Goods and Services Tax or “GST” as it is popularly known is the newest taxation system in India which came into existence on 01st of July of 2017.
This new indirect tax structure became a law after facing a number of political hurdles in the course of its becoming a law. In fact, it is also expected to encounter a large number of functional hurdles during its implementation owing to its scale and complexities.
The implementation of this transformational tax system in a huge and multi-dimensional country like India has generated a lot of interest in the financial circles around the world.
The impact of this new taxation can only be understood by knowing a little about the earlier indirect tax system which existed prior to the implementation of GST.
Let us therefore put that into perspective.
Since the last seventy years, India has been following a three-layer structure of indirect tax system in the country. Businesses either manufacturing or services were liable to pay taxes to the Union or the Central Government, the respective State Government and the Local bodies like municipalities.
The old indirect tax system had a number of flaws in it. In fact, the primary cause of most of the flaws in the tax system was on account of control of multiple authorities over a single business entity. The multiple authorities being the Central, State and Local governments. Let me quote a few examples of the said flaws:
- In the old tax structure, there were about 17 laws that a business entity could be subjected to. This created multiple accounting works for a business in matters related to taxation.
- Every business entity had to encounter all applicable taxes imposed by the Central, State and Local govt.
- Dealing with multiple tax authorities means encountering multiple tax officials related to each law applicable. This created multiple bureaucratic hurdles for smooth functioning of any business.
- Businesses had to adhere to filing of multiple tax documents like Returns and annual reports, keep multiple account books etc. catering to different tax authorities.
- A single product or a service was at times subjected to multiple taxes (for e.g. States used to charge VAT on the Excise Duty paid by a manufacturer to the Central Govt.)
- Goods that were sold across states were taxed without any provision of input credit to buyers.
- Purchase value of products varied from State to State based on variable tax rates levied by different States (for e.g. VAT on mobile used to be 5% in Delhi and 14% in Maharashtra thus having difference in the price of the same item at different parts of the country).
- Differences in threshold limit existed under different tax laws (for e.g. under Central Excise Act the threshold limit for a small manufacturer is set at Rs 1.50 Crs whereas under the Service tax Act the limit was only Rs 10 lacs).
These are only a few deficiencies of the old tax system that existed prior to the introduction of GST. Now, removing or nullifying the effects of these flaws will not only ensure a smooth and fair tax collection mechanism set in place, but it will also bring a higher amount of tax compliance from businesses in the future.