Goods and Services Tax | GST UPSC

January 19, 2024

13 Minutes

GST in India

Introduction

GST brought a landmark change in the country’s taxation system and completely transformed the way tax on various products and services was collected in India, making it more organized and efficient. In this article, specially tailored for UPSC aspirants, we'll take a closer look at the GST system and try to understand all the important parts of it.

Understanding Goods and Services Tax and GST Full Form

GST, which stands for Goods and Services Tax, is a value-added tax applicable to goods and services consumed domestically. Unlike the earlier tax systems, it focuses on the 'supply' of goods or services rather than the manufacture or sale. This tax is borne by consumers but remitted to the government by businesses engaged in selling goods and services.

Let's consider a real-life example to illustrate how GST functions. Imagine a bakery that produces and sells cakes. Under the earlier tax system, the bakery would pay different taxes at various stages of the production process – when purchasing raw materials, during manufacturing, and at the point of sale. Now, with GST, the focus shifts to the entire supply chain. The bakery pays GST only on the value it adds to the cake at each stage. So, when the bakery buys ingredients, it pays GST on the purchase price. When it sells the cake, it collects GST from the customer. The difference between the GST collected and the GST paid is then remitted to the government. This shift from taxing each stage of production to the final consumption simplifies the process and avoids tax-on-tax scenarios, making GST a more efficient and transparent system.

Features of GST

Supply-Side Tax Collection

GST brings about a significant change in how things are taxed in India. By shifting its focus to the supply of goods and services, unlike the traditional approach, where each stage of production was taxed, GST has simplified the tax process in the country.

The introduction of GST has streamlined the taxes and made the system more efficient. It has ensured that the coverage of economic activities becomes comprehensive by considering the entire supply chain from production to consumption.

Destination-Based Collection

Goods and Service follows the principle of destination-based consumption taxation, departing from the earlier origin-based system. In this approach, taxes are levied at the point of consumption, contributing to the creation of a unified national market.

By taxing goods and services at the destination, GST promotes fair taxation, ensuring that the revenue generated is retained by the state where the final consumption occurs.

Dual GST System

India operates under a dual GST system, involving both the Central Government and individual states in the taxation process. This system includes Central GST (CGST) and State GST (SGST), which are levied simultaneously.

The dual GST system ensures a balanced taxation structure by allowing both the central and state governments to collect revenues independently. CGST goes to the central government, while SGST is retained by the respective state government.

Integrated Goods & Services Tax (IGST)

IGST and Uniform Tax: IGST makes sure there's one fixed tax rate when things move between states. So, if you're sending or receiving something from a different state, you pay the same tax rate. This helps businesses because it makes trade between states smoother. It's like having the same rules for everyone, making sure things move easily across state borders.

Importing Goods or Services: With GST, bringing things into the country (like toys or gadgets) is treated like trading between states. It means there's a tax called Integrated Goods & Services Tax (IGST) and some other taxes when you bring things from another country. This makes it easier for both local and imported stuff because it stops the taxes from piling up.

Advantages of GST

For the Government

Unified Common Market: GST establishes a unified market, attracting foreign investment and supporting the "Make in India" initiative.

Tax Streamlining: The harmonization of laws, procedures, and tax rates simplifies taxation processes.

Enhanced Compliance: Online filing and verification of input credits increase tax compliance.

For the Overall Economy

Certainty in Taxation: GST provides certainty in taxation procedures, fostering a common national market.

Corruption Reduction: Increased use of IT and reduced human interface contribute to a decrease in corruption.

Economic Growth: Boosts export, manufacturing, employment, and GDP, fostering overall economic growth.

For Trade and Industry

Simpler Tax Regime: GST introduces a simpler tax regime with fewer exemptions.

Ease of Doing Business: Increases ease of doing business, reduces multiplicity of taxes, and eliminates double taxation.

Efficient Neutralization: Ensures more efficient neutralization of taxes, particularly beneficial for exports.

For Consumers

Transparent Prices: Seamless flow of input tax credit ensures transparent prices for consumers.

Price Reduction: Long-term reduction in the prices of goods and commodities.

Poverty Eradication: Contributes to poverty eradication through increased employment opportunities and financial resources.

GST Portal

The GST portal is like an online tax hub that helps businesses and taxpayers perform actions like signing up for GST, filing returns, and making tax payments online. The portal makes it easy for everyone to follow the tax rules and do their tax-related tasks in one place. It's user-friendly and makes tax processes simpler, so people can easily meet their tax requirements.

Functions of GST Portal

Registration: Enables a smooth and effortless registration process for both taxpayers and businesses within the GST system.

Return Filing: Oversees the filing of diverse GST returns, ensuring accuracy in reporting transactions and adherence to regulatory requirements.

Payment Processing: Manages the comprehensive processing of refunds and GST payments online, ensuring a seamless financial transaction experience for taxpayers.

Data Management: Ensures secure storage and retrieval of taxpayer information, upholding the principles of confidentiality and data integrity on the platform.

