The structure of indirect taxes in India up to 30-6-2017 was based on three lists in the Seventh Schedule of the Constitution of India, which came into effect on 26-1-1950. These provisions were based on the situation prevailing in 1935 and were based on the Government of India Act, 1935. Due to changes in the functioning of society, this structure had become outdated. Most of the countries have moved towards the common tax structure long ago. However, for India, GST is the tax for the twenty-first century.
The foundation of GST in the country was laid down in the Budget Speech of 28th February 2006 by the then Finance Minister. Since then, there has been a constant endeavor for the introduction of the GST in the country whose culmination has been the introduction of the Constitution (122nd Amendment) Bill in December 2014.
What is GST?
The full form of GST is Goods and Services Tax. It was first introduced in the Budget Speech presented on 28th February 2006. It laid the foundation for a complete reform of India’s indirect tax system. Finally implemented on 1st July 2017 as the Goods and Services Tax Act, the indirect taxation system thus went through a chain of amendments since its inception.
With this tax reform, GST replaced multiple indirect taxes that were levied on different goods and services. The Central Board of Indirect Taxes and Customs (CBIC) is the regulatory body governing all changes and amendments regarding this tax.
GST Meaning and Scope
GST definition is easy to decode. It is a destination-based, multi-stage, comprehensive tax levied at each stage of value addition. Having replaced multiple indirect taxes in the country, it has successfully helped the Indian Government achieve its ‘One Nation One Tax’ agenda.
The tax is levied on goods and services sold within India’s domestic boundary for consumption. Implemented by a majority of nations worldwide with respective customisations, the tax has been successful in simplifying the indirect taxation structure of India.
GST is levied on the final market price of goods and services manufactured internally, thereby reflecting the maximum retail price. Customers are required to pay this tax on a purchase of goods or services as an inclusion in their final price. Collected by the seller, it is then required to be paid to the government, thus implying the indirect incidence.
The GST rates on different goods and services are uniformly applied across the country. Goods and services have, however, been categorised under different slab rates for tax payment. While luxury and comfort goods are categorised under higher slabs, necessities have been included in lower and nil slab rates. The main aim of this classification is to ensure the uniform distribution of wealth among residents of India.
History of GST and GST Information
Back in 2000, the then Prime Minister of India introduced the concept of Goods and Services Tax. He also formed a committee to draft new indirect tax law.
It, however, took 17 more years for its implementation. Meanwhile, the bill went through multiple introductions, amendments and rescheduling.
- 2000 – Committee set up by the PM for drafting Goods and Service Tax law for India.
- 2004 – A task force reported a need to implement this law and improve the indirect tax system in India.
- 2006 – Goods and Services Tax introduction scheduled on 1st April 2010 by the Finance Minister of India.
- 2007 – Decision to phase out Central Sales Tax (CST).
- Consequently, CST rates were reduced to 3% from 4%.
- 2008 – GST’s dual structure was finalised by the EC for separate legislation and levy.
- 2010 – Postponement of GST introduction due to structural and implementation hurdles. A project launched for the computerisation of commercial taxes.
- 2011 – Introduction of Constitution Amendment Bill for enabling the Goods and Services Tax Law.
- 2012 – Discussion regarding the tax initiated by the Standing Committee; stalled due to lack of clarity regarding Clause 279B.
- 2013 – GST’s report presented by the Standing Committee.
- 2014 – The Finance Minister of India reintroduces the Goods and Services Tax Bill to Parliament.
- 2015 – The Lok Sabha clears the bill, but it is stalled in the Rajya Sabha.
- 2016 – Goods and Services Tax Network (GSTN) went live. The law’s amended model passed in both Houses of Parliament and received a nod from the President of India.
- 2017 – The Cabinet approves four supplementary bills on GST cleared by the Lok Sabha and the Rajya Sabha. The Goods and Services Tax Law was implemented on 1st July 2017.
List of Taxes Subsumed after GST Implementation
Good service tax was introduced as a comprehensive indirect tax structure. With this introduction, the government aimed to consolidate all indirect taxes levied under one umbrella.
