How GST simplifies India’s tax structure

Dubai: India’s goods and services tax (GST) will be a destination-based tax that will replace the current Central government taxes and duties such as Excise Duty, Service Tax, Counter Veiling Duty (CVD), Special Additional Duty of Customs (SAD), central charges and cesses and local state taxes, such as; Value Added Tax (VAT), Central Sales Tax (CST), Octroi, Entry Tax, Purchase Tax, Luxury Tax, state cesses and surcharges and Entertainment tax (other than the tax levied by the local bodies).

The dual structure of the new tax system will allow the central and state governments to levy GST simultaneously, on a common taxable value, on the supply of goods and services.

In the case of imports and inter-State supplies, an Integrated IGST (GST) shall be levied by the central government, proceeds of which will be shared by the central and the recipient state government. IGST is an Indian innovation which would help tax move along with goods/services, across states and therefore reduce refund situations at state borders.

GST, is expected to bring a significant shift from origin-based taxation to a destination-based tax structure. This is likely to impact not only the operating business models but also the revenues of the centre/states. It has the potential to impact cash flow, pricing, working capital, supply chain and IT systems and hence provides an opportunity to transform your business.

Unlike today when services are taxed by the central government, sale of goods is taxed by the states while the manufacturer is taxed only by the central government, GST will allow equal opportunity to the centre and the state to tax all supplies of goods and services.

The ‘dual GST’ model which envisages that both the central and state governments will simultaneously tax all transactions within a particular state involving the supply of goods and services under CGST Act and SGST Act, respectively. These taxes are deposited by the tax payers electronically and will go directly into the respective government’s CGST/SGST accounts.

Benefits

GST has been envisaged as a more efficient tax system, neutral in its application and attractive in distribution. The advantages of GST are:

• Wider tax base, necessary for lowering the tax rates and eliminating classification disputes

• Elimination of multiplicity of taxes and their cascading effects

• Rationalisation of tax structure and simplification of compliance procedures

• Harmonisation of center and state tax administrations, which would reduce duplication and compliance costs

• Automation of compliance procedures to reduce errors and increase efficiency

Destination principle

The GST structure would follow the destination principle. Accordingly, imports would be subject to GST, while exports would be zero-rated. In the case of inter-state transactions within India, the state tax would apply in the state of destination as opposed to that of origin.

Taxes to be replaced

GST would replace most indirect taxes currently in place.

Central taxes

• Central Excise Duty [including additional excise duties, excise duty under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955]

• Service tax

• Additional Customs Duty (CVD)

• Special Additional Duty of Customs (SAD)

• Central Sales Tax (levied by the Centre and collected by the states)

• Central surcharges and cesses (relating to supply of goods and services)

State Taxes

• Value Added Tax

• Octroi and Entry Tax