Latest GST Statistics (Courtsey: GST Council)

Goods and Services Tax Network (GSTN)

The Goods and Services Tax Network (GSTN), a Section 8 non-governmental, private limited company, which was incorporated on March 28, 2013, to provide GST-related technical infrastructure and services to the central government, state governments, businesses, corporates and taxpayers for an efficient implementation of the new tax regime.

It serves as the backbone of GST-related operations and ensures seamless functioning of the GST framework by through constant innovation in design, innovation and user experience.

Notably, Section 8 companies are not-for-profit organisations that come under Companies Act, 2013.

Latest Achievements of GSTN

The GST Council, in its latest report, has listed following new upgrades implemented by GSTN:

GSTR 2B Creation: GSTN has created GSTR 2b to help businesses streamline their procurement and supplier relations. It is an automatically drafted statement for Input Tax Credit (ITC) that gets generated for businesses. It relies on the details provided by the suppliers of the business.

NIL Returns through SMS: GSTN has streamlined the reporting process for taxpayers with no taxable activity during a specific period, enabling the simplified filing of NIL (zero) returns through SMS.

Improved UI for Address Fields: User Interface (UI) enhancements by GSTN include improvements in address fields, fostering a more user-friendly experience and reducing errors during data entry.

Auto-population of Returns: GSTN has facilitated the convenience of auto-populating specific sections of returns, minimizing manual efforts for taxpayers and ensuring accuracy in reporting.

About Article 279A

Article 279A outlines the constitution and functions of the GST Council. It emphasizes the need for a harmonized structure of GST and the development of a harmonized national market for goods and services. The quorum, procedures, and decision-making principles are also defined.

GST Council

The GST Council, constituted under Article 279A, plays a pivotal role in GST governance. It consists of the Union Finance Minister as Chairman, the Union Minister of State in charge of Revenue or Finance, and members nominated by State Governments. Key functions include recommending taxes, goods and services for GST, determining rates, and more.

Pillars of GST Council

Law Committee

• This committee is instrumental in proposing changes to GST laws based on feedback from industries, trades, and taxpayers.

• It actively engages in drafting rules and notifications, ensuring legal compliance.

• Additionally, it examines representations from trade on legal issues, contributing to a more responsive and adaptive legal framework.

GIC (Goods and Services Tax Implementation Committee)

• GIC stands as the decision-making body at the apex level within the GST Council.

• It takes decisions on urgent and procedural matters, ensuring the smooth functioning of the GST system.

• The GIC plays a crucial role in providing timely resolutions to critical issues that may arise during the implementation of GST.

Fitment Committee

• Tasked with determining rates for various supplies under GST, the Fitment Committee plays a key role in setting the tax structure.

• It recommends rates provided in the Act or Rules and addresses issues related to rates, classification, and inverted duty structure.

• The committee's efforts contribute to maintaining a fair and well-balanced tax structure.

ITGRC (Information Technology Grievance Redressal Committee)

• Envisaged to address challenges faced by taxpayers due to technical glitches on the GST Portal, the ITGRC focuses on improving user experience.

• Standard Operating Procedures (SoP) are established to submit data-related issues to the GST Council, ensuring efficient grievance redressal.

• This committee plays a critical role in enhancing the technological aspects of GST, making it more user-friendly and responsive.

Challenges for Effective GST Implementation

Cross-Utilization Issues: Challenges arise from difficulties in managing cross-utilization of input tax credit, leading to complexities in claiming credits for businesses operating in multiple states.

Revenue Loss for Manufacturing States: GST has posed challenges for states heavily reliant on manufacturing, as they may experience revenue loss due to the destination-based nature of GST.

High Revenue-Neutral Rate: The need to find a balanced revenue-neutral rate remains a challenge, as setting it too high can lead to increased costs for consumers, while setting it too low may impact revenue collection.

Concerns from Financial Institutions: Banks and insurance companies express concerns about the burden of multiple registrations and compliance requirements under the GST regime, impacting their operational efficiency.

Dependence on Political Consensus: The success of GST is closely tied to maintaining political consensus among states and the center, ensuring smooth implementation and necessary reforms.

Technological Adaptation Challenges: The successful operation of GST relies heavily on the adaptation and integration of technology, requiring businesses and tax officials to upgrade their systems and processes.

Capacity of Tax Officials: The effective administration of GST depends on the capacity and readiness of tax officials to handle the complexities of the new tax structure and ensure compliance among taxpayers.

Conclusion

In conclusion, GST represents a positive shift towards formalizing the Indian economy. Leveraging global experiences can help overcome challenges and further refine the system. The four pillars of GST, coupled with the role of the GST Council, contribute to creating a unified, transparent, and efficient taxation framework in India.

Practice Questions

Multiple Choice Questions (MCQs)

Q1: Consider the following statements about the Goods and Services Tax (GST) system:

Statement 1: GST is solely focused on the point of sale of goods.

Statement 2: IGST ensures a uniform tax rate for interstate transactions.

Statement 3: The GSTN plays a role in formulating GST laws.

