Where Does The GST Money Go In India?
Goods and Services Taxes (GST) was introduced to replace the previous structure of indirect taxes and create a one-tax regime in India. Have you ever wondered as a taxpayer, why was GST introduced? Where does the GST money go? How are the end consumers benefitting from GST? This article will answer your queries regarding GST.
What does GST mean?
Before the introduction of GST in India, there were many forms of indirect taxes. Some were imposed by the Central Government like Central Excise Duty, Central Sales Tax, Service Tax, etc. Others were levied by the State Government like Luxury Tax, Purchase Tax, Value Added Tax, etc. Besides these taxes, there was a surfeit of non-tariff barriers like octroi, entry tax, check posts, etc. This served as a hindrance to the free flow of trade throughout the nation. Taxpayers had to bear the high cost of goods and services.
GST is an indirect tax, which is levied on the sale-purchase of goods and services. It is imposed at each stage of the supply chain ranging from manufacturing or import to the retail level. The previous indirect taxes were origin-based taxes, which meant that taxes were collected from a point where goods and services were produced.
On the other hand, GST is a consumption tax, also known as a destination-based tax. GST also has an anti-profiteering clause so that the businesses can pass the benefit of reduced tax rates on goods or services or both to the consumers.
History of GST in India
- 2000: The Vajpayee Government in 2000 proposed the idea of GST. Empowered Committee (EC) was established by the finance ministers of the states. Their task was to design the structure of GST. The Central and State Governments allotted their Representatives. Their task was to critically examine the idea and submit their reports to the EC. The head of the Empowered Committee was Asim Dasgupta.
- 2004: Vijay L. Kelkar was appointed as the head of a task force. He is a prominent Indian economist and served as an Advisor to the Minister of Finance of the Central Government. His report pointed out many issues in the existing tax structure. His report also suggested that some of the problems could be solved by the proposed GST system.
- February 2005: P. Chidambaram was the then finance minister. He announced the government’s intention to replace the existing tax structure with a uniform GST. It was a long-term policy of the government to implement GST throughout the country. The goal was to cover each stage of the supply chain ranging from manufacture or import to the retail level. It was discussed in the Union Budget Session 2005-06.
- February 2006: 1 April 2010 was announced as a date for GST introduction by the finance minister.
- November 2006: Parthasarthy Shome who was an advisor to the finance minister informed the state governments to get ready for the forthcoming GST system. He also asked them to create all the appropriate reforms in their present-day tax structure.
- February 2007: 1 April 2010 was reserved as the last day for GST execution. This was announced in the Union Budget Session 2007-08.
- February 2008: Again, at the 2008-09 Union Budget Session, the finance minister reaffirmed that the deadline for GST implementation was 1 April 2010. He also assured the Parliament that significant progress was made in creating the GST Bill.
- July 2009: The basic framework of the GST structure was announced under the leadership of the new finance minister Pranab Mukherjee.
- November 2009: The First Discussion Paper (FDP) was presented by the head of the EC Asim Dasgupta.
- February 2010: Mission-mode project was started with an initial budget of Rs.1,133 crore to digitize states commercial taxes. The GST implementation was delayed for a year.
- March 2011: 115th Amendment Bill was introduced in the Parliament by the UPA Government for GST implementation. But the bill couldn’t pass because of fierce opposition from the NDA alliance. After that, the bill was forwarded to a standing committee.
- June 2012: The Bill was discussed in the standing committee. Clause279B was a clause of concern for the opposition parties. This clause gave extra power to the Central Government to tackle GST disputes.
- November 2012: 31 December 2012 was fixed as the last date to resolve GST related issues by the Union Finance Minister P. Chidambaram.
- February 2013: During the budget session, the government announced that Rs.9,000 crore will be given to the states as compensation.
- August 2013: The Parliament receives the report of the standing committee. It suggested few amendments to the tax structure.
- October 2013: The Gujarat Government led by NDA opposed the bill because GST was a destination-based tax. This would force the state to bear a heavy loss.
