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Goods and Services Tax

Goods and Services Tax

Goods and Services Tax (GST), one of the most radical tax reforms in the history of Indian economy, has been effective from 1 July 2017.

Goods and Services Tax (GST), one of the most radical tax reforms

Goods and Services Tax (GST) is among the big tax reforms introduced in the history of the Indian fiscal evolution. In addition to the exceptional impact GST has on the economic growth of the country and the way business is done in India, it has achieved the following:

  • Converted India into one common market by seamless flow of tax credits – in the earlier regime some taxes were not creditable when goods moved from one state to another, excise/service tax credit was not available to a trader and a services unit could not claim credit of Value Added Tax (VAT) paid on goods
  • Multiple indirect tax laws replaced by a singular uniform tax regime making compliance easier across the country
  • Number of slab rates reduced substantially making life easier and disputes reduced
  • Compliance process became uniform across the country due to one common IT portal where businesses and government agencies interact – this has reduced human interaction and brought transparency in the administration
  • Business decisions may not be driven by tax considerations any more, as most of the taxes are creditable, bringing in overall efficiency in business operations spurring economic growth
  • Electronic filing and online credit matching has substantially reduced non-compliance and tax frauds – this is providing significant boost to honest businesses.

Dual GST structure

Under the new regime, the central and state governments are levying GST on every supply of goods and services at the same time, on a common taxable value. State GST and Central GST rates are the same

IGST - an Indian innovation

However, in the case of imports and interstate supplies, one single Integrated GST (GST) is levied only by the central government, proceeds of which are equally shared by the central and the recipient state governments. IGST is an Indian innovation which is helping tax credits move along with goods/services, across states and therefore, has reduced refund situations at state borders.

Destination-based tax

GST has brought a significant shift from origin-based taxation to a destination-based tax structure. This has impacted not only the operating business models but also the revenues of the centre/states. It has the potential to improve cash flow, pricing, working capital, supply chain and fine tune IT systems and hence provide an opportunity to transform businesses.

Goods and services taxed by both the governments

Unlike in the earlier regime where services were taxed by the central government, sale of goods was taxed exclusively by the states and the manufacturer was taxed only by the central government, GST allows equal opportunity to the centre and the state to tax all supplies of goods and services at the same time. This demonstrates the true federal character of the Indian fiscal system.

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