Indian taxation system consists of direct and indirect taxes. The direct taxes include income tax, wealth tax, corporation tax etc. While the indirect tax includes service tax, Value Added Tax (VAT), customs and excise duties etc. The VAT was introduced to replace sales tax in indirect tax regime to solve the problem of cascading effect or tax on tax.
However the existing regime of VAT also has certain problems like:
When goods are transferred from one state to another, if it is for transportation purpose then it does not attract VAT, but if the goods are transported for sale, then it attracts VAT. Many big companies opened warehouses in several states to avoid VAT. Small and medium enterprises which are unable to open warehouses suffered due to more tax burden.
Another problem here lies in rate arbitrage. We know that different states have different VAT. In this case, if a person buys an Audi car, he would prefer to buy from the state where there is less VAT as compared to the state with more VAT, which in turn will lead to regional imbalance in development.
Besides, VAT had the problem of tax on tax, for example, if central excise on a product of Rs1000 product is 10%, then VAT was applicable on Rs1100, and not on Rs1000.
To remove above vulnerabilities GST was introduced in the form of macro-economic reform and is applicable now all over the country.
It will benefit the consumers as the cost of products will decrease which in turn will increase the demand of that product.
Less corruption will be there as the GST network will be used in handling all the transactions with less human interventions.
It has broadened the tax base, as 27 lakh new registered entries were seen in the formal sector. It will increase the revenue in the long run and thus address the problem of fiscal deficit.
The number of returns filed with this new taxation regime is less as compared to earlier. Also, there are now just 6 rates which are less than earlier ones which included different VATs of different states. This regime will also benefit the SMEs, and also will help in balanced development of all the states.
GST will promote cooperative federalism between the centre and states.
Elimination of interstate check post which will increase the time and distance covered by the trucks, and the efficiency of transportation in our country.
Small traders with threshold of up to Rs 20lakh will not come under the GST while there is a composite scheme for small and medium enterprises with turnover up to Rs1.5crore to file return which can pay 1-5% GST.
The GST rate of 28% is considered high when compared with other countries.
Lower GST on gold and jewellery which should be kept high.
Still, many items like electricity, real estate, alcohol, petrol are out of the GST ambit.
States are facing a revenue loss as VAT constituted the highest percentage of revenue for the states which is now subsumed under the GST. On the other hand corporate tax which constitutes higher revenue for the centre is not affected.
India being an IT hub, still has not created a robust GST network, there are problems seen in handling large amounts of data when filing returns.
Still there are many issues to be solved. For example, if chocolate is considered luxury item, it would attract higher rates, while if it is Patanjali chocolate, the product is considered as a healthy item, so there is classification dispute.
Another issue arises, if any item is sold without packaging then it will attract no tax while if that item is packed, then it attracts the tax.
Although there are issues seen in the implementation of the GST, yet there is a hope that things will improve in the long run. Various states facing revenue loss are compensated for a period of five years. Teams are working for a robust GST network. Now, not more than 50 items attract 28% tax. Also, there is a provision of making anti profiteering authority which would look into whether the profits are reaching to the end consumers. The government has also brought a provision of e-way bill to track goods from place to another.
Since this is the first tax reform on a massive scale after independence, it will take at least one year to settle the issues.
- Akriti Singh