes on goods and services. For inter-state transactions, the Integrated Goods and Services Tax (IGST) is levied to ensure seamless movement of goods across state borders. This structure maintains the federal nature of India’s governance, with both levels of government participating in the tax process.
• Comprehensive Tax on Goods and Services: Single Tax for Goods and Services: GST replaces multiple indirect taxes such as VAT, excise duty, service tax, and others, consolidating them into a single tax on the supply of goods and services. This makes the tax system simpler and more transparent, as it eliminates the cascading effect of taxes (tax on tax).
• Destination-Based Tax: GST is a destination-based tax, meaning it is levied at the point of consumption rather than at the point of production. This helps ensure that the tax burden is borne by the final consumer, and the revenue accrues to the state where the goods or services are consumed.
• Tax on Value Addition: GST is a value-added tax system, meaning tax is paid on the value added at each stage of production or distribution. Businesses receive a credit for the tax paid on inputs, and only the value added is taxed at each stage, eliminating the cascading effect of taxes.
• Uniform Tax Rate and Classification: GST aims to standardize tax rates across the country by classifying goods and services into different tax slabs. The major tax slabs are typically 5%, 12%, 18%, and 28%. Essential goods and services like food items may be taxed at lower rates or exempted, while luxury goods and sin goods (such as tobacco and alcohol) are taxed at higher rates.
• Input Tax Credit (ITC): A key feature of GST is the Input Tax Credit system, which allows businesses to offset the tax paid on inputs (raw materials, goods, and services used in production) against the output tax liability. This ensures that tax is only levied on the value added at each stage of production, preventing tax on tax and reducing the overall tax burden.
• Broad Tax Base: GST applies to a wide range of goods and services, creating a broad tax base. This leads to higher revenue generation for the government and ensures greater compliance, as more sectors are covered under the tax regime. Certain sectors like exports, healthcare, and education are either exempt or zero-rated to ensure minimal impact on essential services.
• Simplified Tax Compliance: GST has introduced online filing of returns, making the entire process of tax collection and compliance simpler and more transparent. Businesses are required to file periodic returns, providing details of sales, purchases, and tax paid, which can be tracked by the authorities for better monitoring.
• E-way Bill for Transport of Goods: Under GST, businesses need to generate an e-way bill for the transportation of goods above a certain value. This is a digital document that tracks the movement of goods and ensures that the tax system is not evaded during transportation.
• GST Council: The GST Council is the supreme body responsible for making recommendations on matters relating to GST, including tax rates, exemptions, and the scope of goods and services covered under the system. The GST Council is composed of the Union Finance Minister, State Finance Ministers, and other members, ensuring collaborative decision-making between central and state governments.
• Export Promotion and Incentives: Exports are Zero-Rated under GST, meaning goods and services exported outside the country are not subject to GST. This helps promote exports by making Indian goods and services more competitive in the global market. Exporters can claim a refund on taxes paid on inputs, which ensures that their goods and services are not taxed.
• Transparency and Accountability: GST ensures a higher degree of transparency and accountability in the tax system by establishing an online platform for filing returns and making payments. The use of digital systems helps reduce human intervention and potential for tax evasion, leading to greater efficiency in tax administration.
• Improved Revenue Collection: The simplification of the tax structure and the increased efficiency in tax collection contribute to higher tax compliance and improved revenue collection. With the removal of barriers to inter-state trade, businesses can operate more efficiently, increasing the tax base and ensuring consistent revenue flow for both state and central governments.
• Integration with Other Tax Reforms: GST integrates with other revenue reforms, such as digital payments and financial inclusion. The online nature of the system encourages businesses to maintain proper books and records, making the economy more formalized and transparent.

GST is a comprehensive and revolutionary tax reform in India that aims to simplify the tax system, eliminate the cascading effect of taxes, and foster economic growth. Its key characteristics, such as the dual tax structure, input tax credit, broad tax base, transparency, and collaborative decision-making through the GST Council, make it a significant step toward achieving a unified and efficient national tax system.

