Basics of Taxation system in India

India’s Taxation System, integral to its economic framework, underwent a landmark overhaul with the introduction of the Goods and Services Tax (GST) on July 1, 2017. India’s shift to the GST regime marks a significant milestone in its economic history, showcasing the country’s ability to undertake major reforms. While challenges remain, the potential benefits of GST in terms of fostering a unified market, improving tax compliance, and stimulating economic growth are undeniable. Continuous efforts to simplify the GST structure and enhance the GSTN’s functionality will be key to realizing the full benefits of this transformational tax reform. As India continues to evolve its taxation system, GST will undoubtedly play a central role in shaping its economic destiny.

Historical Context and Evolution

Historically, India’s taxation system was a complex web of direct and indirect taxes levied by both the central and state governments. Direct taxes included income tax, corporate tax, etc., which are paid directly by the taxpayer to the government. Indirect taxes, such as sales tax, service tax, VAT (Value Added Tax), excise duty, etc., were levied on the manufacture, sale, and consumption of goods and services. This system was fraught with inefficiencies, including tax-on-tax (cascading effect), lack of credit for taxes paid on inputs, and a fragmented Indian market with varying tax rates and regulations across states.

Constitutional Framework for GST

The introduction of GST required a constitutional amendment, given the division of taxation powers between the central and state governments. The Constitution (101st Amendment) Act, 2016, paved the way for the launch of GST. It led to the establishment of the GST Council, a key governing body comprising the Union Finance Minister as its chair and state finance ministers as members. This council is tasked with making recommendations on various aspects of GST, including rates, exemptions, and thresholds.

GST Model

GST is a destination-based tax, meaning it is collected from the point of consumption rather than the point of origin. This model replaced the earlier origin-based taxation model, which led to economic distortions across states. GST in India follows a dual model (CGST, SGST/UTGST) where the Central and State Governments simultaneously levy tax on a common tax base. For inter-state transactions, the Integrated Goods and Services Tax (IGST) is applied, ensuring the seamless flow of tax credits from one state to another. This framework ensures that every value addition is taxed, and tax credits are available across the supply chain, thus minimizing the cascading effect of taxes.

Key Features and Benefits

• Broad-based and Comprehensive:

GST subsumed most of the indirect taxes, reducing complexity and making the system more transparent.

• Elimination of Cascading Tax effects:

By allowing input tax credit, GST minimized the cascading effect, making goods and services cheaper over time.

• Uniform Tax Rates:

A uniform tax rate across states under GST eliminates economic distortions and creates a single national market, boosting trade and commerce.

• Digital Compliance:

GST is supported by a state-of-the-art digital infrastructure, the GST Network (GSTN), which facilitates registration, tax payments, and return filings, enhancing compliance and reducing corruption.

Implementation Challenges

Despite its benefits, the implementation of GST faced several challenges:

• Technical Glitches:

The GSTN portal faced technical issues, affecting compliance, especially for small and medium enterprises (SMEs).

• Complexity in Rates:

Multiple tax rates and classification issues have led to confusion among businesses, calling for a simpler rate structure.

• Compliance Burden:

Small businesses have struggled with the compliance requirements under GST, although measures have been taken to ease these burdens over time.

Economic Impact

GST has had a profound impact on the Indian economy. It has increased tax collections over time, indicating improved compliance and expansion of the tax base. By reducing the cost of doing business and eliminating inter-state trade barriers, GST has enhanced the competitiveness of Indian goods and services, contributing to economic growth and stability.