Goods and Services Tax (GST)

Syllabus
GS Paper III – Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context
7 years of GST: Balancing tech & transformation

---

Goods and Services Tax (GST)

Introduction

Seven years after its inception, the Goods and Services Tax (GST) stands as a transformative force in India’s digital economy. This tech-driven tax system, characterized by automation and efficiency, has brought us closer to the vision of “one nation, one tax.” By streamlining registration, tax payments, and return filing through the GST Network (GSTN), it has empowered businesses and the tax department alike. Moreover, GST has incentivized micro, small, and medium enterprises (MSMEs) to register, unlocking credit facilities and fueling their growth.

Key points about the Goods and Services Tax (GST)

• Introduction to GST:
  • GST is an indirect tax system that replaced several existing taxes in India, including excise duty, VAT, and service tax.
  • The Goods and Service Tax Act was passed in Parliament on March 29, 2017, and it came into effect on July 1, 2017.
• Comprehensive Tax Structure:
  • GST is a comprehensive, multi-stage, destination-based tax.
  • It is levied on every value addition during the supply of goods and services.
  • Unlike the fragmented tax structure before GST, it provides a unified framework for the entire country.
• Tax Collection Mechanism:
  • Under the GST regime, taxes are collected at every point of sale.
  • For intra-state sales (within the same state), both Central GST (CGST) and State GST (SGST) are charged.
  • Inter-state sales (between different states) are subject to the Integrated GST (IGST).

Benefits of the Goods and Services Tax (GST) system in India

1. Elimination of Cascading Tax Effect:
   • GST eliminates the cascading effect of tax, commonly known as “Tax on Tax.” It brings indirect taxation under one umbrella, preventing double taxation and reducing the overall tax burden.
2. Higher Threshold for Registration:
   • Under GST, the threshold for mandatory registration has been increased to Rs. 20 lakhs (Rs. 10 lakhs for Northeastern states). This exempts many small traders and service providers from the tax liability.
3. Composition Scheme for Small Businesses:
   • Small businesses with a turnover of Rs. 20 to 75 lakhs can benefit from the Composition scheme. It simplifies tax compliance and reduces the burden on these enterprises.
4. Simple and Easy Online Procedure:
   • GST processes, from registration to return filing, are entirely online. Start-ups find this streamlined approach beneficial, as they no longer need to navigate multiple registrations for VAT, excise, and service tax.
5. Reduced Compliance Burden:
   • Unlike the previous system with separate VAT and service tax returns, GST combines these into a single return, reducing compliance requirements for businesses.
6. Special Treatment for E-Commerce Operators:
   • GST provides specific provisions for e-commerce operators, ensuring smoother tax collection and compliance in the digital marketplace.
7. Improved Efficiency of Logistics:
   • With seamless interstate movement of goods, GST has enhanced logistics efficiency, benefiting businesses and consumers alike.
8. Regulation of the Unorganized Sector:
   • GST brings the unorganized sector into the formal economy, promoting transparency, accountability, and fair competition.

India’s digital leap and the impact of GST

• GST Network (GSTN): Foundation for Success
  • The success of GST relied on a robust compliance infrastructure, with the GST Network (GSTN) playing a pivotal role.
  • GSTN streamlined registration, tax payments, and return filing, transforming tax compliance.
• Simplified Compliance to Combat Tax Evasion
  • Enhanced Compliance and Data Analytics: GSTN simplified compliance for businesses and tax authorities, using data analytics to identify and tackle tax evasion.
  • Automation: Processes like e-waybills, e-invoicing, and monthly returns were automated, revolutionizing tax compliance and inspiring other countries.
• Benefits for Micro, Small, and Medium Enterprises (MSMEs)
  • Increased MSME Registration: Initiatives like quarterly returns and relaxed GSTR-9C requirements incentivized MSMEs to register under GST, expanding the taxpayer base.
  • Business Growth: Large businesses prefer working with GST-registered and compliant entities, driving MSME expansion.
  • Improved Credit Facilities: GST unlocked better credit facilities for MSMEs, further fueling their growth.
• “Ek Bharat, Sreshtha Bharat” (One Nation, One Tax)
  • Unified System: GST fulfilled its promise by creating a common market and eliminating the cascading effect of taxes that inflated business costs.
  • Competitiveness Boost: Indian businesses gained competitiveness in both domestic and global markets.
• Streamlined Interstate Movement:
  • Before GST: Interstate movement of goods faced entry taxes and checkpoints at state borders, causing delays and increased costs.
  • After GST: The elimination of these hurdles allows seamless movement of goods, resulting in faster transit times and reduced logistics costs for businesses.
• Enhanced Credit Flow:
  • GST has ushered in an era of improved credit flow and more liberal credit provisions compared to the pre-GST regime.
  • Businesses can now reimagine their supply chains with greater financial flexibility.
• Centralized Model for Margins:
  • By eliminating the need for multiple warehouses, companies can operate with a centralized model.
  • Key beneficiaries include fast-moving consumer goods, consumer durables, retail, and the automotive sectors.

