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Goods and Services Tax in India

Goods and Services Tax (GST) is a part of the proposed tax reforms that center round evolving an efficient and harmonized consumption tax system in the country. GST will have a important impact on almost all aspects of businesses operating in the country, including the supply chain, sourcing and distribution decisions, inventory costs and cash flows, pricing policy, accounting and IT systems and transactions management.

Union Budget for the year 2006-2007, Finance Minister proposed that India should move towards national level Goods and Services Tax that should be shared between the Centre and the States. He proposed to set April 1, 2010 as the date for introducing GST. World over, goods and services attract the same rate of tax.

Why Goods and service tax?

One of the main reasons of the introduction of GST is to avoid cascading effect of taxes in India. For example manufacturing of a product attract CENVAT. The manufacturer pays CENVAT on goods produced. So the CENVAT element is loaded on the product. According VAT rules, the sales tax is payable on the aggregate selling price which include CENVAT. Here there is no set off benefits available. Likewise there are many situations in the nature of cascading effect for instance, State VAT on CST, Entry tax on VAT etc.

Service Tax under GST

Service Tax is presently levied at 10.3% tax on more than 105 services. States do not levy or collect service taxes at present, but get a share from the Centre’s collections. It is proposed that states will keep the entire collection from certain services from this year.

States would also tax another set of proposed new services, collect and appropriate as \ part of compensation for central sales tax phase-out in 2010.

Though State Service Tax proposed to be levied on new local services would add to the cost, a redeeming feature is that Input Tax Credit would be eligible on the State Service Tax and a host of other levies like entry tax, electricity tax, and luxury tax etc that would be integrated under State GST. Of course, the service will qualify as an eligible input service for claiming cenvat credit.

Benefits of GST:-

♦ GST provide comprehensive and wider coverage of input credit setoff, you can use service tax credit for the payment of tax on sale of goods etc.
♦ GST will be removed and need not pay. At present there is no input tax credit available for GST.
♦ Many indirect taxes in state and central level subsumed by GST, You need to pay a single GST instead of all.
♦ By reducing the tax burden the competitiveness of Indian products in international market is expected to increase and there by development of the nation.
♦ Uniformity of tax rates across the states
♦ Ensure better compliance due to aggregate tax rate reduces.
♦ Model is likely to take ‘Business to Business’ as well as ‘Business to Consumer’ transactions into account.
♦ Prices of goods are expected to reduce in the long run as the benefits of less tax burden would be passed on to the consumer.
♦ Overall tax compliance cost will reduce for government and can concentrate on GST

Goods and Services Tax