Goods and Services Tax- GST | Indian Economy for UPSC CSE PDF Download

Goods and Services Tax (GST) is a comprehensive indirect tax on manufacture, sale, and consumption of goods and services throughout India. GST would replace respective taxes levied by the central and state governments.

What is GST?

• It is a destination-based taxation system.
• It has been established by the 101st Constitutional Amendment Act.
• It is an indirect tax for the whole country on the lines of “One Nation One Tax” to make India a unified market.
• It is a single tax on supply of Goods and Services in its entire product cycle or life cycle i.e. from manufacturer to the consumer.
• It is calculated only in the “Value addition” at any stage of a goods or services.
• The final consumer will pay only his part of the tax and not the entire supply chain which was the case earlier.
• There is a provision of GST Council to decide upon any matter related to GST whose chairman in the finance minister of India.

What taxes at center and state level are incorporated into the GST?

At the State Level

• State Value Added Tax/Sales Tax
• Entertainment Tax (Other than the tax levied by the local bodies)
• Octroi and Entry Tax
• Purchase Tax
• Luxury Tax
• Taxes on lottery, betting, and gambling

At the Central level

• Central Excise Duty
• Additional Excise Duty
• Service Tax
• Additional Customs Duty (Countervailing Duty)
• Special Additional Duty of Customs

Timeline of GST

• 1986: VishwanathPratap Singh, Finance Minister in Rajiv Gandhi’s government, proposed in the Budget a major overhaul of the excise taxation structure. This was similar to GST in a theoretical sense.
• 2000: Initiating discussions on GST, Vajpayee government appoints an Empowered Committee headed by the then finance minister of West Bengal Asim Gupta.
• 2004: Vijay Kelkar, then advisor to the Finance Ministry, recommends GST to replace the existing tax regime.
• Feb 28, 2006: GST appears in the Budget speech for the first time. Finance Minister Chidambaram sets an ambitious task of implementing GST by April 1, 2010.
• Feb 28, 2007: Chidambaram said in his Budget speech that the Empowered Committee of finance ministers will prepare a road map for GST.
• April 30, 2008: The Empowered Committee submits a report titled ‘A Model and Roadmap Goods and Services Tax (GST) in India’ to the government.
• Nov 10, 2009: Empowered Committee submits a discussion paper in the public domain on GST welcoming debate.
• Feb 2010: Government launches project for computerisation of commercial taxes. Finance Minister Pranab Mukherjee defers GST to April 1, 2011.
• March 22, 2011: Constitution Amendment Bill (115th) to GST introduced in the LokSabha
• March 29, 2011: Bill referred to Standing Committee on Finance.
• Nov 2012: Finance minister and state ministers decide to resolve all issues by Dec 31, 2012.
• Feb 2013: Declaring government’s resolve to introduce GST, the finance minister makes provisions for compensation to states in the Budget.
• Aug 2013: The standing committee submits a report to Parliament suggesting improvements. But the bill lapsed as the 15th LokSabha was dissolved.
• Dec 18, 2014: Cabinet approval for the Constitution Amendment Bill (122nd) to GST.
• Dec 19, 2014: The Amendment Bill (122nd) in the LokSabha
• May 6, 2015: The Amendment Bill (122nd) passed by the LokSabha.
• May 12, 2015: The Amendment Bill presented in the RajyaSabha
• May 14, 2015: The Bill forwarded to joint committee of RajyaSabha and LokSabha
• Aug 2015: Government fails to win the support of Opposition to pass the bill in the RajyaSabha where it lacks sufficient number.
• Aug 3, 2016: RajyaSabha passes the Constitution Amendment Bill by a two-thirds majority. Note: GST constitutional amendment bill needs to passed by at least 50% of state legislatures to be implemented. Assam is 1st State to pass GST bill.
• 1 July 2017: GST to be applicable across India.