- May 2014: The Bill lapsed. Narendra Modi was elected as the PM of India and the NDA government came into power.
- December 2014: 122nd Amendment Bill was submitted in the Parliament by the Union Finance Minister Arun Jaitley. Again, the bill was forwarded to the standing committee due to resistance from opposition parties.
- February 2015: GST was sought to be implemented by 1 April 2016. This was announced in the budget speech of Arun Jaitley.
- May 2015: The Lok Sabha passed the 122nd Amendment Bill. Petroleum was excluded from the GST regime.
- August 2015: The Rajya Sabha does not pass the Bill.
- March 2016: The ruling and the opposition parties decided that the GST rate should not exceed 18%. But the government didn’t want to fix tax rates. It was decided that the Parliament should have the power to raise tax rates and the government should seek the permission of the Parliament before raising taxes.
- June 2016: The draft of the GST laws was released to the public by the Finance Ministry to get public opinion and suggestions.
- August 2016: After the Government suggests 4 amendments to the Bill, the UPA alliance supports the Bill. The Rajya Sabha passed the 122nd Amendment Bill.
- September 2016: The 122nd Amendment Bill becomes an Act as the Honourable President Pranab Mukherjee gives his approval.
- 2017: After getting passed in both the Houses of Parliament and received President’s consent, 4 GST related Bills become Act.
- Central GST Bill
- Integrated GST Bill
- Union Territory GST Bill
- GST (Compensation to States) Bill
The GST rates were concluded by the GST Council, and later the GST Act came into effect on 1st July 2017.
Free GST E-BookLearn Free Basics of GST
Where does GST money go?
To run any country, the government needs revenue. It collects revenues through various methods. The majority of its revenue comes from the taxes that the taxpayers of the country pay. According to the Indian Budget 2020-21, GST accounts for 28.46% of the total revenue. Under the GST system, there are four types of taxes.
Let’s understand these four taxes in detail.
This stands for Integrated Goods and Services Taxes. This tax is levied by the Central Government on inter-State/UTs sale of goods or services or both. Also applicable on sale of goods or services or both with the supplier or buyer located in any foreign country. For example, Y orders a sling bag on Amazon. The sling bag is sold by X manufacturer in Mumbai. Y lives in Jaipur. Since the item will move from Mumbai to Jaipur, it is an interstate transaction. Hence, IGST is levied. So, if the price is ₹ 1000 and the GST rate is 12%, then Y will pay a total amount of ₹ 1120. The GST amount is ₹120. This amount is IGST and the Central Government will receive the tax amount.
Central Goods and Services Taxes (CGST) is a tax levied by the Central Government on the intra-state sale of goods or services or both.
State Goods and Services Taxes (SGST) is a tax levied by the State Government on the intra-state sale of goods or services or both.
Say, Y stays in Mangalore and orders a laptop on Amazon. X manufacturer located in Bengaluru sells the laptop. The laptop will be transported from Bengaluru to Mangalore. The transaction will take place within the state of Karnataka. Hence, this is an intrastate sale. Both CGST and SGST will be levied. Assume the price of the laptop is ₹ 1,00,000 and the GST rate is 12%. Y will pay ₹ 1,12,000 and the GST amount is ₹ 12,000. This tax amount will be divided into two parts. If the CGST rate is 6% and the SGST rate is 6%, then ₹ 6000 will go to the Central Government and the rest ₹ 6000 will go to the Karnataka Government.
This stands for Union Territory Goods and Services Taxes. Like the SGST, this tax is levied on the intra-Union Territory sale of goods or services or both. This tax is levied by the governments of those Union Territories that don’t have their legislative assembly. These include Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli and Daman and Diu, Ladakh and Chandigarh. SGST is applicable for those Union Territories which have their legislative assemblies like Delhi, Puducherry and Jammu and Kashmir.
The location of the supplier and customer plays an important role to understand the type of GST that will apply to a transaction.
Transactions outside the State/ UTs or Foreign Territory – This happens when the seller and buyer are located in two different states or Union Territories. Also valid in the case of import of goods or services or both into India and export of goods or services or both from India. Under this, a buyer will pay IGST to the seller which will eventually be collected by the Central Government.
