What is the Goods and Services Tax or GST

gst explained

When the clock strikes 12, India will undergo the biggest Economic reform of this century – The Gods and Services Tax or GST. This single tax reform will change the economic status quo of the country in many ways. It is the biggest economic reform the country has seen since the 1991 LPG reforms. The new tax system is sure to put India on a double-digit growth rate track and fulfill the dream of One Nation, One Tax.

To the uninitiated, the GST is a replacement model for all the indirect taxes that are levied on Goods and Services consumed by the members of the community.  This new model will be replicated throughout the country, starting from 12 o’clock midnight.

What Exactly is GST?

Any government has to generate receipts to balance its expenditures. For this purpose, there are various methods and the most popular one is taxation. Taxation can be of two types- direct or indirect. Income Tax is direct taxation as it is paid by the person earning the income to the government (IT Department); on the other hand,  service tax, octroi, CENVAT, CST, Entry Tax, entertainment tax, Excise Duty, Customs Duty, VAT etc are indirect taxes. Indirect means these taxes are collected by an intermediary who in turn pays it to the government. Indirect taxes are not paid on income but rather on the Goods and Services consumed. There are many problems with this model –

1) It increases the cost of the products as the tax is taxed again at each stage of production. This is called cascading of taxes.

2) Also, there are many leakages which add more to the misery.

3) Some taxes like Octroi and Entry taxes are collected by the state governments for letting the goods enter the state. This results in a waste of time and energy and ravages the productivity of the economy.

4) Some taxes come under the state list and state has the authority to levy it. This creates hurdles and disputes between center and states.

There are many such problems but these are the most significant ones. The government seeks to improve this situation by replacing the current model with a central one (GST). Under GST regime, the prices of most of the products will come down as cascading of taxes will be eliminated. This is true for most of the products that we use on daily basis. Luxury goods, however, will get costlier; they will also attract cess. There are four slabs under GST – 5%, 12%, 18% and 28%. Most of the unpacked food items will attract a GST of 0%, which means they won’t be taxed. Petroleum products, Alcohol, and Tobacco products have been kept out of the GST for now.

GST will result in a seamless single market (one India); it is a giant leap towards Cooperative Federalism and will also help in Fiscal consolidation. Under the new GST regime, Tax revenues will rise and it will help narrow the Fiscal Deficit in the long run. GST is transparent, corruption free and will be powered by the GSTN (Goods and Services Tax Network)– the IT solution that is the backbone of GST. It is a private company which is working with Infosys and dozens of other entities to get the system up and running before the clock hits 12. The measure of its robustness we will come to know once it is launched. The Gross Domestic Product of India is expected to grow by 2% if the GST model is implemented successfully.

With GST, the present government has shown that it won’t shy away from taking big decisions (There have been debates on GST for decades but no one implemented it). Demonization, GST and the disinvestment of Air India are some of the boldest decisions taken by the present government. Don’t know why but I feel that the disinvestment of BSNL is going to be the next target for the government as it can not sustain against the private companies in Telecom space and there is no point in wasting public money over its revival. That being said, the future of India seems bright as some good steps along with the upcoming demographic dividend (2020-2040) will help India in the long run. In short, India is finally gearing up to unleash its true potential. Let’s just hope that things go right.

 

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One thought on “What is the Goods and Services Tax or GST

  1. The article does not go into the details but is a quick read for those who have no idea about GST. Understanding GST will take a lot of time if you do not know the finance jargons. Also, I am not convinced about the disinvestment of BSNL. They are merging with MTNL. Pulling it off is a tough task

     

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