The Importance Of Goods And Services Tax Explained In Simple Terms With Examples

The benefits of Goods and Services Tax (GST) can’t be overstated. Introduced to create ‘One Nation – One Tax – One Market’, the uniform tax system certainly holds promise for India. Let’s see how –

Brings all Taxes Under a Single Umbrella

Previously, the State and the Union government excised separate taxes. This resulted in a cascading effect, with taxes levied on different stages and at different rates.

While the Centre imposed Central sales tax, Excise duty, Income tax, Service tax, and Security transaction tax, the State collected VAT or Sales tax, Octroi, State excise, Entry tax, Property tax, and Agriculture tax.

With the advent of GST, indirect tax rates and structures are now common across India. This has brought about a simpler tax system, erasing the intricacies of multiple taxes, thereby simplifying business operations and mitigating double taxation on goods.

Previously, there were seventeen different taxes excised by the Central and State/UT Governments, having a cascading effect of tax on tax. Replaced by one GST, India enjoys the benefits of a common market. Read more under GST Rates in India. 

Impacts the Cost of Goods

The cascading effect of taxes largely affects the prices of goods. GST reduces the cost of goods and services, which are layered with multiple taxes.

For instance, Person A sells goods to Person B and charges sales tax on the sold product. Person B further sells the product to Person C with sales tax. In this case, Person B was levying sales tax liability, which included sales tax paid on the previous purchase, a tax on tax.

GST’s system of unified tax-credits throughout the value-chain, and across all Indian States, ensures minimal cascading of taxes. The merging of major Central and State taxes in GST, comprehensive set-off of input goods and services, and the removal of Central Sales Tax (CST) in return minimises the cost of locally manufactured goods and services.

Creates an Expansive Tax Base

GST targets micro, small, and medium-sized enterprises (MSMEs) with its minimum compliance cost. For instance, the exemption limit for MSMEs has been increased from Rs 20 lakh to Rs 40 lakh. Furthermore, businesses with a turnover of up to Rs. 1.5 crore are entitled to a composition scheme, through which they pay only 1% flat rate and file only one annual return.

Similar compliance and schemes are available to small service providers. More than 35 lakh small traders, manufacturers, and service providers are expected to profit from such trader friendly measures.

Improves Compliance and Transparency Through E-invoicing

The complex structure of the past, an indirect tax system prevented transparency.  GST has launched the issuing of e-invoices by taxpayers. The new system of e-invoicing demands business to business (B2B) transactions to be electronically authenticated with GSTN on the common GSTN portal.

Earlier, a transaction between the manufacturer and consumer was done directly, without the government having a proof of the same. E-invoicing ensures immediate upload of an invoice on the GSTN portal.

The biggest advantage of E-invoicing is the deliverance of transparency and proof. Furthermore, it prevents tax evasion. The real-time tracking of e-invoicing by manufacturers, as well as government, is also bound to minimise cases of fraud and fake GST invoices.

Contributes to the GDP

GDP largely depends on government revenue, and the GST tax regime helps in increasing the country’s GDP.

For instance, GST promoted an easier, faster, and cheaper movement of goods across all states, in India’s unified market. Tax for entry into other states, standardised tax structures across states and Union Territories have minimised compliance expenses, eradicating a variety of taxes.  In a way, the GST subsumes all other such taxes, the excise duty available for manufacturers is also phased-out, adding to the government revenue, thereby increasing the GDP.

Secondly, GST boosts indirect revenues to the government with its extended tax-paying base. The increased revenue will, in return augment developmental projects and urban financing, adding to the GDP.

Lastly, indirect taxes levied at multiple stages, increased the cost of collecting taxes. With GST, this cost is expected to decrease, leading to a higher generation of revenue for the government.

For a more educated view on the subject, do visit GST explained.