What exactly is the GST and why did it become a necessity in India? GST full form is ‘Good and Service Tax,’and it is the biggest tax reform in India.
On July 1st, 2017, GST was made effective and launched all over India at midnight. If you are interested to explore GST further, you can read about cgst act applicability in this article.
The new tax reform essentially swallowed up a number of the established tax laws such as VAT tax, Central Excise Law, Service Tax Law, Entry Tax, Octroi and so on. Instead, they are all counted under GST and further divided into three categories.
There is the SGST which is collected by the government of the state. The CGST and IGST, meaning Central Good and Service Tax and Integrated Good and Service Tax, respectively, falls under the jurisdiction of state government.
India has been contemplating the implementation of GST for over a decade. However, it was until the year 2017, that all the previous tax laws could be eradicated to form a new tax system.
The news of GST gained a mixed response. While some were looking forward to seeing what the government planned to do with the new law, others were disappointed in the hike in tax prices. Businesses are now made it mandatory to have gstin number to operate from India.
Indeed, the first implementation of GST saw higher tax rates that all VAT and excise law combined. The new tax law went through numerous changes since its establishment until the tax rates were lowered and the security system was raised as well.
This brings us to a really important question. What was the purpose of GST? Why did the government decide it was important to bring about a new tax law when the old one was doing just fine? There are numerous reasons for it. To shed some light, let’s keep in mind that the GST law is actually established in 160 countries. A lot of countries found this law beneficial and for good reasons.
The GST is a destination-based tax law and the tax is levied on the goods consumed. We will now focus on some points that have made it a mandatory law.
1. Unified Tax Law
GST combined a number of taxes, eradicating the problem of multiple taxes for the traders and providing a simpler tax system for consumers who so they can follow.
The multiple taxes used to be a point of confusion for traders and consumers. Both of them found it hard to keep track of so many taxes when establishing and paying for a business. The number of taxes a trader has to register for when filing for taxation has become way low.
More than anything, the tax rate is the same all over the country at a central and state level. This creates a common market for goods pan India and encourages foreign direct investment.
2. Lower Tax Rate
Originally, when the GST was first implemented, the tax rate was actually higher than all the tax combined. However, once it settled down and the government realized their mistake in calculation, the tax rate went down by a lot. This was the original goal of the government but because of some problems that weren’t sorted, it confused the people for some time.
3. Tighter Tax Law
Through GST, the government planned on establishing a tighter tax law. Various other laws were established with GST to curb tax evasion. Some of these laws were only possible under the GST regime.
The procedure for registration as a taxpayer, refund of taxes, tax return, common tax base, and classification of goods, everything was unified. This will lead to a more certain tax system, which will help the government keep track of evaders and hunt them down.
The GSTIN number also allows the government to get information on a taxpayer and their history and returns of tax. This creates a more transparent system. The more transparency we have at hand, the easier it is to discourage evasion of GST.
4. Growth Of Small Countries
The new tax law will divide the tax rate in a way that is fair for everyone. This way, the established companies should follow the low strictly while the smaller ones have a chance to grow in a fair environment.
The tax burden on companies has come down, which naturally means the price for consumer goods is lower. Smaller companies can produce goods at an economical price and still get a good profit. The low price also means an increase in consumer demand, which will, in turn, create more goods. Essentially, the GST law should help India become a manufacturing hub.
5. Moving Towards Unified GST
Right now, the GST in India exists in a dual GST format, mainly divided between SGST and CGST and sometimes IGST. This is done keeping the federal structure in mind. However, the ultimate goal is to move towards a more common, unified GST law all over India, which is the case for a lot of international countries. The current GST is a necessary step towards that direction.
In theory, GST is a good tax system. Whether it is successful or not, depends on how the government deals with it. Some things need to be done correctly for the tax to bring about the changes it has been made for.
One of them is the same rates in all states. If not so, it would be a bit of a hassle for the businesses to comply according to the law of certain states while keeping the Central Goods and Service Tax system in mind. It will also make tax a moot point when choosing the location for a business, leading to a boom in all states.
Right now, the GST is a destination-based tax, focused mainly on goods. It should be easy to identify where the goods are going. However, the same can’t be said for service and the government must deal with the stipulations that will help one identify the destination for service.
GST was a necessary tax law for India, especially if we want to compete with the foreign market. There are still some issues but we hope we are moving towards a better India.