Need for Goods and Services Tax (GST) in India – with examples

Introduction

India ranks 130 out of 189 countries in ease of doing business. This ranking clearly indicates that India needs transformation rather than a small change. There are flaws in the current policies which makes doing business so difficult in India. Hence, a new system is based on the glitches of the existing system.

As said, GST is the solution to the flaws in the current taxation policy. It is expected that GST will revamp the whole indirect tax structure in India and it will provide a boost to the ease of doing business.

Here are some important tribulations for which GST is the way out.

• The multiplicity of taxes: GST is set to subsume all the major indirect taxes currently prevailing in the country. Whether it is Service tax or excise or VAT or Central Sales Tax, each of these taxes will no longer be valid once GST is levied.
  Further, it is easy to comply with only one tax, then to follow up with many.
   
• Cascading effect: This is one of the important reasons for which GST has been introduced. Removal of cascading effect. Cascading effect means the tax on tax.  An example would be a better way of understanding this problem:
  Suppose, a service provider uses one product worth Rs.100 (VAT @10%) while providing his main service. The value of service provided is Rs.1000 (Service tax @ 15%). Assume GST rate of 20%.

Under current System: VAT credit is not available to the service provider. Hence, the cost of output service shall be as follows:
Value of Service Rs.900 + Value of input Rs.110 = 1010 + 15% Service tax.
The final Cost price inclusive of service tax is Rs.1161.50/-

Under GST Regime: After GST regime, only one tax shall be applicable, i.e. GST. Input tax credit of all inputs shall also be available. Hence, the cost of output service shall be as follows:
Value of Service Rs.900 + Value of Input 100 = Rs.1000 +20% GST.
GST on Output service will be Rs.200. Input credit available is Rs.20 (20% of Rs.100). Final tax to be paid to the government shall be Rs.180/-.

You can see from the above example that under the current system, there was a tax on tax. But when we move to GST regime, tax rate increase but there was no cascading effect.
 

• Litigations over disputes: As per the Constitution of India, Central Government can levy and collect taxes on services and state government enjoys full autonomy when it comes to goods.
  There are some transactions on which VAT and service tax both are applicable. This amount to double taxation ultimately leads to disputes. As per the recent report, an estimated of 5.5 lakh crore is stuck in litigations. Litigation is a scourge for the tax-friendly regime and hence, it has to be curtailed down to provide efficiency to the system.
  Under GST regime, it is expected that various sources of litigations will come to an end and environment of the tax-friendly regime will rise.
   
• Increased Tax Revenue: India’s tax to GDP ratio is low as compared to the world or other Asian countries. It signifies that taxation policy is not ideal in comparison to the world. Look where India stands in comparison to the world regarding tax to GDP ratio;

From the above, it can be seen that India is far behind in tax to GDP ratio. Under GST, it is expected that tax revenue shall increase because of the wider tax base and lesser exemptions.
The government is expecting higher revenue due to the following reason:

1. Increased Tax Base: Presently, there are different threshold limit for each indirect tax law. Under excise it is 150 Lakh, under Service tax, it is 10 Lakh, and under VAT, it differs from 5 Lakh to 20 Lakh.
   Under GST, the exemption is proposed to be fixed at 25 Lakh. Hence, there are thousands to an assessee who do not pay excise due to threshold exemption will directly come under the ambit of GST. This will enlarge the tax base and tax revenues.
    
2. Governance: Currently, indirect tax laws are very complex to administer and thus increases the related cost. Further, disputes among the tax laws only make it worst.
   Hence, GST will prove a boon to the tax collectors nationwide. By focusing on only one tax law, the government will get the time to kerb the malpractices and to get more people under the tax net.
    
3. More tax on Services: Around 60% of GDP is contributed by the service sector. The current rate of service tax is 15% (inclusive of Krishi Kalyan Cess and Swachh Bharat Cess). The proposed GST rate will be around 18 to 20%, i.e. more than the current service tax rate.
   Hence, it is now very clear, that government revenue is set to increase.

• Boost to Investment: Under the current scenario, there are many instances where inputs of taxes are not allowed against each other. E.g. A service provider is not eligible of VAT paid on capital goods. Since the input tax credit is not available, the tax amount is added to the cost of the product, which makes capital goods or other products costlier.
  However, under proposed GST Regime, seamless credit will be available as only the common law and taxes will prevail, this will ultimately result in cheaper capital goods, more demand, and more investment, in turn, will drive more growth.

Conclusion

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