Under the Indirect taxes structure in India, indirect taxes like VAT, Excise, Service Tax, Entry Tax etc. are levied on consumption whereas the direct taxes (Income Tax) are levied on the income earned.
Increasing the indirect taxes makes consumption more and more costly and therefore has an inflationary effect, which makes the poor to suffer the most. Because of this reason indirect taxes are usually seen as regressive, whereas the direct taxes, which targets the richer richer section of the society, generally seen as progressive.
The Goods and Service Tax (GST) regime will put an end to the cascading effect of tax levied on various products, beginning from the initial stage of production to reaching the ultimate end consumer.
The GST structure has been designed with dual taxation regime; there will be only three components (i) Central GST (CGST), and (ii) State GST (SGST) (iii) Integrated GST (IGST) Under the Goods and Service Tax regime, the total amount of indirect tax in the form of GST for any sale/manufacture of goods or rendering of services will be proportionately distributed in both Central and States exchequers.
How is Goods and Service Tax will be different from Value Added Tax? The Value Added Tax commonly known as VAT is applicable on sale of goods and not rendering of services. Whereas the Service tax levied on services rendered. However, Goods and Service Tax have the application on both goods as well as on services, and it will have a uniform pricing.
In the GST example stated above, the tax paid on the sale within the state can be claimed against the tax paid on the sale outside the state, which is not possible under the current scenario.
The Credit of SGST cannot be avail against CGST and vice versa but both can be avail against IGST.
The GST framework works on the existing principles but is to some extent different when it comes to calculating the sales made outside the state. The sales made outside the states are managed by an integrated Goods and Service Tax model. This GST framework makes sure that the correct apportionment of CGST and SGST, and the accurate flow of money between the central and state exchequers.
The bottom line GST is much more than just a repackaged VAT, as the way GST is structured solves most of the challenges encountered by the Indian businesses with the existing VAT regime today.
From the global tax viewpoint, there is a very thin line between VAT and GST, to a point both of these regimes are conceptually alike. But in India, the two tax regimes differ completely from each other due to the ways they are implemented.
Though GST is set to replace the existing VAT system in the country, GST was a much-required step in preparing the nation for a robust and data-driven tax system which is simple and promises transparency at every level.