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What is GST? with definition, operation, constituents, rates, advantages and disadvantages

We explain that what is GST? with definition, operation, constituents, rates, advantages and disadvantages. GST, short for goods and services tax, is an indirect tax levied on the sale of services and goods intended for consumption in the domestic market.

As a tax regime, the GST Act was passed in the Indian parliament on March 29, 2017 and entered into force on July 1, 2017.

France was the first country to adopt this tax regime in 1954. Since then, almost 160 countries in the world have subscribed to the GST in one form or another. Some of the predominant nation-states with a GST include the United Kingdom, Canada, Australia, Vietnam, Singapore, South Korea, Spain, Nigeria, Italy, and Brazil.
In India, the GST was introduced to replace the multiple federal and provincial indirect taxes such as VAT, excise tax, service tax, countervailing duty, entry tax, octroi and luxury tax with one tax regime centralized, uniform, manageable and transparent.

How does GST work?

Under the GST regime, taxes are collected at each point in the supply chain. It is based on the added value rather than the gross value of the product at the point of sale. Consumers are the main bearers of this tax. However, it is the merchant who is supposed to pay the proceeds of the tax to the government. As follows, the GST is a destination-based, multi-stage value-added tax.

  1. Based on destination because it is charged at the destination point of a good or service that is in the consumers’ location. For example, if a good is produced in Uttar Pradesh and consumed in West Bengal, the proceeds from the GST will go to the government of West Bengal, as the GST will be collected at the place of consumption.
  2. Multistage because it is required in each phase of the production and distribution chain of a product or service.

GST is applied at every point in the supply chain. (source: cleartax.in)

  • Finally, added value because it is loaded on the added value to a product or service at each stage of its supply chain.

GST is based on added value. (source: cleartax.in)

GST constituents

Under the GST regime in India, a variety of taxes at the federal and provincial level have been subsumed and combined by the following three types of taxes.

  1. Central Goods and Services Tax (CGST): The central government collects this tax for transactions carried out in a particular state. For example, Uttar Pradesh.
  2. State Goods and Services Tax (SGST): State governments collect this tax on intrastate sales.
  3. Union Territory Goods and Services Tax (UGST): This tax is charged by the governments of the union territories (without legislatures) for transactions carried out in a particular union territory.
  4. Integrated Goods and Services Tax (IGST): The central government applies this tax to interstate sales. The proceeds are then distributed between the union government and consumer states according to GST guidelines set by the government of India.

GST fees in India

The Government of India has established a GST council consisting of thirty-four members, mainly the finance minister of the states with the union finance minister at the head. The responsibility for setting GST rates for various goods and services rests with this council. Consequently, the following tax tables have been decided for the classification of goods and services.

  1. 0% or exempt goods and services.
  2. 0.25%
  3. 1.50%
  4. 5%
  5. 12%
  6. 18%
  7. 28%
  8. 28% with cess

It should be noted that certain products and services such as electricity, alcohol and petroleum products have not yet been incorporated into the GST regime. Consequently, they are taxed in accordance with the previous tax structure.

GST advantages

The fact that so many countries have subscribed to the GST itself implies how beneficial this tax regime is. The following are some of the important benefits of GST:

  1. Simplify the tax system: It subsumes various central and state taxes and subjects them to a single and uniform tax regime.
  2. Promotes Ease of Business: GST simplifies the tax system, which in turn enables distributors, suppliers or manufacturers to do business without any additional tax burden.
  3. Aims to prevent tax evasion: GST levies taxes at multiple stages of production, alerting tax departments if any attempt is made to evade taxes.
  4. Facilitates Interstate Economic Transactions: GST unifies the country as a single market with its uniform tax system. Consequently, it becomes easier for states to conduct economic exchanges since borders no longer act as barriers.
  5. Reduced cost of services and goods: GST eliminates the cascading effects of multiple taxes such as VAT and other state and central tariffs. Consequently, the total cost of services and goods is reduced.

Disadvantages of GST

When it comes to practical implementation, GST has a wide range of disadvantages.

  1. Not easily discernible: Despite its numerous claims to simplify the tax regime, GST with its different tax blocks for different products cannot be so easily understood.
  2. Higher spending on software: Filing for GST requires the purchase of software, which increases the financial burden on small businesses.
  3. Does not incorporate all products and services: Despite its claim to create a uniform tax regime, GST does not incorporate alcohol, petroleum products, and electricity into its network.

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