Goods and Services Tax (GST) | UGC NET Commerce Preparation Course PDF Download

What Is the Goods and Services Tax (GST)?

The Goods and Services Tax (GST) is a value-added tax applied to most goods and services sold for domestic consumption. Although consumers bear the cost of GST, it is collected by businesses and remitted to the government.
Critics argue that GST disproportionately affects individuals in lower and middle-income brackets, making it a regressive tax. This, they claim, can deepen income inequality and worsen social and economic divides. In response, some countries have introduced GST exemptions or lower rates on essential items like food and healthcare, while others provide GST rebates or credits to alleviate its impact on low-income households.
It's important not to confuse the goods and services tax (GST) with the generation-skipping trust, which also uses the GST abbreviation.

Key Points:

• GST is a tax on goods and services sold within a country for domestic consumption.
• It is included in the final sale price and paid by consumers, while businesses pass the tax to the government.
• GST typically applies at a single rate across the nation.
• Governments favor GST for simplifying the tax system and minimizing tax evasion.
• Critics argue that GST places a heavier burden on lower-income individuals than on higher earners.

Understanding the Goods and Services Tax (GST)

• Overview of GST: The Goods and Services Tax (GST) is a type of value-added tax imposed on most goods and services sold within a country for domestic consumption. Unlike traditional taxes that are collected at different stages of production and distribution, GST consolidates these taxes into a single point, typically paid by the end consumer.
• Impact on Consumers: Consumers ultimately bear the burden of the GST, as they pay it as part of the purchase price. However, it is the responsibility of businesses to collect and remit the tax to the government. This indirect taxation system has both advantages and disadvantages.
• Concerns and Criticisms: Critics of GST argue that it can disproportionately affect individuals in the lower and middle-income brackets, potentially worsening income inequality. To address this, some countries offer exemptions or reduced rates on essential items like food and healthcare. Additionally, measures such as GST credits or rebates may be implemented to alleviate the impact on lower-income households.
• Government Interventions: Governments may introduce policies to mitigate the regressive nature of GST. For instance, they may exempt certain goods and services deemed essential from GST or lower the tax rate on them. These interventions aim to ensure that the tax system remains fair and does not excessively burden vulnerable populations.

Fact: France pioneered the implementation of GST in 1954, and since then, approximately 140 countries have adopted this taxation system in various forms. Among these nations are Canada, Vietnam, Australia, Singapore, the United Kingdom, Spain, Italy, Nigeria, Brazil, and India.

Dual Goods and Services Tax Structures

Only a select few nations, like Canada and Brazil, have opted for a dual GST framework. In contrast to a unified GST setup where taxes are collected by the federal government and then dispersed to the states, a dual system involves the application of both federal GST and local sales tax. For instance, in Canada, the federal government imposes a 5% tax, while certain provinces levy a provincial sales tax (PST) ranging from 8% to 10%. Consequently, a consumer's invoice distinctly displays the GST and PST rates applied to their purchase.

Harmonized Sales Tax (HST)

More recently, some provinces in Canada have amalgamated the GST and PST into a unified tax referred to as the Harmonized Sales Tax (HST). Prince Edward Island led the way by implementing the HST in 2013, merging the federal and provincial sales taxes into a single levy. Subsequently, several other provinces, including New Brunswick, Newfoundland and Labrador, Nova Scotia, and Ontario, have followed suit by embracing the HST model.

Understanding Critiques of the GST

• Regressive Nature of GST: Goods and Services Tax (GST) is often criticized for being regressive. This means that it imposes a relatively higher burden on lower-income households compared to higher-income households. This disparity arises because GST is applied uniformly to the consumption of goods and services, rather than being based on income or wealth.
  For instance, individuals with lower incomes typically allocate a larger portion of their earnings towards essential consumables like food and household items, which are subject to GST. Consequently, the tax can disproportionately impact those with lower incomes, leading to concerns about social equity.
• Potential Adjustments for Progressivity: In response to the regressive nature of GST, some countries have explored potential adjustments to make the tax system more progressive. One proposed strategy involves levying a higher tax rate on individuals with higher incomes, thereby redistributing the tax burden more equitably.
  For example, policymakers may consider implementing tax credits or exemptions for essential goods and services that form a larger part of lower-income households' expenditures. By doing so, they aim to mitigate the disproportional impact of GST on vulnerable populations.

