Tax structure in India: Direct and Indirect taxes, Overview of Goods and services tax Implementation of GST

Tax Structure in India

Direct Taxes

1. Income Tax:

Income tax is a direct tax imposed on individuals, Hindu Undivided Families (HUFs), companies, and other entities based on their income. It's regulated by the Income Tax Act.

2. Corporate Tax:

Corporate tax is levied on the income of companies. In India, there are different tax rates for domestic and foreign companies.

3. Capital Gains Tax:

Capital gains tax is imposed on the profit earned from the sale of assets such as real estate, stocks, and other investments.

4. Wealth Tax:

Wealth tax was abolished in 2015, but it was a direct tax on the net wealth of individuals and HUFs.

Indirect Taxes

1. Goods and Services Tax (GST):

GST is the most prominent indirect tax in India, introduced in 2017, which subsumed various other indirect taxes, such as Central Excise, Service Tax, VAT, and more.

2. Central Excise:

Central Excise is a tax levied on the manufacture and production of goods in India. It's governed by the Central Excise Act, 1944.

3. Service Tax:

Service tax was a tax imposed on services rendered. It has been subsumed into GST.

4. Value Added Tax (VAT):

VAT was an indirect tax levied on the sale of goods by state governments.

5. Custom Duty:

Custom duty is a tax imposed on the import and export of goods. It's regulated by the Customs Act.

Overview of Goods and Services Tax (GST)

Introduction:

GST is a comprehensive indirect tax that was introduced in India on July 1, 2017. It replaces a multitude of indirect taxes and is based on the principle of taxing the value addition at each stage of the supply chain.

Key Features of GST

1. Dual Structure:

GST in India has a dual structure, consisting of Central Goods and Services Tax (CGST) levied by the central government and State Goods and Services Tax (SGST) levied by state governments.

2. Input Tax Credit (ITC):

One of the fundamental features of GST is the seamless availability of ITC. Businesses can claim credit for the GST paid on inputs against their GST liability.

3. Destination-Based Tax:

GST follows a destination-based tax system. The tax is collected where the goods or services are consumed, not where they are produced.

4. Simplified Compliance:

GST aims to simplify tax compliance through the use of online portals and a common set of forms and returns.

Implementation of GST

1. GST Council:

The GST Council is the governing body responsible for decisions related to GST, including tax rates, exemptions, and administration. It is chaired by the Union Finance Minister and consists of state finance ministers.

2. Reasons for GST Introduction

a. Simplification:

GST aimed to simplify the complex tax structure that existed prior to its introduction.

b. Elimination of Cascading:

The previous tax structure led to tax-on-tax or cascading effect. GST replaced it with a seamless credit system, eliminating cascading.

c. Uniform Taxation:

GST sought to create a uniform tax structure across India, reducing tax barriers between states.

d. Increased Compliance:

The online system and unified returns aimed to increase tax compliance.

e. Boost to Manufacturing and Services:

GST was expected to boost the manufacturing and services sectors by streamlining taxation.

3. Pros & Cons of GST

Pros:

1. Simplified Tax Structure: GST has simplified the tax structure, reducing the number of taxes and compliance requirements.
2. Elimination of Cascading: The seamless credit system has eliminated the cascading effect, reducing the tax burden on businesses.
3. Uniform Taxation: GST has brought uniformity in tax rates and rules across states.
4. Boost to GDP: It was expected to boost India's GDP by making it easier to do business.
5. Online System: The online portal has made tax compliance more efficient.

Cons:

1. Complex Compliance: While the system aims to simplify compliance, it can still be complex, especially for small businesses.
2. Changes in Rates: Frequent changes in tax rates can be challenging for businesses to adapt to.
3. IT Infrastructure Challenges: Not all businesses, especially in rural areas, have access to the necessary IT infrastructure for online compliance.
4. Anti-Profiteering: The anti-profiteering provision can be ambiguous and lead to disputes.
5. Initial Disruptions: The initial implementation of GST led to disruptions for businesses adjusting to the new system.

Registration under GST

1. Persons Liable for Registration:

Businesses with an aggregate turnover exceeding a specified threshold (currently INR 20 lakhs, INR 10 lakhs for special category states) must register for GST. Additionally, specific categories of businesses are mandatorily required to register, irrespective of their turnover.

2. Procedure of Registration:

The registration process is done online through the GST Common Portal. It involves providing required documents and details, verification, and the issuance of a unique GSTIN.

3. Exemption from Registration:

Certain businesses, like small-scale suppliers and specific service providers, may be exempt from GST registration under certain conditions.

Administration of GST

1. Officers under GST:

GST administration is carried out by various officers, including GST Commissioners, Deputy Commissioners, and Assistant Commissioners.

2. Appointment and Powers:

These officers are appointed by the government and are vested with powers related to assessment, inspection, search, seizure, and arrest.

3. Levy and Collection of CGST/SGST:

The Central Government collects Central GST (CGST), and the State Governments collect State GST (SGST). The rates are decided by the GST Council

Composition Levy Scheme

1. Composition Levy:

Small businesses with an aggregate turnover up to a certain limit (currently INR 1.5 crore) can opt for the composition scheme. They are taxed at a fixed percentage of their turnover.

2. Benefits:

The composition scheme simplifies compliance for small businesses, as they are not required to maintain detailed records.

3. Limitations:

Businesses under the composition scheme cannot avail of Input Tax Credit (ITC) and cannot supply goods or services outside their home state.

Input Tax Credit (ITC)

1. Simple Problems:

Input Tax Credit allows a registered person to claim credit for the GST paid on inputs. A simple problem could involve calculating ITC for a given scenario. For example, if a manufacturer has a GST liability of INR 10,000 and has paid INR 8,000 as GST on inputs, they can claim ITC of INR 8,000 to offset their liability.

Time of Supply

1. Time of Supply:

The time of supply under GST is crucial for determining when GST liability arises. It depends on the type of supply (goods or services) and various factors, such as the issue of invoices, completion of services, or the movement of goods.

Tax Invoice, Credit, and Debit Notes

1. Tax Invoice:

A tax invoice is a document issued by a registered person when supplying goods or services. It contains details of the transaction, including the GST charged.

2. Credit Note:

A credit note is issued when there is a reduction in the value of a supply, typically due to returns or discounts. It adjusts the original tax liability.

3. Debit Note:

A debit note is issued when there is an increase in the value of a supply, usually due to additional charges or underbilling. It adjusts the original tax liability.

In conclusion,

 the implementation of GST in India marked a significant shift in the country's tax structure. It introduced a unified, streamlined system that aimed to simplify tax compliance and eliminate cascading effects. Understanding the registration process, administration, input tax credit, time of supply, and documentation such as tax invoices, credit notes, and debit notes is vital for businesses and taxpayers to navigate the GST system effectively. While GST has its advantages, it also comes with complexities and challenges, which necessitate a strong understanding of the system for compliance and optimal tax management.