Select the correct statements using the code given below:

A. Statement 1 and 2

B. Statement 2 and 3

C. Statement 1 and 3

D. None of the above

Q2: Which statements accurately describe the challenges faced by businesses under the GST regime?

Statement 1: Cross-Utilization Issues pose difficulties in managing input tax credit.

Statement 2: The destination-based nature of GST might lead to revenue loss for manufacturing states.

Statement 3: GST brings ease of doing business for banks and insurance companies.

Select the correct statements using the code given below:

A. Statement 1 and 2

B. Statement 2 and 3

C. Statement 1 and 3

D. None of the above

Q3: Consider the following statements regarding the role of the GST Council:

Statement 1: The Law Committee actively engages in drafting rules and notifications.

Statement 2: GIC (Goods and Services Tax Implementation Committee) focuses on improving user experience on the GST Portal.

Statement 3: ITGRC (Information Technology Grievance Redressal Committee) addresses challenges due to technical glitches.

Select the correct statements using the code given below:

A. Statement 1 and 2

B. Statement 2 and 3

C. Statement 1 and 3

D. All of the above

Q4: Which statements accurately capture the advantages of GST for consumers?

Statement 1: GST ensures transparent prices for consumers.

Statement 2: Long-term reduction in the prices of goods and commodities is a direct outcome of GST.

Statement 3: Poverty eradication is a result of increased employment opportunities due to GST.

Select the correct statements using the code given below:

A. Statement 1 and 2

B. Statement 2 and 3 C. Statement 1 and 3

D. All of the above

Answers and Explanations

Answer 1: D. None of the aboveExplanation: Statement 1 is incorrect as GST focuses on the entire supply chain, not just the point of sale. Statement 2 is correct as IGST indeed ensures a uniform tax rate for interstate transactions. Statement 3 is incorrect as the GSTN's role is technical infrastructure and services, not formulating laws.

Answer 2: A. Statement 1 and 2
Explanation: Statement 1 is correct as Cross-Utilization Issues are a challenge for businesses managing input tax credit. Statement 2 is correct as the destination-based nature of GST can lead to revenue loss for manufacturing states. Statement 3 is incorrect as GST, in reality, may bring complexities for banks and insurance companies.

Answer 3: C. Statement 1 and 3
Explanation: Statement 1 is correct as the Law Committee engages in drafting rules and notifications. Statement 2 is incorrect as GIC focuses on decision-making, not user experience. Statement 3 is correct as ITGRC addresses challenges due to technical glitches on the GST Portal.

Answer 4: C. Statement 1 and 3
Explanation: Statement 1 is correct as GST ensures transparent prices for consumers. Statement 2 is incorrect as long-term reduction in prices is not a direct outcome of GST. Statement 3 is correct as increased employment opportunities can contribute to poverty eradication due to GST.

Mains Style Question

Q: Examine the impact of Goods and Services Tax (GST) on the formalization of the Indian economy. Discuss the challenges faced by businesses, states, and financial institutions in adapting to the GST regime. Suggest measures to address these challenges and enhance the efficiency of the GST system. (Word limit: 300 words)

Model Answer

The implementation of the Goods and Services Tax (GST) in India was a monumental step towards economic formalization, aiming to create a unified and transparent tax structure. However, this ambitious transition was not devoid of challenges, impacting businesses, states, and financial institutions across the country.

Challenges Faced:

Businesses: The shift from traditional tax systems to GST presented formidable challenges for businesses. The adaptation to a new taxation framework required substantial efforts in understanding and implementing revised procedures. Cross-Utilization Issues, complexities in managing input tax credit, and the need for technological upgrades posed hurdles, particularly for small and medium enterprises.

States: The destination-based nature of GST altered revenue dynamics for states. Manufacturing states faced the risk of revenue loss as GST favored the point of consumption. Harmonizing state-specific tax rates and policies proved challenging, demanding a delicate balance between uniformity and regional autonomy.

Financial Institutions: Banks and insurance companies encountered operational challenges due to the burden of multiple registrations and compliance requirements. The intricacies of the GST regime necessitated a thorough review of existing operational frameworks, impacting efficiency and adaptability.

Measures to Enhance Efficiency:

Unified Education and Training: To address these challenges, a robust education and training program is imperative. Workshops, seminars, and awareness campaigns must be conducted to disseminate comprehensive information about the nuances of GST, ensuring stakeholders are well-prepared for its complexities.

Technological Integration: Encouraging technological integration is vital for businesses and financial institutions. Incentives for investing in advanced systems can streamline processes, reduce errors, and enhance overall efficiency in compliance and reporting.

Regular Consultation with States: Sustained and regular consultations with state governments are crucial for addressing challenges specific to each region. Collaborative efforts can facilitate a more harmonized approach, ensuring that the benefits of GST are evenly distributed among states.

Conclusion

In conclusion, while GST has undeniably formalized the Indian economy, the journey has been riddled with challenges. Addressing these challenges through unified education, technological integration, and sustained collaboration is imperative to unlock the full potential of GST. It not only fosters economic growth but also creates a transparent and efficient taxation system essential for the country's development.