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Implementation of Goods and Services Tax (GST) i
n India: A Comprehensive Reform
A landmark tax reform, aimed at replacing the current complex structure of multiple indirect taxes with a comprehensive dual Goods and Services Tax (GST), is set to become a reality. With a clear roadmap laid down by the Finance Ministry, the Government of India is on course to fast-track the implementation of GST, effective from July 1, 2017.
Proposed GST Structure for India
The idea of implementing GST in India was first proposed in 2004 by the Task Force on Implementation of the Fiscal Responsibility and Budget Management Act, 2003 (Kelkar Committee). The committee observed that a nationwide dual GST would create a common market, expand the tax base, improve revenue productivity, and enhance economic efficiency.
Existing Indirect Tax Structure
Currently, India’s indirect tax system is fragmented, with both the Central and State Governments levying taxes:
- Central Government Taxes: Customs duties, Central Excise Duty, Service Tax, etc.
- State Government Taxes: Value Added Tax (VAT), Entry Tax, Octroi, etc.
This multiplicity of taxes has led to interconnected legislations, causing tax cascading, distortions, and inefficiencies, ultimately affecting GDP growth.
Limitations of the Current Tax System
- CENVAT (Central VAT) does not tax value addition beyond the production stage.
- No integration of VAT on inputs with Service Tax, leading to a cascading tax effect.
Proposed GST Model
The GST model will be a consumption-based VAT, ensuring that only final consumption is taxed. GST is expected to:
✔ Integrate taxes on goods and services across the entire supply chain.
✔ Capture value addition at every stage.
✔ Eliminate tax cascading by allowing set-off at every level.
Key Features of the GST Model
- Dual GST Structure: GST will have two components:
- Central GST (CGST) – Collected by the Union Government.
- State GST (SGST) – Collected by State Governments.
- Destination-Based Taxation: Tax revenues will accrue to the state of consumption, not production.
- Tax Credit Mechanism: Input Tax Credit (ITC) will be allowed across CGST and SGST, but cross-utilization between the two will be restricted.
- Inter-State Transactions:
- Integrated GST (IGST) will be levied on inter-state supplies.
- CST (Central Sales Tax) will be phased out.
Indirect Taxes to be Subsumed Under GST
| Central Taxes | State Taxes |
|---|---|
| Central Excise Duty | VAT/Sales Tax |
| Service Tax | Entertainment Tax (except local bodies) |
| Additional Excise Duties | Central Sales Tax (CST) |
| Excise Duty on Medicinal & Toilet Preparations | Octroi/Entry Tax |
| Additional & Special Additional Duty of Customs | Purchase Tax |
| Central Cesses & Surcharges on goods & services | Luxury Tax, Lottery, Betting, and Gambling Taxes |
GST Rate Structure
The GST Council has proposed a four-tier tax structure:
| Tax Rate | Products & Services |
|---|---|
| Exempt | Food grains, milk, cereals, education, healthcare, hotel rooms below ₹1,000 |
| 5% | Edible oil, sugar, tea, coffee, coal (reduced from 11.69%), life-saving drugs, small restaurants |
| 12% | Computers, processed food, fertilizers, non-AC hotels, business-class air tickets |
| 18% | Soaps, toothpaste, branded garments, telecom, IT services, financial services |
| 28% | Luxury goods, cars, aerated drinks, 5-star hotels, cigarettes (+cess) |
Impact of GST Rate Structure
- Coal taxation reduced from 11.69% to 5%, benefiting the power sector.
- Essential FMCG items like soaps and toothpaste will see tax reductions.
- Education & healthcare remain exempt to avoid inflationary impact.
- Luxury items will attract higher tax + cess, ensuring revenue neutrality.
Input Tax Credit (ITC) & Seamless Tax Flow
Under the GST regime, Input Tax Credit will be structured as follows:
✔ CGST credit can only be used for CGST payments.
✔ SGST credit can only be used for SGST payments.
✔ IGST credit can be used for any tax liability (CGST, SGST, IGST).
✔ Cascading of taxes will be eliminated, making taxation more efficient.
Comparison of Current vs. GST Tax Regime
Non-GST Regime (Cascading Taxation)
✔ Manufacturer pays ₹13 in tax.
✔ Wholesaler adds ₹16.3 tax.
✔ Retailer adds ₹18.93 tax.
✔ Total tax burden: ₹58.23 (paid by the consumer).
GST Regime (Elimination of Cascading Effect)
✔ Total GST paid across the value chain: ₹16.
✔ Final price paid by the consumer: ₹166 (₹150 + ₹16 GST).
✔ Reduction in tax burden, making goods/services cheaper.
Industry-Specific Impact of GST
1. Food Industry
- Exemptions for essential food items protect low-income consumers.
- Minimal tax impact on processed food ensures price stability.
2. Housing & Construction
- The sector is a major economic driver and will benefit from seamless tax credits.
3. FMCG Sector
- The industry will expand rapidly, with lower tax rates boosting consumer demand.
4. Rail Transport & Logistics
- Bringing rail transport under GST will enhance efficiency and tax compliance.
5. Financial Services & IT
- GST on financial services will be based on explicit fees, similar to New Zealand’s model.
- Software classification as goods or services will determine GST applicability.
Impact on Small Enterprises
✔ Businesses below the threshold are exempt from GST.
✔ Turnover-based taxation for small businesses between threshold & composition limit.
✔ Larger SMEs will fall under GST, requiring compliance upgrades.
Offences & Penalties Under GST
✔ Fake invoices, tax evasion, obstruction of tax officers – Strict penalties apply.
✔ Penalties range from ₹10,000 to 100% of tax evaded.
✔ Imprisonment for severe tax frauds (1–5 years).
Refund Claims Under GST
✔ Automatic refund processing within 90 days.
✔ Interest payable for delays beyond 3 months.
✔ Special refunds for exporters, UN bodies, embassies.
The Road Ahead for GST in India
The implementation of GST is set to transform India’s tax system, promoting:
✅ A unified national market
✅ Reduction in tax cascading
✅ Ease of doing business
✅ Enhanced compliance & transparency
With GST replacing multiple indirect taxes, businesses will experience reduced complexity, lower costs, and improved efficiency, ultimately boosting economic growth.
