The Benefits of Dual GST in India

GST, or Goods and Services Tax, is a major structural change in many countries’ tax systems, resulting in the elimination of numerous taxes in exchange for a single tax that utilizes one framework. The dual GST vs. single GST debate offers us evidence of how their differences tailor the GST to the peculiar needs of a specific country.

Dual GST in India refers to the Goods and Services Tax system implemented on July 1, 2017, which is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. The "dual" aspect of GST in India indicates that it is administered by both the central and state governments simultaneously, under a dual structure.

This system is unique in that it consists of three components:

• Central Goods and Services Tax (CGST): Levied by the Central government on intra-state sales (sales within the same state). The revenue collected under CGST is for the Central government.
• State Goods and Services Tax (SGST): Levied by the State governments on intra-state sales. The revenue collected under SGST goes to the State government.
• Integrated Goods and Services Tax (IGST): Levied by the Central government on inter-state sales (sales from one state to another) and imports. The IGST is shared between the Central and State governments as per agreed upon rates, ensuring that the state of consumption receives its share of tax revenue.

Features of Dual GST

Dual GST (goods and services tax), modeled after the Indian system, consists of several unique elements, such as state-wise definition of GST credits, taxation, and cascading avoidance. These elements help to simplify the tax system, increase compliance, and ensure a more equitable distribution of tax revenue between the center and the states.

Here are the key features of the dual GST model:

• Dual Structure: Dual GST comprises Central GST (CGST), levied by the Central Government, and State GST (SGST) or Union Territory GST (UTGST), levied by the respective state or union territory governments for intra-state supplies. Interstate purchases and imports are subject to Integrated GST (IGST), which the federal government collects and distributes to the states.
• Destination-Based Tax: GST is a destination-based tax, meaning that the tax is collected by the state where the goods or services are consumed rather than where they are produced. This ensures that the revenue accrues to the consuming state, promoting equitable revenue distribution across states.
• Input Tax Credit (ITC): A significant feature of dual GST is the seamless flow of input tax credit (ITC) across the entire value chain and between the Central Goods and Service Tax. Taxpayers can claim credit for the tax paid on inputs (goods or services used in production) against the tax payable on the output (final product). This reduces the cascading effect of taxes, making goods and services cheaper for the end consumer.
• Comprehensive and Continuous Chain of Tax Credits: The GST system allows for a comprehensive and continuous chain of tax credits from the manufacturer to the retailer to the final consumer, ensuring that tax is levied only on the value added at each stage.
• Online Tax Administration: GST is administered through a digital platform, the GST Network (GSTN), which facilitates registration, tax payment, and return filing. This digitalization of tax administration enhances transparency, efficiency, and ease of compliance.
• Unified Common National Market: By subsuming a majority of the indirect taxes at the central and state levels, GST has created a unified common national market, reducing the economic barriers between states and making the movement of goods and services across the country smoother and less costly.
• Compliance Simplification: The GST regime aims to simplify compliance for businesses and taxpayers through uniform GST rates, standardized procedures, and the elimination of multiple state and central tax levies.
• Anti-Profiteering Measures: The GST law includes provisions to prevent businesses from profiteering by ensuring that the benefits of ITC and reduced tax rates are passed on to consumers in the form of lower prices.
• Exemptions and Thresholds: GST provides for exemptions and threshold limits below which businesses are not required to register, thereby reducing the compliance burden on small traders and service providers.
• E-Way Bill System: To streamline the movement of goods, the GST regime introduced the e-Way Bill system, which is an electronic permit required for the inter-state and intra-state transportation of goods beyond a certain value.

Benefits of Dual GST

Dual GST integration instantly improved the tax situation in India, which had been clearly transformed.

The main advantage of dual GST is that it increases profits for central as well as state governments that can subsequently be spent on projects that would require funding the targeted generation of development projects.

It also, to a great extent, prevents the domino effect of taxes, therefore providing lower prices for consumers and enhancing the efficiency of the tax system. Moreover, due to the broader base and compliance, taxation is prevented from evasion, which is one of the factors that determines how robust the economy is.

Here are the key benefits of the Dual GST system:

• Elimination of Tax Cascading: Dual GST eliminates the cascading effect of taxes, where tax is levied on an already taxed value. By allowing input tax credit (ITC) across the supply chain for both goods and services, it ensures that tax is only paid on the value addition, reducing the overall tax burden on the final consumer.
• Simplified Tax Structure: By replacing a plethora of central and state taxes with a unified system, Dual GST simplifies the tax structure, making it easier for businesses to comply and for the government to administer.
• Increased Revenue for Governments: Widely applicable GST, together with higher tax compliance due to the whole system being transparent and simple, may be the major factor leading to the increase of government revenues (both in the center and in the regions).
• Enhanced Efficiency of Logistics and Distribution: The removal of inter-state barriers and the introduction of the e-Way Bill under GST have streamlined the movement of goods across state borders, reducing transit times and logistics costs. This has led to more efficient national supply chains and distribution networks.
• Boost to the 'Make in India' Initiative: By making goods and services produced within the country more competitive in the domestic market through lower tax burdens, GST supports the 'Make in India' initiative, encouraging manufacturing and job creation.
• Level Playing Field for Small Businesses: The GST regime was designed to offer a composition scheme for small businesses under which they enjoy the benefits of reduced taxation and smaller compliance requirements, which help them in the competition with bigger enterprises in some way.
• Greater Transparency and Reduced Corruption: The digital administration of GST through the GST Network (GSTN) has brought in greater transparency in tax administration, reducing corruption and making it easier for businesses to comply with tax regulations.
• Increased Foreign Investment: The single and simplified tax policy as well as its GST feature make India a more attractive market for foreign investors with no multiple taxes and stable and understandable taxation regulations.
• Promotion of Digital Economy: The GST system encourages digital transactions and record-keeping, promoting the growth of a digital economy and supporting the government's drive towards digitization and modernization of the economy.
• Consumer Benefits: Over time, the reduction in the overall tax burden on goods and services, along with increased competition among manufacturers and service providers, is expected to lead to lower prices for consumers.
• Wider Tax Base: GST has brought more businesses into the tax net, expanding the tax base. This is mainly because, under GST, businesses benefit from availing input tax credit only if their suppliers are compliant, incentivizing everyone in the supply chain to become GST-compliant.

