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The General Service Taxation (GST) scheme known as the Goods and Services Tax (GST) is an indirect tax throughout India to replace taxes levied by the central and state governments. It was introduced as The Constitution (One Hundred and First Amendment) Act 2017, following the passage of Constitution 122nd Amendment Bill. The GST is governed by GST Council and its Chairman is the Finance Minister of India. Under GST, goods and services will be taxed at the following rates, 0%, 5%, 12%, 18%, 28%.
The Goods and Services Tax (GST), India's biggest tax reform in 70 years of independence, was launched at midnight of 30 June 2017 by Prime Minister Narendra Modi. The launch was marked by a historic midnight (June 30-July 1, 2017) session of both the houses of parliament convened at the Central Hall of Parliament. The session was also attended by high-profile guests from the business and the entertainment industry the likes of industrialist Ratan Tata. It was the fifth time in the history of India’s independence when such a monumental midnight session was held there. The other four includes: the first, August 14-15, 1947, declaring India’s Independence marked by Nehru’s historic speech "Tryst with Destiny"; the second, August 14-15, 1972, celebrating the silver jubilee of India’s Independence; the third, August 9-10, 1992, celebrating 50th anniversary of Quit India Movement; and the fourth, August 14-15, 1997: celebrating the golden jubilee of India’s Independence.
The reform process in India's indirect tax regime was started in 1986 by Vishwanath Pratap Singh with the introduction of the Modified Value Added Tax (MODVAT). The Goods and services tax (GST) was first conceptualised and given a go-ahead in 1999 during a meeting between then Prime Minister Atal Bihari Vajpayee and his economic advisory panel, which included three former RBI governors IG Patel, Bimal Jalan and C Rangarajan. Despite being an NDA govt, Vajpayee set up a committee headed by the then finance minister of West Bengal, Asim Dasgupta – a communist – to design a GST model.
The Asim Dasgupta committee was also tasked with putting in place the back-end technology and logistics (later came to be known as GSTN in 2017) for rolling out a uniform taxation regime in the country.
In 2003, the Vajpayee government formed a task force under Vijay Kelkar to recommend tax reforms. In 2005, Kelkar committee recommended rolling out GST as suggested by the 12th Finance Commission.
After the fall of NDA govt in 2004, P Chidambaram in February 2006 first mooted for a GST rollout by 1 April 2010.
However, during the entire 10 years of UPA rule, it couldn't be achieved. In 2010, with TMC routing CPI(M) out of power in West Bengal, Asim Dasgupta resigned as the head of the GST committee. Dasgupta admitted in an interview that 80% of the task had been done.
In 2014, Narendra Modi was elected in a resounding mandate by the people, and with the dissolution of the 15th Lok Sabha, the GST Bill – approved by the standing committee for reintroduction – lapsed. Seven months after the formation of the Modi government, Finance Minister Arun Jaitley introduced the GST Bill in the Lok Sabha. In February 2015, Jaitley set another deadline of 1 April 2016 to implement GST. In May 2015, the Lok Sabha passed the Constitution Amendment Bill paving way for GST.
Now in opposition, the Congress demanded that the GST Bill be again sent back to the Select Committee of the Rajya Sabha where it enjoyed a majority. Finally in August 2016, the Amendment Bill was passed. Over the next 15 to 20 days, 18 states ratified the GST Bill and President Pranab Mukherjee gave his assent to it.
A single GST will replace several existing taxes and levies which include: central excise duty, services tax, additional customs duty, surcharges, state-level value added tax and Octroi.
Other levies which are currently applicable on inter-state transportation of goods are also likely to be done away with in GST regime.
What is GST?
Goods & Services Tax is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition.
To understand this, we need to understand the concepts under this definition. Let us start with the term ‘Multi-stage’.
Now, there are multiple steps an item goes through from manufacture or production to the final sale. Buying of raw materials is the first stage. The second stage is production or manufacture. Then, there is the warehousing of materials. Next, comes the sale of the product to the retailer. And in the final stage, the retailer sells you – the end consumer – the product, completing its life cycle.
Goods and Services Tax will be levied on each of these stages, which makes it a multi-stage tax. How? We will see that shortly, but before that, let us talk about ‘Value Addition’.
Let us assume that a manufacturer wants to make a shirt. For this he must buy yarn. This gets turned into a shirt after manufacture. So, the value of the yarn is increased when it gets woven into a shirt. Then, the manufacturer sells it to the warehousing agent who attaches labels and tags to each shirt. That is another addition of value after which the warehouse sells it to the retailer who packages each shirt separately and invests in marketing of the shirt thus increasing its value.
GST will be levied on these value additions – the monetary worth added at each stage to achieve the final sale to the end customer.
There is one more term we need to talk about in the definition – Destination-Based. Goods and Services Tax will be levied on all transactions happening during the entire manufacturing chain. Earlier, when a product was manufactured, the centre would levy an Excise Duty on the manufacture, and then the state will add a VAT tax when the item is sold to the next stage in the cycle. Then there would be a VAT at the next point of sale.
Now, Goods and Services Tax will be levied at every point of sale. Assume that the entire manufacture process is happening in Rajasthan and the final point of sale is in Karnataka. Since Goods & Services Tax is levied at the point of consumption, so the state of Rajasthan will get revenue in the manufacturing and warehousing stages, but lose out on the revenue when the product moves out Rajasthan and reaches the end consumer in Karnataka. This means that Karnataka will earn that revenue on the final sale, because it is a destination-based tax and this revenue will be collected at the final point of sale/destination which is Karnataka.