The Goods and Services Tax (GST) introduction, the biggest reform in India’s indirect tax structure since the economy opened up 25 years ago is now set to become reality.

Current we have Value-Added Tax (VAT) systems both at the central and state levels. But the central VAT or CENVAT mechanism extends tax set-offs only against central excise duty and service tax paid up to the level of production. CENVAT does not extend to value addition by the distributive trade below the stage of manufacturing; even manufacturers cannot claim set-off against other central taxes such as additional excise duty and surcharge.

Likewise, state VATs cover only sales. Sellers can claim credit only against VAT paid on previous purchases. The VAT also does not subsume a host of other taxes imposed within the states such as luxury and entertainment tax, octroy, etc.

Once GST comes into effect, all central- and state-level taxes and levies on all goods and services will be subsumed within an integrated tax having two components: a central GST and a state GST.

This will ensure a complete, comprehensive and continuous mechanism of tax credits. Under this there will be tax levied only on the value addition at each stage, with the producer/seller at each stage being able to set off his taxes against the central/state GST paid on his purchases. The end-consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
The proposed tax will take the form of “Dual GST” which is concurrently levied by Central Government and State Government. This will comprise:

  • State GST (SGST) – Levied by State
  • Central GST (CGST) – Levied by Centre
  • Integrated GST (IGST) – Levied by Center for Inter-state supply of goods and Services
Transaction New System Old System Comments
Sale within the State SGSt and CGST VAT & Excise/ST* Under the new System,a transaction of Sale within the state Shall have two taxes,SGST – which goes to the state;and CGST which goes to the Centre
Sale Outside the State IGST CST & Excise/ST* Under the new System,a transaction of sale from one state to another shall have only one type of tax,the IGST-which goes to the Centre

The advantage of introducing GST in India are many and the most important ones include:

  • Removal of multiple Taxation
  • Possible reduction in prices
  • Increase in Government Revenue
  • Lower cost of compliance and procedural adherence