Concerns and proposed solutions for improving GST

• Fixing Inverted Rate Structures and Easing ITC Rules:
  • Addressing Inverted Duty Structure: Despite efforts to streamline GST rates and enhance cash flow, sectors dealing with an inverted duty structure still face challenges. Further reforms can alleviate credit accumulation issues and address industry concerns.
  • Inclusion of Petroleum Products: Advocates are pushing for petroleum products to be brought under the GST framework.
    • This would ensure seamless input tax credit (ITC) flow across the supply chain, benefiting businesses and the overall economy.
    • By addressing credit bottlenecks and incorporating critical products like fuel, the government can create a more efficient and beneficial GST system.
• Simplified Rate Structure:
  • Benefits of Rate Rationalization: Compared to the previous regime, rate rationalization in GST has significantly boosted consumer demand and economic growth. Notably, the auto sector has benefited.
  • Issues with the Current Multi-Tier System: The existing multi-tier rate system (ranging from 0 to 28 percent with additional cess on certain items) leads to classification disputes and inadvertent non-compliance. It also creates inversion challenges in specific sectors.
  • Consultation and Rationalization: Industry consultation for rate rationalization can reduce inversion cases, minimize classification disputes, and enhance compliance. Simplifying the rate structure by reducing the number of rates will make GST more efficient for all stakeholders.
• Addressing Evolving GST Law Disputes:
  • Initial Challenges: As the GST law continues to evolve, disputes naturally arise. Initially, businesses faced errors due to unfamiliarity with the new laws, resulting in divergent positions and minimal precedents.
  • Amnesty Scheme Proposal: The government could introduce an amnesty scheme to regularize initial period transactions, waiving interest and penalties.
• National Advance Ruling Authority:
  • Inconsistent State-Level Rulings: State-level advance rulings on GST create confusion due to inconsistencies. Establishing a National Advance Ruling Authority would ensure uniform interpretation of the law nationwide, reducing uncertainty for businesses.
• Goods and Services Tax Appellate Tribunal (GSTAT):
  • Streamlining Dispute Resolution:
    • The GSTAT has immense potential to streamline dispute resolution within the GST framework.
    • Recent appointment of a tribunal president is a positive step.
    • Timely appointment of remaining GSTAT members is crucial for clarity on limitation periods and a fully functional tribunal.
    • A robust GSTAT will reduce the burden on High Courts, leading to more efficient dispute resolution for businesses.
• Sectoral FAQs:
  • Guidance for Complexity: Reintroducing sector-specific FAQs would be immensely helpful in navigating ongoing GST complexities and nuances.

Conclusion

The implementation of GST has indeed set a strong foundation for India’s dynamic economy. As we look ahead to GST 2.0, several key areas deserve attention:

• Rate Rationalization: Simplifying the multi-tier rate structure and ensuring consistency across sectors will enhance efficiency.
• Liberalized Credit Regime: Further empowering businesses with seamless credit flow can drive growth.
• Mature Dispute Resolution: Strengthening mechanisms like the Goods and Services Tax Appellate Tribunal (GSTAT) will expedite case resolution.

Together, these steps will shape the next phase of GST, fostering economic progress.

Source: Business Standard

---

Related PYQ

Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017. How has COVID-19 impacted the GST compensation fund and created new federal tensions? [UPSC Civil Services Exam – 2020 Mains]

---

Practice Question

Discuss the impact of GST implementation on India’s digital economy and propose reforms to enhance compliance and benefits. [250 words]

---