Probably the biggest tax overhaul system, which independent India has seen could be the introduction of Goods and Services Tax, leave apart the Direct Tax Code (which could replace the Income Tax Act, 1961). Though the implementation date of GST is still unclear, but it could see the light of day soon.

Here is an idea of the whole GST system and how it would work and its benefits.

The concept of GST is prevalent successfully in many countries. In India, there is multiplicity of taxes both at the Central and the State level. Although introduction of CENVAT and VAT have considerably helped in reducing this burden, however they still have their anomalies.

CENVAT doesn’t include taxes like Additional Excise Duties, Additional Customs Duty, Surcharges while VAT omits taxes such as Luxury Tax, Entertainment Tax in its fold. Further all these taxes omit the taxes on Services, which is a major component of overall tax structure.

With GST, all taxes would be removed and a continuous chain of set-off from the original producer’s point and service provider’s point upto the retailer’s level would be established which would eliminate the burden of all cascading effects.

The system would allow setting off GST paid at previous stages with the GST charged.

The model likely be followed under GST could be as follows:
  • GST will have two components- Central GST (levied by Centre) and State GST (levied by the State)
  • All laws and definitions, rates, valuation, classification would be uniform across all states
  • CGST and SGST would be applicable to all transactions of goods and services except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits
  • CGST and SGST would be paid in the accounts of Centre and States separately
  • Taxes paid against Central GST shall be allowed for input tax credit (ITC) for the Central GST only. Similar is the case for State GST. No cross utilisation of ITC between CGST and SGST would be allowed.
  • Each taxpayer would be allotted a PAN linked taxpayer identification number with a total of 13/15 digits and periodical returns to both Central and State GST authorities would have to be submitted. Linking the ID number with PAN would facilitate data exchange and improved compliance.
  • Every transaction would have a component of SGST and CGST and would be levied on the same price or value. SGST would be chargeable only when both supplier and recipient are located within the State.

The Central Taxes which could be subsumed under GST are:  Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal and Toiletries Preparation Act, Service Tax, Additional Customs Duty(Countervailing Duty – CVD), Special Additional Duty of Customs (SAD) – 4%, Surcharges and Cesses.

The State Taxes which could be subsumed under GST are: VAT / Sales tax, Entertainment tax, Luxury tax, Taxes on lottery, betting and gambling, Entry tax not in lieu of Octroi.

Taxes which are kept outside the purview of GST are Purchase tax, tax on items containing Alcohol, Tobacco products and Petroleum Products.

GST is likely to have a two-rate structure both at Central and State level: lower rate for necessary and basic importance items and standard rate for general goods. There will also be a special rate for precious metals and a list of exempted items.  Services are likely to have a single rate for both CGST and SGST.

GST is likely to have a uniform threshold limit of gross annual turnover of Rs. 10 lakh both for goods and services across the country. While for Central GST, the limit may be fixed at Rs.1.5 Crore for goods and comparatively higher for services.

For small traders and industries, a compounding scheme of levy of 0.5% on a maximum annual turnover of Rs. 50 lakhs may be fixed to avoid the legal procedures, compliance and framework for these people.

The likely GST rate, which can be revenue neutral for the Government, may be fixed at 14-16%.

GST would help widening the coverage of tax base and improve tax compliance, leading to higher generation of revenues which may in turn lead to the possibility of lowering of average tax burden.

It would help in uniformity of tax rates around the country and thus improving competitiveness among Indian businesses, and the whole country would become a single market rather than an array of different states.