India's Adoption of the GST

• Main Objective of GST Implementation: India introduced a dual GST system back in 2017, marking a significant overhaul in the country's tax framework after many years. The primary aim behind implementing the Goods and Services Tax (GST) was to eradicate the issue of double taxation, where taxes are levied at multiple stages of production and distribution, leading to tax cascading.
• Elimination of Tax Cascading: Tax cascading, or the imposition of taxes on top of already taxed components, was a major concern addressed by the GST. This system aims to prevent the scenario where taxes are levied on the total value of a product, including taxes paid on inputs.
• Impact on the Manufacturing Process: To illustrate, let's consider a scenario where a manufacturer produces notebooks. Initially, the manufacturer buys raw materials for Rs. 10, which includes a 10% tax component. This means that they pay Rs. 1 in tax for materials worth Rs. 9. During the manufacturing process, the value added by the manufacturer amounts to Rs. 5, resulting in a total value of Rs. 15. The 10% tax on the final product would be Rs. 1.50. With GST, the tax already paid can be adjusted against this additional tax, effectively reducing the tax burden.
• Impact on Wholesalers and Retailers: Subsequently, when the wholesaler buys the notebook for Rs. 15 and sells it to the retailer for Rs. 17.50 after adding a markup, the tax implications continue. The wholesaler can offset the tax paid on the purchase against the tax on the sale price, reducing the overall tax burden. This process continues down the supply chain, ensuring that tax is not levied on already taxed components.
• Overall Tax Calculation: By implementing the GST system, the total tax burden from the manufacturer to the retailer is streamlined. The effective tax rate decreases as taxes paid at previous stages can be adjusted against subsequent tax liabilities. This results in a more efficient and equitable tax structure throughout the supply chain.

Overview of India's GST Tax Rates

India introduced the Goods and Services Tax (GST) on July 1, 2017, with a structured tax rate system aimed at simplifying the taxation process and reducing overall tax burdens. Let's delve into the different tax rates that have been implemented:

• A 0% tax rate is applied to essential items such as certain foods, books, newspapers, homespun cotton cloth, and hotel services.
• Goods like cut and semi-polished stones are taxed at a minimal rate of 0.25%.
• Household necessities such as sugar, spices, tea, and coffee incur a 5% tax under the GST regime.
• Products like computers and processed food fall under the 12% tax bracket.
• Items like hair oil, toothpaste, soap, and industrial intermediaries are taxed at 18%.
• Luxury goods including refrigerators, ceramic tiles, cigarettes, cars, and motorcycles attract a higher tax of 28%.

Transition from the Previous Tax System

Previously, without the GST, taxes were levied at each stage of the production chain, leading to cascading tax effects. This resulted in higher overall taxes and increased costs for consumers. The implementation of the GST aimed to streamline this process, reducing inflation in the long run.

For instance, let's consider the impact on a product like soap:

• Under the previous tax system, soap would be taxed at various stages of production, including on raw materials and final product, leading to higher costs.
• With the GST in place, the tax is only applied at the point of sale, ensuring that the final consumer bears a fair tax burden.

Benefits of GST Implementation:

The introduction of the GST system in India brought several advantages:

• Simplification: By replacing multiple indirect taxes with a single GST, the system became more straightforward for businesses and consumers to understand.
• Reduced Tax Evasion: The unified tax structure helped in curbing tax evasion and improving compliance.
• Boost to Economy: Streamlining taxation facilitated smoother inter-state trade and boosted economic growth.
• Consumer Benefit: With reduced tax cascading effects, the end consumer experienced lower prices for goods and services.

Overall, the GST implementation in India aimed at fostering a more transparent and efficient tax system, benefiting both businesses and consumers alike.

Goods and Services Tax vs. Generation-Skipping Transfer Tax

The Goods and Services Tax (GST) should not be confused with the Generation-Skipping Transfer Tax (GSTT), as they are entirely unrelated. GST is a type of value-added tax (VAT) applied to the sale of goods and services. In contrast, the GSTT is a federal tax of 40% imposed on inheritances transferred to beneficiaries at least 37½ years younger than the donor, typically to prevent the avoidance of estate taxes by wealthy individuals naming younger heirs like grandchildren.

Who Pays GST?

GST is generally paid by consumers purchasing goods or services. However, certain sectors, such as agriculture and healthcare, may be exempt from GST depending on regional regulations.

How Is GST Calculated?

To calculate GST, multiply the price of a good or service by the applicable GST rate. For example, if GST is 5%, a $1.00 item would cost $1.05 after tax.

Benefits of GST

GST simplifies taxation by replacing multiple taxes with a unified system. It can also reduce tax evasion and corruption by making tax collection more straightforward for businesses.

Are VAT and GST the Same?

While VAT and GST are both indirect taxes levied on goods and services, they differ in their application. VAT is common in European countries and is collected at each production stage, whereas GST, used in various countries worldwide, is applied only at the final point of sale. VAT often covers a broader range of products than GST, and rates for both can differ based on the goods or services and the country.

Conclusion

GST is a tax on most goods and services for domestic consumption and is paid by consumers but collected by businesses, which remit it to the government. Some countries offer GST exemptions or credits for essential goods and lower-income households. While GST simplifies taxation, critics argue it is regressive, as it can disproportionately affect lower-income individuals. Countries with dual GST systems, such as Canada and Brazil, also apply local sales taxes in addition to federal GST.