Thus, except for customs duty that is levied on the import of goods, Goods and Services Tax replaced multiple indirect taxes. This introduction helped overcome the limitations of its previous indirect tax structure regarding implementation and inefficiency in the collection process.
Following is the list of indirect taxes that were subsumed by Goods and Service Tax-
Indirect Taxes Imposed by the Central Government
- Central Sales Tax
- Service Tax
- Central Excise Duty
- Excise Duty (Additional)
- Countervailing Duty or Additional Customs Duty
- Special Additional Customs Duties
Indirect Taxes Imposed by the State Government
- State VAT
- Entry Tax and Octroi Duty
- Luxury Tax
- Amusement and Entertainment Tax
- Taxes on Advertisements
- Goods and services related to cess and surcharges
- Purchase Tax
- Tax on betting, lottery and gambling.
Objectives of GST
The key objectives of GST are-
‘One Nation, One Tax’
GST took the place of many indirect taxes that existed before. It was introduced with a core motive and policy called the ‘One Nation, One Tax’. It was introduced as so to provide set tax rates for a service/product that every state would follow. It even simplified administering taxes and compliances.
To Subsume Indirect Taxes in India
To create a centralised and unified tax system on goods and services, GST was introduced in India. Under its laws, the majority of indirect taxes were subsumed into one to simplify administration.
To Restrain Tax Evasion
Prior to the introduction of GST, the tax evasion rate was very high. In order to curb evasion and create a centralised tax surveillance system, GST was introduced in India. It has effectively contributed to reducing the number of tax defaulters.
Types of GST and GST Rules
Components of Goods and Services Tax | What does it mean? |
State Goods and Services Tax (SGST) | SGST refers to the tax payable on the sale of services and products within a state. It replaces previous taxes, including Value Added Tax, Entry Tax, State Sales Tax, Entertainment Tax, surcharges and cesses. |
Central Goods and Services Tax (CGST) | The tax levied on the supply of intra-state products is CGST. The Central Government charges this tax. CGST replaced many taxes levied by the Centre, including Service Tax, Central Excise Duty, CST, SAD, Customs Duty, etc. |
Union Territory Goods and Services Tax (UTGST) | Taxes applicable to the sale of products and services in Union Territories, such as Andaman and Nicobar, Daman and Diu, Chandigarh, Dadra, etc. |
Integrated Goods and Services Tax (IGST) | The sale of inter-state products and services leads to taxation. This is IGST. Basically, when businesses transfer services and products from one state to another, they need to pay this form of GST. |
Collection of tax is thus undertaken in the following way for intra-state and inter-state transactions.
GST Levy and Revenue Share | Intra-State Sale | Inter-State Sale |
Goods and Services Tax | SGST+CGST | IGST |
Share of Revenue | Revenue collected to be shared between state and central government equally. | Revenue collected by the central government. It will then be shared as per the goods’ destination. |
Example
Here’s an example to help you understand the levy, collection and share of revenue between the state and the central government.
A seller in Maharashtra sells goods worth Rs. 1 lakh to a buyer in the same state. The tax rate applicable to the goods is 12%, comprising 6% of CGST and 6% of SGST. The total GST of Rs. 12,000 collected will be shared between the centre and the state at Rs. 6,000 each as the sale is made intra-state.
The same seller sold goods worth Rs. 50,000 from Maharashtra to Karnataka. The tax rate applicable to these goods was 18%. The seller will thus charge IGST of Rs. 9,000 from the buyer due to it being an inter-state sale. The tax collected will be submitted to the central government.
Once submitted, the tax will be shared by the central government and state government based on the supply of goods made. For ease of tax collection, the government has made the entire system for the payment of GST online.
FAQs
When was Goods and Service Tax (GST) implemented in India?
The GST was implemented at midnight on July 01, 2017. It came into effect after the Goods and Service Tax Act was passed in the Parliament of India.
What is the limit of GST?
For businesses that operate in most states, the GST limit for registration is an annual turnover of Rs. 20 lakhs (for the supply of services) and Rs. 40 lakhs (for the supply of goods).