Transaction within the State/ UTs– This is possible when the seller and buyer are located in the same state or Union Territory. When a taxable transaction occurs in a state or a Union Territory with its legislature, then both CGST and SGST is collected. The CGST goes to the Central Government and the SGST goes to the State Government. If a taxable transaction is happening in a Union Territory which has no legislature of its own, then UTGST and CGST are collected.
Also read: How to Calculate Aggregate Turnover For GST
Why was GST introduced?
The indirect tax system before GST had various limitations. There was a clear separation between the taxation laws of the State and the Central Government. The Central Government had the authority to levy taxes on the production of goods except for alcohol for human consumption, tobacco, opium, etc.
The Centre also imposed Sales Tax on goods of the production state and Service Tax on services. The Centre was solely responsible for levying custom duties on the import and export of goods and services to and from India. The States had the power to impose VAT, Luxury Tax, Purchase Tax and Entry Tax. This indirect tax regime had two main disadvantages.
Cascading effect– Before GST, a tax was imposed on goods at every stage of production. As multiple taxes were imposed, the final burden of tax payment falls on the consumer. This causes the inflationary pricing of goods. Let us use an example to comprehend this concept in a better way.
X is a car manufacturer. Let’s compare the pre and post GST regimes.
A car dealer in Maharashtra purchases cars from X. These indirect taxes was imposed on the cars.
Central Excise Duty to the Central Government on car manufacturing
VAT/CST to the Maharashtra State Government on selling the cars
Assume that the price of each car is ₹ 5,00,000.
Central Excise Duty is 10%. The price is ₹ 50,000.
VAT is 12%. Price is ₹66,000
The total price is ₹6,16,000.
Then, the car dealer will sell the car to a consumer. The dealer’s margin is 10%.
The price of the car is ₹5,50,000. (This price is the cost of the car + Central Excise Duty)
The margin of the dealer as mentioned above is 10%. The price is ₹55,000.
VAT is 12%. The price is ₹ 72,000.
The price of the car for the consumer is ₹6,77,600.
Under the GST tax structure, X sells cars to the car dealer.
Assume that the price of each car is ₹ 5,00,000.
CGST is 11%. The price is ₹ 55,000.
SGST is 11%. Price is ₹55,000
The total price is ₹6,10,000.
In the second stage of the supply chain, a consumer buys the car.
The price of the car is ₹5,00,000.
The margin of the dealer is 10%. The price is ₹50,000.
The sales Price is ₹5,50,000.
CGST is 11%. The price is ₹ 60,500.
SGST IS 11%. The price is ₹ 60,500.
The price of the car for the consumer is ₹6,71,000.
As you can see that the consumer pays less tax under the GST regime. Under the previous indirect tax regime, all the stakeholders faced the tax burden but under GST only the consumer bears it.
The multiplicity of taxes– Under the previous indirect tax structure, the Central Government levied multiple taxes like Central Excise Duty, Additional Excise Duties, Service Tax, and Additional Customs Duty. Similarly, the State Governments had various taxes like VAT, Entertainment Tax, Luxury tax, State Cesses and Surcharges, Octroi, Entry Tax and Purchase tax.
These multiple taxes generated confusion among the consumers. Sometimes consumers were overcharged as they were unable to cross-check the taxes imposed on their products or services. Some had also paid false non-existent taxes. Now consumers are vigilant and careful because GST is a PAN-India tax structure. There is less confusion regarding indirect taxes as GST is based on the idea of “ONE NATION ONE TAX”.
GST paid by the taxpayers goes to the central and state governments and acts as a main source of revenue to run the country. In simpler terms, GST money go to the Government for run the country. GST was introduced to smoothen the tax processes and bring the unorganized sector into the formal economy. It has eliminated the cascading effect as well as multiplicity of taxes of the previous tax structure. The GST portal has digitized the tax system as activities like registration, refund application and return filing are done online.
You can read the following articles