One Nation – One Tax:

GST will extend to whole of India including the State of Jammu and Kashmir. On 7th July, 2017, the Jammu and Kashmir Goods and Services Tax Bill, 2017 was passed by the State Legislature, empowering the State to levy State GST on intra-state supplies with effect from 8th July, 2017. Concomitantly, the President of India has promulgated two ordinances, namely, the Central Goods and Services Tax (Extension to Jammu and Kashmir) Ordinance, 2017 and the Integrated Goods and Services Tax (Extension to Jammu and Kashmir) Ordinance, 2017 extending the domain of Central GST Act and the Integrated GST Act to the State of Jammu and Kashmir, with effect from 8th July, 2017. With this, the State of Jammu and Kashmir has become part of the GST regime, making GST truly a “one nation, one tax” regime.

Indirect Taxes Subsumed in GST

The main objective of the GST is to reduce the complexities, remove the effects of cascading tax burden by introducing a new broad based tax regime which subsumes all the taxes levied on the sale of goods and/or provision of services by both the centre and the states and provide a larger pull for set off of taxes.

Following principles were applied to identify the indirect taxes levied on supply of goods or services to be subsumed:-

• Only indirect taxes on goods and/or services were subsumed.
• The taxes were part of the supply chain i.e. manufacturer, service provider or retailer or consumer,
• The taxes resulted in free flow of tax credits in intra and inter-State levels.
• The taxes such as Stamp Duty, Municipal Taxes which were specifically unrelated to supply of goods or services, were not subsumed; and
• The subsuming of the taxes maintained revenue neutrality and fairness between the Central and the States

Taxes Not Subsumed in GST:

Following taxes were not subsumed in GST:

• Basic Customs Duty levied on Import of goods into India.
• Exports Duty imposed on export of goods are not available in India in abundance,
• Road and Passenger Tax ,
• Toll Tax
• Property Tax
• Stamp Duty
• Electricity Duty

Treatment of Specific goods:

• The Alcoholic Liquor for Human Consumption Under clause 12 A of Article 366, of the Constitution the supply of alcoholic liquor for human consumption is outside the ambit of GST. The States will continue to impose tax on it. Moreover, CST on inter-state sales of alcohol products would also continue.
• Tobacco Products Tobacco and tobacco products being “Sin Goods” will be subjected to GST subject to a separate excise duty by the Centre.
• Petroleum, Crude, High Speed Diesel (HSD) , Motor Spirit, Natural Gas and Aviation Turbine Fuel(ATF) The states will continue to levy VAT on intra-state sales of petroleum products. Inter-state sales would continue to attract Central Sales Tax (CST). However, these products may be transitioned into the GST regime on a future date to be notified by the GST Council. Moreover, these products are also subject to levy of excise duty imposed by the Centre in addition to the VAT or GST.
• Newspapers and newspaper advertisements There is no GST on newspaper but advertisements are subject to levy of GST

Advantages of GST

The Goods and Services Tax (GST) has brought about significant changes to India’s taxation system, offering a range of advantages for businesses, consumers, and the economy as a whole. Below are the key advantages of GST:

