What is GST ?
1) HISTORY OF GST (GOODS AND SERVICES TAX)
France was the world’s first country to implement GST Law in the year 1954. Since then, 159 other countries have adopted GST in one form or another. In many countries VAT is the substitute for GST, but unlike the Indian Vat system, these countries have a single VAT tax which fulfils the same purpose as GST.
In India, the discussion of GST Law flagged off in the year 2000, when the then Prime Minister Atal Bihari Vajpayee brought the issue to the table. After a long journey and amendments by the then National party i.e. Congress and now by the BJP, the GST is introduced as The Constitution Act, following the passage of Constitution 122nd Amendment Bill. The Lok Sabha passed four bills related to GST on 29th March, 2017.
Not only is this a game- changing tax reform initiative, it also puts in place a template for cooperative federalism because the states are as much a stakeholder as the Centre. The roll out has been made possible after the States and the Centre agreed to merge their existing taxation powers to evolve a uniform tax structure.
The GST regime is set to be in force from 1st July, 2017 with a special midnight session in the central Hall of the Indian Parliament by Prime Minister Narendra Modi, in the presence of President Pranab Mukherjee to commemorate this occasion.
2) WHY IS GST IMPORTANT?
Currently, the Indian tax is divided into two subgroups- direct and indirect taxes. Direct taxes are levies where the liability cannot be passed on to someone else. Example: Income Tax, where you earn the income and you alone are liable to pay the tax on it. Indirect taxes are levies where the liability can be passed on to someone else.
GST subsumes a host of indirect taxes levied by the Centre and the States including service tax, excise duty, value added tax, luxury tax, entertainment tax and entry tax. This means that both the Centre and the States are giving up their autonomy when it comes to collecting these indirect taxes-a major part of the revenue stream. It will mitigate cascading or double taxation and pave the way for common national market.
3) HOW IT WORKS
When GST will be implemented in India, there will be three kinds of applicable Goods and Services Tax:
- CGST: where the revenue will be collected by Central government.
- SGST: where the revenue will be collected by state governments for intra-state sales.
- IGST: where the revenue will be collected by central government for inter-state sales.
The basis of GST is the seamless flow of Input Tax Credit (ITC) along the entire value addition chain. At every stage of manufacturing process, businesses will have an option to claim the tax that has already been paid in the previous transaction. ITC is the credit that an individual receives for the tax paid on the inputs used in manufacturing the product.
So if there is a 5% tax that an individual must submit to the govt., he can deduce the amount he has paid at the time of purchase and pay the remaining amount to the government.
Under GST goods and services will be taxed at the following rates: 0%, 5%, 12%, 18%, and 28%.
There is a special rate of 0.25% on rough precious and semi-precious metals and 3% on gold.
4) WHAT IS HSN CODE AND SAC UNDER GST?
Harmonized System of Nomenclature was conceived and developed by World Customs Organization (WCO) with a vision of classifying goods from all over the world in a systematic and logical manner. In India, while implementing GST, all goods are classifies based on HSN number.
The HSN structure contains 21 sections, with 99 chapters about 1,244 headings and 5,224 sub-headings.
India has already been using HSN system since 1986 in the Central Excise and Customs regime. It is a much more detailed classification that added another two digits to the 6-digit structure. Indian manufacturers under GST shall be required to follow a 3-tiered structure of HSN.
- Those with a turnover of less than INR 1.5 Crores need not follow HSN.
- Those with a turnover exceeding INR 1.5 Crores but less than INR 5 Crores shall be using the 2 digit HSN codes.
- Those with a turnover exceeding INR 5 Crores shall be using the 4 digit HSN codes.
- Those dealers who are into imports or exports shall mandatorily follow the 8 digit HSN codes.
Similar to the International HSN Codes, India has adopted a Service Accounting Code (SAC) for all its services. GST will subsume the service tax, which covers all kinds of services at a national rate of 15%, apart from other rates in some cases. Since GST is a combination of goods and services both, an equable classification for services is also required. SAC will remain the same under the GST regime.
So essentially, Goods & Services Tax is going to have a two-pronged benefit. One, it will reduce the cascading effect of taxes, and second, by allowing input tax credit, it will reduce the burden of taxes and, hopefully, prices.