What Makes GST Better Than Indirect Taxes?

What Makes GST Better Than Indirect Taxes?
What Makes GST Better Than Indirect Taxes?

If you ever wonder what is GST? Then read – GST, as a tax reform, will remain etched the pages of Indian economic history. With multiple opinions flying around in support of the move to have a single tax slot for goods and services, it’s crucial to dig deep. To understand why GST is better than indirect taxes, it is important to have a working knowledge of what it is, let’s get to it!

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A Simplified Tax Reform

GST means a single tax that is inclusive of indirect taxes that were levied on goods and services. This was implemented back in 2017, on 1st July. This single tax approach is seen as a major reform in the income tax segment of the country. It is expected to boost the economy by efficiently collecting taxes and pointing out defaulters.

The old taxation system had multiple demerits that a singular tax system could rectify. The multi-tax layer that was previously in place increased every step of the way as a product or service was passed on from the manufacturer to the end-consumer.

What Was There Before GST?

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Before GST was brought to effect there were multiple indirect taxes levied upon products and services. This included VAT, education cess and multiple other taxes which varied from state to state. This form of tax was added to every single purchase made. This only brought a hefty tax for the end-buyer.

For example during the product manufacturing process, the materials assembled have already been taxed, now again it is being taxed during its sale. This meant that the end-consumer is paying multiple taxes for the same product.

Such indirect taxes were not only complex but also varied widely across the sub-continent finally limiting business growth to stringent taxation policy. Not only was it not sustainable in the long-run but it had other demerits too.

Disadvantages Of VAT

VAT or value-added tax was also implemented with almost the same concept of an integrated taxation system in the country. But the reality was far from it. The different VAT laws in different states meant different charges on the same goods. This, in turn, meant that a business had to depend on the tax policies of a state to make a sale.

With VAT it was also impossible to extract ITC (input tax credit). This was again one of the main reasons why it was a hindrance for businesses, especially small, medium and micro businesses to reach greater heights of success.

How Crucial Is GST For India?

Stipulated to be a true business and economic growth move GST was welcomed by many economists. This ticked off the right boxes for micro, small and medium businesses the most. Before with indirect taxes, there were high chances of extra charges like entry fees, end-user taxes, VAT, education cess and what not at every step. Read more info about Composition Scheme under GST from this finance blog.

This not only made business difficult but also laid heavy tax payable by the end-buyer. For India to do well economically, businesses needed to get a fair chance to sell across states with a single tax benefit. This enabled many small companies to take their products and services to cross the border to another state within the sub-continent.

This move is also expected to contribute to the country’s GDP. With an amazing IT incurring strategy through GST, the government is expected to earn more revenue and run their operations smoothly. The traditional method for IT, put in place after independence from the British rule was continuously escalating with multiple defaulters who were not exactly legally exempted. The strenuous process also made it difficult to keep track, especially when it came to businesses managing their finances.

Effect On Interstate Business

The entry fee and other taxes levied on products and services that are being available outside of the concerned state, layered and escalated the amount of tax. This is why all kinds of businesses required austerity measures that enable them to cater to bigger markets without having to pay too heavy taxes which would, in turn, increase the price of the product for the end-buyer.

State governments were concerned with their share of the revenue which they use for the development of their respective state. But GST brought about the solution to this contradiction with itself. The state would be compensated and there is a provision for them to earn revenue from GST.

Types Of GST

GST can show up on the bill as parted under SGST and CGST, meaning state goods and services tax and central goods and services tax respectively. There is another approach used, named IGST which stands for integrated goods and services tax. The concept is the same for both cases. But this is the simplest explanation to answer what is GST and how it reflects on a bill.

With SGST and CGST, the tax amount going to the state government and the central government is very prominent. Apart from this GST is calculated in different slabs ranging from 6% to 18% or more. This does vary depending on what the sector of the goods or services in question belong to.

Why Is GST A Preferable Choice?

Firstly the “tax on tax” system was increasingly becoming a tool of torment for businesses and end-buyers. Not only did GST manage to bridge the gap somewhat between a business and a potential consumer belonging to a certain state but also helped incur more IT.

The simple online procedures paired with a very clear taxation outline and benefits were something that both the sellers and the buyers could look forward to with GST. The journey towards GST was filled with crests and troughs but the long term results were what the country was looking forward to while implementing the move.

Not only did GST simplify the procedure but also proved that the indirect taxation methods and their complexities. It was the indirect taxes which resulted in defaults on IT and misinterpretation of data generated based on the revenue, especially for businesses as well as individuals.