Benefits of GST

For Central and State Governments

• Simple and Easy to administer: Because multiple indirect taxes at the central and state levels are being replaced by a single tax “GST”. Moreover, backed with a robust end to end IT system, it would be easier to administer.
• Better control on leakage: Because of better tax compliance, reduction of rent seeking, transparency in taxation due to IT use, an inbuilt mechanism in the design of GST that would incentivize tax compliance by traders.
• Higher revenue efficiency: Since the cost of collection will decrease along with an increase in the ease of compliance, it will lead to higher tax revenue.

For the Consumer

• The single and transparent tax will provide a lowering of inflation.
• Relief in overall tax burden.
• Tax democracy that is luxury items will be taxed more and basic goods will be tax-free.

For the Business Class

• Ease of doing business will increase due to easy tax compliance.
• Uniformity of tax rate and structure, therefore, better future business decision making and investments by the corporates.
• Removal of cascading effects of taxes.
• Reduction in transactional cost will lead to improved competitiveness.
• Gain to the manufacturer and exporters.
• It is expected to raise the country GDP by 2% points.

GST Council

• It is the 1st Federal Institution of India, as per the Finance minister.
• It will approve all decision related to taxation in the country.
• It consists of Centre, 29 states, Delhi and Puducherry.
• Centre has 1/3rd voting rights and states have 2/3rd voting rights.
• Decisions are taken after a majority in the council.

 What is the Principle of GST?

• The Centre will levy and collect the Central GST.
• States will levy and collect the State GST on the supply of goods and services within a state.
• The Centre will levy the Integrated GST (IGST) on the interstate supply of goods and services, and apportion the state’s share of tax to the state where the good or service is consumed.
• The 2016 Act requires Parliament to compensate states for any revenue loss owing to the implementation of GST.

What is GSTN?

• GSTN is registered as a not-for-profit company under the companies Act.
• It has been formed to set up and operate the information technology backbone of the GST.
• While the Central (24.5%) and the state (24.5%) governments hold a combined stake of 49%, the remaining 51% stake is divided among five financial institutions—LIC Housing Finance with 11% stake and ICICI Bank, HDFC, HDFC Bank and NSE Strategic Investment Corporation Ltd with 10% stake each.
• GSTN had awarded Infosys Ltd the contract to develop the hardware and software for GST.
• The idea behind GSTN was to set up an entity that is equidistant from both the Central government and the state governments, as it will advise both the Centre and the states on the information technology network

Suggestions to improve the GST regime in India

• Expansion Of Tax Base: There are many goods that are still outside the GST net and hamper the seamless flow of input tax credit. Key items outside its ambit are electricity, alcohol, petroleum goods, and real estate. Among fuels, it may be possible to bring natural gas and aviation fuel within GST. Also, the government in the upcoming meeting can reduce the GST on essential items such as oxygen concentrators, vaccines, etc to overcome the pandemic.
• Infusing tax predictability: The GST Council can adjust the rates only once a year. Further, the Center shouldn’t bypass GST by introducing any Cess. The Center can also rationalize the present Cess ecosystem in India to a bare minimum. This will ensure tax predictability to states and enhance the ease of doing business.
• More accommodative approach from the Center: To prevent an irretrievable breakdown during the pandemic the Center has to be more accommodative to State’s needs. Such as, allocating State’s share properly, procuring vaccines from abroad, etc. This will further enhance State’s reliability on GST.

Conclusion

GST is a positive step towards shifting the Indian economy from the informal to the formal one. But, the Center and States have to understand the limitations associated with Indirect Taxes and move towards the inclusion of people into the Direct tax bracket. But, to revive GST Regime back on track India needs some radical steps such as an extension of revenue guarantee to States, restricting cesses, above all respecting the need of the State government's fiscal problems.

CURRENT NEWS

Goods and Services Tax Council

Context

Recently, at the 47^th meeting of the Goods and Services Tax (GST) Council, chaired by Union Finance Minister, officials approved hiking the rates for some goods and services while removing exemptions for several mass consumption items to simplify the rate structure. 

What is the GST Council?