• Elimination of Cascading Taxation (Tax on Tax): GST eliminates the cascading effect of taxes by allowing businesses to claim input tax credits (ITC) on the tax paid for goods and services used in production. This means tax is only levied on the value added at each stage, leading to a reduction in the overall tax burden on consumers. Before GST, taxes like VAT, excise duty, and service tax were levied at each stage of production, leading to multiple layers of taxation on the same product. GST removes this inefficiency.
• Creation of a Unified National Market: GST has helped create a single, unified national market by eliminating inter-state barriers to the movement of goods and services. Previously, different tax rates in states created confusion and delays in cross-border trade. The uniformity in tax rates under GST ensures that businesses can operate across states without worrying about different tax structures, making it easier to do business nationwide.
• Reduction in Tax Evasion: GST’s digital platform and real-time tax filing system make it easier for authorities to track transactions and ensure compliance. This significantly reduces the opportunities for tax evasion and black market activities. The requirement for businesses to maintain proper digital records, file regular returns, and report transactions reduces human intervention and enhances transparency in the system.
• Boost to the Economy and Business Environment: By streamlining the tax structure and promoting ease of doing business, GST encourages economic growth and enhances the business environment. Small businesses benefit from the composition scheme under GST, which provides them with a simplified tax structure and lower tax rates, thus reducing their compliance burden. GST also leads to greater efficiency in production, distribution, and logistics due to the reduction in various taxes and barriers between states.
• Reduction in Prices of Goods and Services: The reduction of multiple taxes and the removal of the cascading tax effect often leads to a decrease in the prices of goods and services for consumers. This can make goods more affordable and increase consumer spending, boosting demand. Certain goods and services, especially essentials, may also benefit from lower tax rates, thus improving accessibility for lower-income groups.
• Transparency and Accountability: The online tax filing system under GST ensures greater transparency in the tax collection process, as all transactions are recorded digitally. Businesses and consumers can track the movement of goods, tax payments, and returns, leading to greater accountability on both sides (taxpayers and authorities).
• Simplified Tax Compliance: GST simplifies the overall compliance process for businesses. It replaces multiple indirect taxes with a single, harmonized tax system, reducing the complexities associated with compliance under the previous regime. The requirement for one tax return and the electronic filing system make tax reporting more straightforward and efficient for businesses, saving both time and money in managing tax obligations.
• Improvement in Logistics and Supply Chain: The elimination of state borders and the removal of various entry taxes help streamline the logistics and supply chain systems. Goods can now be transported more efficiently across states without the need for tax checkpoints, reducing delays and transportation costs, ultimately benefiting businesses and consumers.
• Facilitation of Export and International Trade: Under GST, exports are zero-rated, which means they are exempt from taxes, making Indian goods more competitive in international markets. Refunds for input taxes on exports ensure that Indian exporters are not burdened by the tax structure, promoting a favourable trade environment and boosting exports.
• Boost to Government Revenues: GST’s streamlined structure and better compliance mechanisms have led to an increase in tax collection efficiency, which can help boost the revenue of the government. With a broader tax base (more businesses included in the system), governments can collect more taxes, leading to improved fiscal health and the ability to invest in public welfare.
• Encouragement of Digital and Formal Economy: By promoting digital filing, invoicing, and payments, GST has helped push India toward a more digital and formal economy. The digital nature of the system encourages businesses to keep accurate records, reducing the shadow economy and fostering greater economic inclusion.
• Simplified Inter-State Taxation: GST makes inter-state taxation simpler by introducing the Integrated GST (IGST) for transactions between states. IGST ensures that the tax burden is properly shared between the central and state governments, avoiding complications in inter-state trade and making it easier for businesses to operate across state lines.
• Positive Impact on the Manufacturing Sector: GST is expected to benefit the manufacturing sector by reducing the cost of raw materials and increasing the ease of access to markets across the country. This can encourage investment in manufacturing and increase the competitiveness of Indian products.
• Encouragement of Start-ups and MSMEs: GST encourages start-ups and small and medium-sized enterprises (MSMEs) by reducing tax-related barriers and enabling them to access a broader market. Simplified tax filing, the composition scheme for small businesses, and the ability to set off taxes paid on inputs encourage entrepreneurship and innovation.

The introduction of GST has been a major reform in India’s taxation landscape, offering significant advantages such as elimination of cascading taxes, simplified compliance, increased transparency, and the creation of a unified national market. It supports economic growth, boosts government revenues, reduces costs for consumers, and facilitates ease of doing business. These advantages contribute to a more efficient, fair, and transparent tax system, which benefits not only businesses and consumers but also the government and the overall economy.

Benefits of GST to Various Stakeholders

The Goods and Services Tax (GST) is designed to streamline the indirect tax system in India, benefiting multiple stakeholders by fostering simplicity, transparency, and efficiency. Here’s how it impacts various stakeholders:

Benefits to Consumers:

• GST eliminates the cascading effect of taxes, leading to lower overall tax on goods and services.
• Tax components are clearly reflected in the invoice, ensuring transparency in pricing.
• Uniform tax rates across the country ensure fair pricing, reducing regional price disparities.
• Improved supply chain efficiency and reduced logistics costs lead to lower product prices.

Benefits to Businesses:

• GST replaces multiple indirect taxes with a single tax system, reducing compliance efforts and costs.
• Businesses can claim input tax credit on all eligible purchases, reducing the tax liability on output.
• A unified market across India eliminates the need for multiple registrations and compliance with state-specific taxes.
• Lower costs and streamlined operations enhance the competitiveness of Indian businesses, especially in global markets.
• Registration requirements under GST encourage businesses to move from the informal to the formal sector, increasing market credibility.

