What is the Old Tax System?
Before the implementation of GST, the indirect tax regime was known as VAT (Value Added Tax).
The VAT was an indirect value-added tax which was applicable for goods sold and not services. It was introduced into the Indian Taxation system on April 1, 2005. However, service tax took care of all the services rendered. Thus, the previous taxation system included several indirect taxes resulting in high tax rates paid from the pocket of the consumer. In taxation basics, VAT replaced Sales Tax.
Introduced to make India a single integrated market, VAT was implemented in all states and union territories of India, except Andaman and Nicobar Islands and Lakshadweep Islands.
What is GST?
The introduction of GST eradicated the old tax system by combining all indirect taxes into one.
GST applies to goods and services with uniform pricing. It is levied on all manufacturing, selling, and consumption of products and services. GST marginalizes the old tax system as it is distributed among the Central and State Governments.
Components of GST are:
- CGST: The Central Government collects it on an intra-state sale ( for e.g., transaction happening within Maharashtra)
- SGST: The State Government collects it on an intra-state sale.
- IGST: The Central Government collects it for inter-state sale (for e.g., Maharashtra to Tamil Nadu).
What are the Disadvantages of VAT?
- VAT complicates things: It is incurred by business entities at every single point during the chain of production, from the point of origination to the point of consumption. The VAT is based on a full-billing system. Hence, its implementation is expensive.
- A VAT would do little to increase the State revenue: VAT is considered regressive as it justs amounts to a colossal waste of time. All the purchase and sale records should be maintained, which will, in turn, increase the compliance cost.
- A VAT could cost significantly more: VAT is not a simple task to calculate at every state, and hence it will affect the poor people more than the rich because they spend a more significant proportion of their income.
- VAT replaces state sales tax making it extremely complicated. As some states, not charging state sales tax will raise a fuss.
What is the Need for GST?
GST has dramatically altered the taxation system of the nation and has helped in eliminating the cascading effect of tax-on-tax. There is a strong rationale that exists for the need for GST. Since the mid-century in 1980, various indirect tax reforms have taken place and only partly have been successful.
Introduction of VAT in 2005, replaced sales tax, and covered all the transactions to the retail stage. VAT ensured that every person in the supply chain cycle gets the credit for all the fees paid on previous purchases, which did not eliminate the cascading effect of taxes.
VAT includes excise tax, and the problem of the cascading effect of tax-on-tax remains. VAT implementation is not feasible in many parts of the country as the goods and services are not taxed at the same rate across the country. Now, since GST eliminates all this discrepancy by making no distinction between products and services, this implies that with GST coming into effect, invasion of tax will not be possible by selling goods as services and gaining undue tax benefit.
Furthermore, GST ensures that the transactions are taxed at the same rate in the country as the new framework will subdue all the indirect taxes imposed by the center and state governments.
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What is the Cascading effect of TAX?
When there is tax levied on a product at every step of the sale, this is known as the cascading effect of the tax. The tax is levied on a value that included tax paid by the previous buyer, making the end consumer pay ‘Tax on already paid tax’.
Differences between GST and the Previous Tax Structure:
|STRUCTURE||Under the old taxation system, the central taxes applicable were custom duty/central sales tax on commodities and services, surcharge and cesses. The state taxes included state VAT, luxury tax, tax on gambling, betting and lottery, sales tax deducted at source.||Under GST, all the central and state taxes are subsumed and a single tax is levied on all goods and services apart from few commodities like petroleum, natural gas, and high-speed diesel.|
|REGISTRATION||VAT registration is decentralized under state and central authorities.||Under GST, registration is through online portals depending on PAN of the entity and other details.|
|BASIS OF LEVY||VAT was levied at the place where goods are manufactured and sold, or at the place where services are rendered.||GST tax will be levied at the place of consumption, as a destination-based tax.|
|FILING OF RETURNS AND COLLECTION OF TAXES||Under the old tax system, service and central excise tax were uniform, but VAT varied from state to state.||Under GST, the process of filing returns is uniform and the dates for collecting or depositing tax are very structured.|
|VALIDATION||Under the VAT system, it partly validates the returns and verification is subjected to assessments by state and central governments.||Validation under GST will take place on the system. There is a thorough amount of consistency checks on input credit availed, tax payments and utilisation.|
|TAX ON EXPORT OF COMMODITIES AND SERVICES||Under VAT, this tax is exempted||Under GST, there is no change.|
|CASCADING EFFECT||Credit between service tax and excise duty is available, but there is no set-off against VAT on excise duty.||Under GST, credit is available on the whole amount of taxes up to the retailer.|
|DISALLOWANCE OF CREDIT ON CERTAIN ITEMS||There are a few non-creditable goods and services under VAT as well as CENVAT rules.||There is no such disallowance unless the GST council specifically allows it.|
|THRESHOLD LIMITS FOR LEVY OF TAX||The threshold for central excise is Rs. 1.5 Crore and for VAT, it ranges between RS. 5 LAKH to Rs. 20 LAKH depending upon the state. For service tax, the threshold limit is Rs. 10 LAKH.||Under GST, the state GST will range between Rs 10 LAKH TO Rs. 20 LAKH, based on the recommendations of the GST council.|
|EXEMPTIONS||Certain areas such as North-East will be able to enjoy exemptions.||Under GST, no such exemptions are availed unless the GST Council may introduce an Investment Refund Scheme for certain zones.|
The implementation of GST on goods and services subsumes miscellaneous central and state taxes. The Indian government has integrated GST to improve the economy by eliminating the cascading system of tax. In an attempt towards the digitalization of India, the online portal of gst.gov.in is providing the taxpayer with every facility possible, from GST certificates to easy filing of tax returns. As per the newly proposed regime, there is a value addition across different stages, providing the benefit of setting off taxes against the central or the state GST. This unified tax structure of GST benefits manufacturers, retailers, and end consumers by streamlining the business process in India.