Throughout the world, over 160 countries have adopted the Goods and Services Tax while France remains the parent country. India adopted this new tax system on 1st July 2017 with the One Hundred and First Amendment of the Constitution of India, replacing the various cascading taxes imposed by the central and state governments. Inspired by Canadian model, India adopted a dual-GST structure which is seen as the biggest tax reforms in the history of India.
It is an indirect tax which superseded various taxes including excise duty, service tax, additional customs duty, surcharges, state- level value added tax and Octroi (imposed by a political unit on certain goods on entry to the area). Exports and direct taxes including income tax, corporate tax and capital tax would be outside the ambit of GST. It levies tax on the sale, supply, manufacture and consumption of goods and services at the national level, but it is refundable to all parties involved in the production chain except the final consumer.
The different Slabs
The structure of GST has been designed in such a manner that crucial goods and services are included in the tax slab with lower charge, while luxury goods and services have been placed in the higher tax slab. In any nation there are various strata of society with different income. Therefore, this new tax regime ensures that different economic classes are not subjected to pay tax at the same rate. India’s economy has become the fastest growing economy surpassing China, but India is plagued with the acute situation of income disparity, the rich are becoming richer and the poor are becoming poorer. Unfortunately, since the introduction of the income tax in 1992, this disparity has worsened.
Source: World Inequality Report 2018
Under this new tax regime, which came to India after 13 years of its first discourse in the Kelkar Task Force report of 2003 goods and services are divided into five slabs follows-
- At 0% Exempted category
- At 5% Essential Goods and services
- At 12% Standard Goods and Services
- At 18% Standard Goods and Services
- At 28% Special Category
Note: There is 3% tax on gold whereas 0.25% tax is levied on semi- precious stones.
The GST council has included over 1300 goods and 500 services under the non- zero tax slabs. Further, 81% of goods and services fall below or in the 18% slab. This implies that7% of the goods and services fall under the exempted category, 14 % under the 5% tax category, 17% levies a 12% tax, 43% attracts the 18% tax slab and 19 % fall under the 28% tax slab.
In case of three developing countries, the maximum products and services falls under:
- 10% Slab- Brazil
- 17% Slab- China
- 18%Slab- India
Developed countries including France, Germany and United Kingdom have set their highest rate at 19% to 20% whereas in India it is 28%.
The World Bank in its India Development Update in March 2018 revealed that India’s GST has secured the second highest tax rate in the world among 115 countries with the similar tax structure. A single slab of GST has been opted by 49 countries, while 28 countries of the world use two slabs, and only five countries, including India, use four non-zero slabs. The countries that use four or more slabs of GST include Italy, Luxembourg, Pakistan and Ghana. Thus, India has among the highest number of different GST slabs in the world.
GST in India is driven by the philosophy of ease of doing business by implementing the notion of ‘one nation, one tax’. Well, GST is a consumption-based tax it is often assumed to be a regressive tax system. With the help of these tax slab based on category of the goods and services as a necessity or luxury good and services, for example cereals, hand tools, handlooms, agricultural implements, wood charcoal, sindur, electrical energy, etc. are exempted from tax which would immensely benefit the poor.
Apart from these, exemption of tax on condoms and contraceptives and municipal waste, sewage sludge, clinical waste, slate pencils, printed books can be seen as a good response to the present situation of population and waste expansion, encouragement for better education and health facilities by tax exemption for both these sectors. Thus, GST ensure exemption of various goods and services which are used by the masses and are basic necessity which was not possible under the earlier tax regime due either purchase tax or sales tax. Further, proper studies and analysis are done before putting any good and services under a particular slab which is done by the GST Council headed by the Union Finance Minister.
For example, the controversy regarding cess on sugar emerged. Cess is levied for a particular purpose from which deviation is not permitted, it is a tax on tax, for example the new Health and Education cess aims to benefit rural and below poverty line (BPL) families by imposing it on personal income tax and corporation tax, at the rate of 4% and is expected to provide the government with an additional tax collection of Rs 11,000. In the 27th GST Council meeting held on 4th May 2018, took up the issue of imposing of cess on sugar as the dues on sugar mills rose to Rs 19,000 crore after the removal of sugar cess, albeit the decision is yet to come. Thus, each good are given thorough study and discussion to understand under which tax slab it should be placed. Further, it clearly indicates that rigorous efforts are put forward to reduce poverty and address the ever-increasing income disparity whilst reducing corruption and tax evasion.
According to the Economic Survey by Chief Economic Advisor Arvind Subramanian, the pre-GST revenue collection by Centre and states was Rs 9.7 lakh crore, while the estimated annualised GST revenue collection is expected at Rs 10.9 lakh crore.
The federal structure of India is reflected in the dual GST model which means that the new tax regime is administered both by the Union and State Government. The tax imposed by the Central Government and State Government are called CGST and SGST respectively whereas IGST or Integrated GST is levied solely by the Central Government. It seems like that the consumers are taxed twice but the relief comes in the form of Input Credit under GST which is often known as the backbone of GST. Input Credit is the amount which can be reduced from the output tax due to the complete payment of input tax.
It can be availed for those taxable persons who are covered under the GST Act by fulfilling certain requirements. The input tax credit (ITC) of CGST would be available for discharging the CGST liability on the output at each stage and the ITC of SGST levied on inputs would be permitted for discharging the SGST on output. There is no provision for cross utilization of credit.
Illustration: A is a manufacturer. Her output tax is Rs 650 whereas input tax is Rs 300. This implied that after claiming the input credit she is required to make a deposition of Rs 300.
- Transactions of goods and services within single state- Attracts both CGST and SGST
- Inter- state transaction and Imported goods and services- Attracts IGST
GST is a consumption-based tax which also means destination-based tax. This implies that collection of tax appropriated by the state where the goods and services are purchased and not on the producing state.
Products including alcoholic products, petroleum products which are not covered under the GST due to constitutional constraints or Centre- State agreements, would be levied tax by the old scheme. Such items would attract sales tax imposed by respective states. Approximately 33% of state fund is composed of petroleum products and it also generates high excise duty income for the Centre. Although there are public debates whether petroleum products should be included in GST.