Benefits to Central and State Governments

• GST broadens the tax base, reduces evasion, and enhances compliance, leading to improved revenue generation.
• A unified tax system and the GST Network (GSTN) simplify tax collection and tracking, reducing administrative overheads.
• The dual GST model ensures fair revenue distribution between the Centre and States.
• Mechanisms like e-invoicing, reverse charge, and ITC tracking enhance transparency and curb tax evasion.

Benefits to Small and Medium Enterprises (SMEs)

• The composition scheme provides relief to small taxpayers with reduced compliance requirements and lower tax rates.
• GST enables SMEs to operate and sell goods across the country without worrying about state-specific tax barriers.
• Simplified processes and input tax credits reduce operational costs for small businesses.

Benefits to Exporters

• Exports are zero-rated under GST, meaning no tax is levied on export goods and services, ensuring global competitiveness.
• Exporters can claim refunds for the input taxes paid, reducing the cost of goods sold internationally.
• Simplified documentation and processes under GST enhance efficiency in export operations.

Benefits to the Economy

• GST removes trade barriers, creating a single, unified market across India.
• Improved tax compliance, reduced logistics costs, and a more efficient supply chain contribute to economic growth.
• A simplified and transparent tax structure improves India’s ease of doing business, attracting domestic and foreign investments.
• GST brings more businesses into the tax net, promoting a shift from the informal to the formal sector.

GST offers a win-win scenario for consumers, businesses, governments, and the overall economy. By reducing inefficiencies and fostering a transparent tax system, GST creates a robust foundation for India’s economic growth and development.

Challenges in GST Implementation:

While the Goods and Services Tax (GST) has brought about significant benefits in terms of simplifying the tax structure and creating a unified market, it has also faced several challenges during its implementation and operation. Below are the key challenges faced by GST:

• Technical Issues and System Glitches: The introduction of GST required a robust online system for filing returns, payments, and managing compliance. However, the GSTN portal (Goods and Services Tax Network) faced several technical glitches in the initial years of implementation, leading to delays in filing returns, payments, and difficulties in reconciling data. The complexities of integrating such a vast system led to problems like system downtime, slow processing, and data mismatches, making it difficult for businesses to file returns on time.
• Complex Compliance Process: GST requires businesses to file multiple returns each month, which has been burdensome for many small and medium-sized enterprises (SMEs). While there have been efforts to simplify the process (such as the introduction of quarterly returns for small businesses), the complexity of the filing system remains a challenge for some businesses, particularly in understanding various forms and matching invoices. Businesses must reconcile the data between their sales and purchase registers, which can be time-consuming, especially when dealing with input tax credit (ITC) claims. Any mismatch in data can lead to delays, fines, or penalties.
• Inconsistent Implementation across States: Since GST is a dual tax structure (CGST and SGST), it requires active collaboration between the central and state governments. While some states were quick to adapt to GST, others faced delays in setting up their systems, leading to regional disparities in the smooth implementation of GST. Many small businesses in rural and less developed regions have faced challenges in understanding the nuances of the new tax system, which has led to non-compliance or wrong filings. Though GST aims for uniformity, some states have varied in their implementation of tax exemptions and rates. States also have different approaches to tax administration, leading to inconsistencies in the way GST is applied and enforced.
• High Compliance Costs for Small Businesses: Small and medium-sized enterprises (SMEs) often struggle with the cost of compliance. Many SMEs find it difficult to afford the technology and accounting resources required for GST compliance, such as hiring accountants and implementing software systems for GST filing and tax calculation. Businesses also need to invest in employee training to understand and comply with the GST framework, which can be expensive and time-consuming.
• Impact on Certain Sectors: Sectors like construction, real estate, and e-commerce have faced difficulties in complying with GST due to their complex nature, and the introduction of GST led to a higher tax burden for some businesses in these areas. For example, real estate developers faced challenges in understanding the tax treatment of under-construction properties, leading to disputes and confusion. Similarly, agriculture and small-scale manufacturing faced challenges in adapting to the new tax system. The service sector also faced complexities, particularly with the input tax credit (ITC) for services, which led to confusion about whether certain services should be taxed or exempt.
• Price Fluctuations and Inflation: The implementation of GST has led to price fluctuations for certain goods and services. In some cases, the effective tax burden increased for consumers due to changes in the tax rate, leading to price hikes, especially in the short term. Although the goal of GST is to reduce prices by eliminating the cascading effect of taxes, there have been instances where essential goods saw an increase in prices, leading to concerns about inflation, particularly for the lower-income population.
• Disruptions in Cash Flow for Businesses: Businesses were initially required to pay GST before claiming input tax credit, leading to cash flow issues for many, particularly for small businesses and those with longer sales cycles. Even though this issue has been partly addressed through periodic revisions in the rules, it remains a challenge for certain sectors. Some exporters and businesses dealing with export of services have faced long delays in receiving GST refunds on input tax credits, which has affected their working capital and cash flow.
• Lack of Clarity on Certain Provisions: Despite the establishment of the GST Council, there have been instances where there is a lack of clarity on the classification of goods and services, leading to disputes between businesses and tax authorities. Certain rules regarding reverse charge mechanism, input tax credits, and the taxation of composite or mixed supplies have led to confusion and errors in compliance, requiring frequent amendments to the GST laws.
• Impact on Informal Sector: The informal sector in India, which is a significant part of the economy, has faced challenges in adapting to the formal GST system. The shift from cash transactions to a formalized digital system has excluded many small businesses from the tax system due to lack of awareness or resources. The compliance requirements have been especially tough on small, unregistered traders, who find it hard to meet the documentation and digital filing standards mandated under GST.
• Increased Burden on Tax Authorities: The introduction of GST has added a significant workload for the tax authorities, who now need to handle a larger volume of transactions, returns, and audits. Ensuring compliance across millions of businesses has been a challenge, and improper enforcement or lack of adequate staffing can lead to inefficiency in the system. Tax authorities also face difficulties in conducting audits of businesses, especially in the case of cross-border transactions and e-commerce, where transactions span multiple jurisdictions.

