What is GST? Benefits of Goods and Service Tax

Ashish M. Shaji

05 Jan, 2021

The introduction of the Goods and Service Tax (GST) is a revolutionary step taken by the Indian Government to create a simplified and integrated system of indirect taxation in India. It was launched on 1^st July 2017 and replaced all the existing myriad of indirect taxes levied by the central and state governments like excise duty, VAT,  Central Sales Tax, Octroi and entry tax, entertainment tax, service tax etc.

It brought all these taxes under the same fold and made compliance easier. One of the major benefits of Goods and Service Tax (GST) is to mitigate the cascading effect of taxes, i.e. the problem of charging tax on tax.

What is GST?

GST is a comprehensive, multi-stage, destination-based consumption tax on value addition. The major change here is that GST is a destination-based tax, i.e. the taxing authority, having jurisdiction in the final place of consumption, collects the tax on such goods and services.

Every trader before applying for GST registration in India first needs to understand the features of this tax regime. The above-mentioned definition of GST is discussed in detail in this article.

When we say that it is a multi-staged tax, then it means that it is levied on every stage in a supply chain. For example, in the production cycle of an item, various stages are included in raw material procurement, manufacturing, warehousing, distribution and final consumption. GST will be levied on each of these stages separately.

It is a tax on value addition; however, in real time it is very difficult for the government to keep track of every value addition. Therefore the concept of Input Tax Credit (ITC) is introduced, which allows the supplier to claim ITC on taxes already paid on input hence eliminating the cascading effect.

The most important feature of GST is that it is a destination based consumption tax. It is a major reform and big shift from the existing tax regime where tax is charged at the place of origin. After the implementation of GST, the taxing authority of the final place of consumption will collect the taxes.

 For example, A is the producer state from where the goods are supplied to State B where they are finally consumed. In the current scenario, taxes are collected and enjoyed in the state of origin i.e. State A. However in the new tax regime, though the taxes will be collected by State A, the final enjoyment of tax will be done by State B which is the consumer State.

Who collects it?

We can say that GST is a dual system where taxes will be imposed at both federal and state levels. Broadly GST can be categorized into two types:

• Intra-state level taxes, i.e. taxes imposed when goods supplied or services are provided within one state. In this level, two types of GST are levied: CGST (Central Goods and Service Tax) and SGST (State Goods and Service Tax). Both of these taxes are concurrent taxes charged on the same base. CGST^[1] is collected by the Central Government whereas SGST is collected by the state government.
• Inter-state level taxes, i.e. Taxes imposed when goods supplied or services are provided from one state to another. Such tax is called IGST (Integrated Goods and Service Tax). IGST is collected by the Central Government.

For any more information about these categories, you can check our previous blog about CGST, SGST & IGST.

Read our article: Types of GST- SGST, CGST, and IGST

Benefits of GST

The benefits of GST can be summarized into following points:

• Removes the Cascading effect of tax;
• High threshold for registration of GST;
• Composition scheme for small business;
• Lesser compliances under GST;
• Simplified online facilities under GST;
• Defined treatment for e-commerce;
• Regulates the unorganized sector;
• Efficiency in logistics.

How GST Eliminates the Cascading Effect?

Let us first try to understand the meaning of the cascading effect. By general definition, a cascading tax is a turnover tax that is applied at every stage in the supply chain, without any deduction for the tax paid at earlier stages. This creates the “tax on tax” problem. In the current taxing system various central and state level taxes are charged like VAT, CST, Excise etc. but there are a lot of restrictions imposed, which create the cascading effect. Few of such restrictions are:

• Central and state level taxes cannot be claimed against each other.
• VAT can only be claimed against VAT.
• CST cannot be claimed as input credit against anything.

The Implementation of GST will provide a comprehensive input tax credit mechanism, which will mitigate these existing ill effects of the existing complex tax system. Under the new regime, it will become very easy to claim ITC against the taxes paid on supplies.

Here is how the set-off works under the new regime:

• IGST can be set off against – IGST, CGST & SGST on Inputs
• CGST can be set off against – IGST & IGST on Inputs
• SGST can be set off against – IGST & SGST on Inputs

Conclusion

Read our article: Compliance Deadlines for Composition Taxpayers Relaxed