Understanding Which Taxes Are Included and Excluded Under India's GST Regime

In India, the Goods and Services Tax (GST) marks a significant transformation in indirect taxation. It consolidates various taxes and levies into a single, unified system. This shift has simplified the tax framework, reducing the complexity and numerous taxes that existed previously. However, some taxpayers still have questions about which specific taxes are covered by GST. This article aims to clarify which taxes fall under the GST framework and which do not, detailing its overall impact. Programs and software that help businesses stay compliant with the latest regulations, such as those assisting with invoice management systems, are essential for businesses.

Guiding Principles for Tax Inclusion under GST

The principles dictating which taxes are integrated into the Goods and Services Tax (GST) are based on specific criteria established by the Indian Constitution and GST legislation. These criteria were developed to determine which central, state, and local taxes could be incorporated into GST. The primary principles include:

• Indirect Nature of Taxes: GST covers taxes that are factored into the cost of goods and services. Taxes not associated with the purchase or sale of goods and services do not fall under the GST system.
• Integration into the Transaction Chain: Taxes under GST are applied throughout the supply chain, from manufacturing to final consumption, ensuring a comprehensive tax structure.
• Seamless Tax Credit Flow: By consolidating taxes under GST, businesses can effortlessly claim tax credits for taxes paid on inputs against taxes owed on sales, which facilitates cross-state transactions.
• Equitable Revenue Distribution: When combining taxes into GST, it is crucial that both state governments and the central government receive a fair share of the tax revenue.

These principles are designed to streamline tax administration, eliminate the cascading effect of taxes, and ensure the GST system is comprehensive, fair, and supportive of a unified national market.

Overview of Taxes Subsumed by GST in India

The Goods and Services Tax (GST) brought together numerous central and state taxes into one cohesive tax system. Below is a simplified list of the taxes absorbed into GST:

Central Taxes Integrated:

• Central Excise Duty (CENVAT): This is an indirect tax imposed and collected by the central government on goods manufactured or produced within India.
• Additional Excise Duties: These refer to extra taxes on specific domestically manufactured items, as outlined in the 1957 'Additional Duties of Excise Act,' with revenue shared between the central and state governments.
• Duties of Excise (Medicinal and Toilet Preparations): This indirect tax applies to the production of medicinal and toilet preparations that contain alcohol or narcotic drugs.
• Additional Duties of Excise (Goods of Special Importance): This is an extra tax levied on particular items such as tobacco, sugar, and textile products.
• Additional Duties of Excise (Textiles and Textile Products): This is an additional charge specifically for goods made from textiles.
• Additional Duties of Customs (Countervailing Duty, CVD): CVD is a tax applied to imported goods to equalize their prices with domestic products, thereby supporting Indian manufacturers.
• Service Tax: This tax was applied to various services, including restaurant dining, travel services, and cable television subscriptions.
• Central Surcharge and Cess: These were additional charges and taxes imposed by the central government on the supply of goods and services, often levied on luxury items to fund specific initiatives like education or health.

State Taxes Integrated:

• State VAT (Value Added Tax): A tax on the value added to goods and services at each stage of the supply chain, which varied by state.
• Central Sales Tax: This tax was applied to the sale of goods that crossed state borders.
• Luxury Tax: This tax was imposed on high-end goods and services considered luxurious.
• Entry Tax (All Forms): In its various forms, states charged taxes on goods entering their territory from another state.
• Entertainment and Amusement Tax: This tax was levied on commercial entertainment and amusement activities by state governments.
• Taxes on Advertisements: These taxes were applied to advertisements appearing in print media.
• State Surcharge and Cess: All surcharges and cesses imposed by state governments were included.

Taxes Not Included Under GST in India

The following taxes remain outside the scope of GST:

• Basic Customs Duty: This is a tax on imported goods, distinct from GST, designed to regulate imports and support local industries. It is calculated based on the item's value upon entering India.
• Tax on Petrol and Diesel: These fuels are not covered by GST. Instead, both the central and state governments levy taxes on them due to the significant revenue implications.
• Tax on Tobacco and Alcohol: This exclusion allows states to continue taxing these products independently.
• Stamp Duty on Property: When individuals purchase property, they pay this tax to the state, and it is not part of GST. The cost varies across different states.
• Electricity Duty: The tax on electricity consumption remains outside GST. It applies to individuals and businesses based on their electricity usage.
• Vehicle Tax: When registering a new vehicle, individuals pay this tax to the state, which is not part of GST.
• Property Tax: This tax applies to the ownership of properties like houses and land. Local governments impose it, and it is separate from GST.

Effects of Taxes Integrated Under GST

Consolidating taxes under GST simplifies tax management, providing businesses with easier compliance and improved operational efficiency. The following points highlight the impact of taxes included under GST:

Advantages:

• Reduces the cascading effect of taxes.
• Simplifies business operations by reducing the need for multiple compliances.
• GST streamlines taxes by applying a uniform tax rate to all goods and services, thus lessening business complexity.
• A unified tax system combines various taxes into one, making tax compliance simpler for businesses.
• Stricter enforcement against tax evasion enhances revenue collection, making it more challenging to avoid paying taxes and helping the government generate more income.
• GST has made operations more affordable for smaller companies and new startups, fostering their growth.
• Businesses gain a pricing advantage due to Input Tax Credit (ITC) claims.
• The prices of many goods decreased due to a reduction in the overall tax rate.

Disadvantages:

• Higher Tax Rates for Certain Services: GST has increased the cost of some services, such as phone bills and bank fees, due to higher tax rates.
• Exclusion of Essential Commodities: Items like petrol and alcohol are not covered under GST, meaning their prices are unaffected by the tax reform.
• Requirement for Multiple GSTINs: Businesses operating in more than one state must obtain multiple GST registrations.

Frequently Asked Questions

Is GST applicable to all goods and services in India? No, certain goods like petroleum products, alcohol, and electricity are currently outside the GST framework and are taxed separately by central and state governments.

What is the primary benefit of the GST system? The main benefit of GST is the elimination of the cascading effect of taxes, which means taxes are no longer levied on taxes, leading to a more streamlined and efficient tax structure.

How does GST impact small businesses? GST aims to simplify compliance for small businesses, often offering options like the Composition Scheme for lower turnover businesses to reduce their tax burden and compliance efforts.

Can I claim Input Tax Credit (ITC) for all my business expenses? Input Tax Credit (ITC) can generally be claimed for taxes paid on inputs used for business purposes, but certain goods and services are blocked from ITC claims under specific GST provisions.

What are the different types of GST in India? GST in India comprises Central GST (CGST), State GST (SGST), Integrated GST (IGST), and Union Territory GST (UTGST), applied based on the nature and location of the supply.