While GST has undoubtedly streamlined the tax system and offered several advantages, its implementation has faced significant challenges. These include technical issues, complexities in compliance, delays in refunds, inconsistent application across states, and the impact on certain sectors of the economy. Addressing these challenges requires continued efforts from both the central and state governments to improve the GST system, provide clarity on tax provisions, enhance IT infrastructure, and offer support to small businesses and other affected sectors. Over time, as the system matures and businesses adjust, many of these challenges are likely to diminish, making GST an even more effective tool for economic growth and development.

Conclusion:

The Goods and Services Tax (GST) is a comprehensive tax reform aimed at simplifying the tax system, improving efficiency, and ensuring uniformity across the country. It replaces multiple indirect taxes with a single, unified tax structure, which has several key benefits and challenges. GST has the potential to boost economic growth by reducing tax cascading (tax on tax), improving the ease of doing business, and creating a more transparent and streamlined tax system. It enables businesses to operate in multiple states without the complexities of inter-state taxes, leading to cost savings and higher productivity. By bringing a large number of goods and services into the tax net, GST has expanded the tax base, increasing government revenues and enabling better funding for public services and infrastructure development. GST introduces technology-driven processes, like e-filing and automated return filing, which make it harder for businesses to evade taxes. This has led to more accurate reporting and improved compliance.

GST is faced with implementation challenges. The initial phase of GST implementation saw teething problems, including complexities in filing returns, inadequate infrastructure, and technical glitches. Smaller businesses, especially those that are not well-equipped to handle the digitalization of tax filing, faced difficulties in adjusting to the new system. While the aim was to make the system revenue-neutral, some industries initially experienced price hikes due to the higher tax slabs in GST, leading to concerns about inflation. GST has significantly altered the fiscal relationship between the central and state governments. While it has promoted national integration, it has also led to debates about the division of tax revenues and the sharing of decision-making power, particularly for states that heavily rely on state-specific taxes.

GST is a transformative policy with the potential to modernize India’s tax system, promote transparency, and create a unified national market. However, its success depends on ongoing refinements, technological upgrades, and continued efforts to simplify compliance, especially for small and medium enterprises. Over time, GST is likely to strengthen India’s economic structure by improving tax collections, reducing compliance costs, and creating a more business-friendly environment.