What is GST? | Definition, Working, Constituents, Rates, Pros vs Cons

GST, short form for the Goods and Services Tax, is an indirect tax charged on selling services and goods meant for consumption in the domestic market.

As a tax regime, the GST Act was passed in the Indian parliament on the 29th of March, 2017. It came into effect on the 1st of July, 2017.

France was the first country to adopt this tax regime in 1954. Since then, almost 160 countries have subscribed to the GST in one form or another. Some predominant nation-states with a GST include United Kindom, Canada, Australia, Vietnam, Singapore, South Korea, Spain, Nigeria, Italy, and Brazil.
In India, GST was introduced to supersede the multiple federal and provincial indirect taxes like VAT, excise duty, service tax, countervailing duty, entry tax, octroi, and luxury tax with a centralized, uniform, manageable, and transparent tax regime.

Key Takeaways

1. GST is a tax applied to goods and services sold within a country.
2. GST is a comprehensive tax covering all production stages, from the purchase of raw materials to the sale of the final product.
3. Many countries have adopted GST to simplify their tax systems and improve compliance.

How does GST work?

Under the GST regime, taxes are levied at each supply chain point. It is based on value addition rather than the product’s gross value at the point of sale. Consumers are the primary bearer of this tax. However, it is the dealer who is supposed to pay the proceeds of the tax to the government. As it follows, GST is a destination-based, multi-stage, and value-added tax.

1. Destination-based because it is levied at the point of a good or service’s destination at the consumers’ location. For example, if a good is produced in Uttar Pradesh and is consumed in West Bengal, the proceeds of GST will go to the government of West Bengal as GST is to be charged at the location of consumption.
2. Multi-stage because it is exacted at each phase of a product or service’s production-distribution chain.

• Lastly, value-added because it is charged on the value added to a product or service at each stage of its supply chain.

Constituents of GST

Under the GST regime in India, various federal and provincial-level taxes have been subsumed and combined by the following three types of taxes.

1. Central Goods and Service Tax (CGST): The central government exacts this tax for transactions in a particular state. For example, Uttar Pradesh.
2. State Goods and Service Tax (SGST): The state governments levy this tax for intra-state sales.
3. Union Territory Goods and Service Tax (UGST): This tax is levied by the governments of union territories (without legislatures) for transactions made in a particular union territory.
4. Integrated Goods and Service Tax (IGST): The central government levies this tax on inter-state sales. The proceeds are then dispensed between the union government and the consuming states as per the GST guidelines established by the government of India.

GST rates in India

The Government of India has established a GST council comprising thirty-four members, primarily the finance minister of the states, with the union finance minister at its head. The responsibility to fix the GST rates of various goods and services is vested in this council. Accordingly, the following tax slabs have been decided to classify goods and services.

1. 0% or exempted goods and services.
2. 0.25%
3. 1.50%
4. 5%
5. 12%
6. 18%
7. 28%
8. 28% with cess

It is to be noted that certain products and services like electricity, alcohol, and petroleum products have still not been incorporated within the GST regime. Consequently, they are taxed according to the previous tax structure.

Advantages of GST

The fact that so many countries have subscribed to GST itself implies how beneficial this tax regime is. The following are some of the significant advantages of GST:

1. Simplifies the taxation system: It subsumes several central and state taxes and brings them under a single, uniform tax regime.
2. Promotes ease of business: GST simplifies the taxation system, allowing dealers, suppliers, or manufacturers to do business without any additional burden of taxes.
3. Aims to prevent tax evasion: GST levies tax at multiple stages of production which alerts the tax departments if any attempt to evade tax is made.
4. Makes inter-state economic transactions easier: GST unifies the country as a single market with its uniform taxation system. Consequently, it becomes easier for the states to conduct economic exchanges as the borders no longer act as barriers.
5. Reduced cost of services and goods: GST removes the cascading effects of multiple taxes like VAT and other state and central duties. Consequently, the overall cost of the services and goods is lessened.

Disadvantages of GST

Regarding practical implementation, GST exhibits a wide range of disadvantages.

1. Cannot be discerned easily: Despite its numerous claims of simplifying the tax regime, GST, with its different tax slabs for different products, cannot be understood so easily.
2. Increased expenditure on software: GST filing requires software purchasing, which increases the financial burden of small businesses.
3. Does not incorporate all products and services: Despite its claim of creating a uniform tax regime, GST does not incorporate alcohol, petroleum products, and electricity within its fold.

References

1. http://ijtef.org/papers/93-F506.pdf
2. https://www.researchgate.net/profile/Anand_Nayyar/publication/323007997_A_Comprehensive_Analysis_of_Goods_and_Services_Tax_GST_in_India/links/5b8a6bcf4585151fd140c393/A-Comprehensive-Analysis-of-Goods-and-Services-Tax-GST-in-India.pdf

Last Updated : 11 June, 2023