GST stands for Goods and Services Tax, which is a comprehensive and new tax that needs to be levied over the manufacturing, consumption, and sales of goods and services across the country. Considered as one of the largest reforms of tax in the nation, GST was imposed with an expectation of improving economic growth as well as bringing together the state economies.
Both the State, as well as the Central government, are directed to levy GST on all the goods and services that are manufactured, imported, and produced in India. Except for exports, everything is subjected to GST. If you’re an economic novice and do not possess much information about the tax regime of the nation, give a read to this guide. You’d have every detail by the time you finish reading this article.
What is GST?
After replacing several Indirect Taxes, GST was introduced, which is also an Indirect Tax. On 29TH March 2017, the GST Act was passed. However, it was on 1st July that it came into force. So, GST is a multi-stage, comprehensive, and destination-based tax that is levied over all the value additions by every State government as well as the Central government.
Now let’s break down the definition of GST and try to understand them separately.
For example, goods that are manufactured in Karnataka are sold to a consumer in Maharashtra. GST is levied where consumption takes place. Therefore, the tax will be imposed at Maharashtra and not in Karnataka.
An item needs to go through multiple hands to reach its destination, i.e., from manufacturer to seller to finally the consumer. GST is imposed on every stage that’s mentioned below, and therefore, is called a multi-stage tax.
- Purchasing raw materials
- Manufacture or production
- Finished goods warehousing
- Sale to the wholesaler
- Sale to the retailer
- Sale to the consumer/customer
3. Value Addition
Let us take an example here as well. For example, a person manufactures cake or pastries. He/she buys sugar, flour, and other raw materials. The inputs which are put into the cake, i.e., sugar, flour, etc., become pricey when they are baked into pastries and cakes.
After the production process is complete, the producer sells it to the agent at warehousing. The agent packs as well as labels them. Again, here value is added to the product and then sold to the retailer.
After receiving the package, the retailer packs them and invests them in marketing, hence, increasing the value. Therefore, at each stage, a certain amount of money is added before it reaches the consumer.
What is the Need for Goods and Services Tax?
If you compare different states, you will notice the VAT rates, as well as regulations, vary. There has been an observation that the states are willing to slash the rates for the sake of attracting investors. As a result, both the Central and State government has to go through a huge loss in revenue, which is clearly not good for the nation’s economy.
GST’s introduction has played a very crucial role in shaping the country’s economy. It was introduced with the aim to plug all the loopholes present in the system. Thus, enabling the government to rationalize the entire taxation regime. Regions that are over-taxed, under-taxed, or non-taxed will be taken care of. Along with that, overburdened organizations will receive relaxation.
Apart from being desirable, the current GST system is also imperative for the rapidly developing economic environment. Separate taxations of services and goods often need splitting of the transaction value into the value of services and goods for taxation. In turn, this leads to more complexities, compliance, and administration costs.
With the globalization of the Indian economy, India has been signing FTAs with more countries than ever. Since India is allowing duty-free or low-duty imports, there’s a need for a transparent and simple taxation system that allows the Indian industry to compete in the domestic market as well as internationally. When taxes from both the Central, as well as state governments, are integrated into the GST system, it provides full credit for taxes collected from the input. The introduction of GST is more beneficial than simply redistributing the burden of tax from one group or sector to another in an economy.
The recent economic slowdown and fall of the world have provided a golden opportunity for India. India should use it wisely to make a position in the global market. In order to achieve this, India needs to increase its GDP.
Therefore, indirect taxes, i.e., GST, is required urgently to unify and rationalize. If the introduction of GST takes place in spirit and letter, it will enhance the overall tax collection. Our economy will receive an amazing boost because of it. We hope this guide has been helpful to you.