• Background:
  • The Goods and Services Tax regime came into force after the Constitutional (122^nd Amendment) Bill was passed by both Houses of Parliament in 2016.
  • More than 15 Indian states then ratified it in their state Assemblies, after which the President gave his assent.
• About:
  • The GST Council is a joint forum of the Centre and the states.
  • It was set up by the President as per Article 279A (1) of the amended Constitution.
• Members:
  • The members of the Council include the Union Finance Minister (chairperson), the Union Minister of State (Finance) from the Centre.
  • Each state can nominate a minister in-charge of finance or taxation or any other minister as a member.
• Functions:
  • The Council, according to Article 279, is meant to “make recommendations to the Union and the states on important issues related to GST, like the goods and services that may be subjected or exempted from GST, model GST Laws”.
  • It also decides on various rate slabs of GST.
  • For instance, an interim report by a panel of ministers has suggested imposing 28 % GST on casinos, online gaming and horse racing.
• Recent Developments:
  • This is the first meeting since a decision of the Supreme Court in May 2022, Supreme Court stated that the recommendations of the GST Council are not binding.
  • The court said Article 246A of the Constitution gives both Parliament and state legislatures “simultaneous” power to legislate on GST and recommendations of the Council “are the product of a collaborative dialogue involving the Union and States”.
  • This was hailed by some states, such as Kerala and Tamil Nadu, who believe states can be more flexible in accepting the recommendations as suited to them.

Single GST Rate

Context

• Recently, the Chairman of the Prime Minister’s Economic Advisory Council, in his personal capacity, has stated that India should have a “Single Goods and Services Tax (GST) Rate” and an “Exemption-less Tax Regime”.

What are the Suggestions?

• Single GST Rate:
  • GST rates should be the same on all goods as ‘progressive’ rates work best with direct taxes, not indirect taxes.
  • When the GST was first announced, the National Council of Applied Economic Research (NCAER) estimated that it would lead to a 1.5% to 2% increment to the Gross Domestic Product (GDP).
  • However, the estimate was based on the premise that all goods and services will be part of GST and there would be a single GST.
  • Different GST rates allows a mindset of ‘prime control’ whereby GST rates are pegged higher for items considered ‘elitist’ and lower for items of mass consumption, resulting in differentiation and subjective interpretation and litigation.
  • Tax rates need to go higher than the current average of 11.5% as opposed to the 17% revenue-neutral rate for GST officially estimated earlier.
• ‘Exemption-less’ Direct Tax Regime:
  • The chairman called for an exemption-less direct tax regime with the argument that while tax evasion is illegal, tax avoidance, by using exemption clauses to reduce tax burden, is legitimate.
  • More tax exemptions also lead to an increase in cases of tax complications.
  • The artificial difference between corporate taxes and personal income taxes (PIT) should be removed.
  • A lot of unincorporated businesses pay taxes under personal income taxes.
  • The removal of differences using exemption-less direct tax system will also reduce administrative compliance.

What is the Current Framework of the GST System?

• About GST:
  • The Goods and Services Tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption.
  • The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services.
  • It is essentially a consumption tax and is levied at the final consumption point.
  • It was introduced through the 101^st Constitution Amendment Act, 2016.
  • It has subsumed indirect taxes like excise duty, Value Added Tax (VAT), service tax, luxury tax etc.
• Existing Tax Structure:
  • Central GST (CGST) covers Excise duty, Service tax etc.
  • State GST (SGST) covers Value Added Tax (VAT), luxury tax etc.
  • Integrated GST (IGST) covers inter-state trade.
  • IGST is not a tax but a system to coordinate state and union taxes.
• There are four major GST slabs:
  • 5%, 12%, 18% and 28%.
  • Some demerit and luxury goods, which are in the 28% bracket, attract additional levy of cesses, the proceeds of which go to a separate fund meant to compensate states for revenue shortfall and repayment of compensation related loans.

GST Council:

• Article 279A of the Indian Constitution states that the GST Council to be formed by the President to administer & govern GST.
• Its chairman is Union Finance Minister of India with ministers nominated by the state governments as its members.
• The council is devised in such a way that the centre will have 1/3^rd voting power and the states have 2/3^rd.
• The decisions are taken by 3/4^th majority.