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Disadvantages of Dual GST

Despite its benefits, Dual GST introduces complexity in compliance and administration, potentially increasing the cost for businesses and the government. The need for businesses to navigate both CGST and SGST requirements can be cumbersome, leading to challenges in compliance.

While the Dual GST system in India brings several advantages, it also presents certain disadvantages and challenges. These include:

• Complexity in Compliance: The dual structure of GST, with both CGST and SGST/UTGST being levied on intra-state transactions, adds layers to the tax compliance process. Businesses need to maintain separate accounts and file returns for CGST, SGST/UTGST, and IGST, making the compliance process more complex compared to a single GST system.
• Increased Administrative Costs: The implementation of Dual GST requires significant administrative effort from both the central and state governments to manage their respective parts of the tax. This can lead to increased administrative costs and the need for extensive coordination between different tax authorities.
• Potential for Tax Disputes: The division of tax authority between the central and state governments can lead to jurisdictional issues and disputes over tax revenue sharing, especially in cases of inter-state transactions where IGST is involved.
• Compliance Burden on Small Businesses: Although the GST regime offers exemptions and simplified schemes for small businesses, the requirement to comply with both central and state GST regulations can still pose a challenge for small and medium enterprises (SMEs) and startups, potentially hindering their growth.
• Inter-State Supply Confusion: The IGST mechanism, designed to tax inter-state supplies, can sometimes create confusion regarding the place of supply, leading to difficulties in determining whether CGST, SGST, or IGST should be applied, particularly for services.
• Rate Multiplicity: Despite the aim of standardizing tax rates, the GST council has implemented multiple tax rates for different goods and services, which can lead to confusion and manipulation, affecting the simplicity of the tax structure.
• Technology Challenges: The reliance on the GSTN (GST Network) for tax filing and compliance necessitates robust technology infrastructure. However, businesses, especially in rural and semi-urban areas, may face challenges due to lack of access to technology, digital literacy, or connectivity issues.
• Initial Implementation Hurdles: The transition to the Dual GST system was marked by teething problems, such as technical glitches in the GSTN portal, confusion over tax rates, and compliance requirements, which caused temporary disruptions for businesses and taxpayers.
• Impact on Fiscal Federalism: While the Dual GST model aims to balance the fiscal autonomy of states with the need for a unified tax system, some states have expressed concerns over losing control over their tax revenues, potentially impacting their ability to independently finance state-specific projects.
• Input Tax Credit (ITC) Challenges: While the ITC mechanism under GST is a major advantage, it also presents challenges, such as delays in the refund process and restrictions on ITC claims for certain inputs, affecting the cash flow of businesses.

Impact and Implications due to the Dual GST Model

The Dual Goods and Services Tax (GST) model, implemented in countries like India, has brought about significant changes in the tax structure, impacting various sectors of the economy, businesses, consumers, and the government. Here are some of the key impacts and implications due to the Dual GST model:

On Businesses

• Increased Compliance Burden: While GST has streamlined tax processes, the initial phase saw businesses grappling with the complexities of compliance, including registration, filing multiple returns, and adapting to the digital processes of the GST network.
• Input Tax Credit: The availability of input tax credit across the supply chain has reduced the cascading effect of taxes, lowering the cost of inputs and potentially increasing profitability for businesses.
• Restructuring of Operations: Businesses have had to reevaluate and often restructure their operations, supply chain, and distribution networks to optimize tax efficiency, particularly due to the destination-based nature of GST.

On Consumers

• Price Changes: The elimination of the cascading effect of taxes has led to a reduction in the cost of goods and services for consumers in many sectors. However, the actual impact on prices has varied across different product categories.
• Greater Transparency: GST has increased transparency in taxation for consumers, making it easier to understand the tax component of the goods and services they purchase.

On the Economy

• Increase in Revenue Collection: By broadening the tax base and improving compliance through a streamlined process, dual GST has the potential to significantly increase overall tax revenue collection for both central and state governments.
• Formalization of the Economy: The GST regime has encouraged the formalization of the economy, with more businesses registering to avail of the benefits of input tax credits, thereby reducing the size of the informal sector.
• Impact on GDP: While the long-term impact on GDP growth is expected to be positive due to increased efficiency and reduced costs of doing business, the initial implementation phase saw mixed effects due to the transitional challenges faced by businesses.
• Inter-State Trade: By creating a unified national market and removing inter-state barriers, Dual GST has facilitated smoother and more efficient inter-state trade, contributing to economic integration within the country.

Sector-Specific Impacts

• Manufacturing Sector: The manufacturing sector has seen benefits from the reduction in the cascading effect of taxes and the more efficient movement of goods across state borders.
• Services Sector: The services sector has experienced changes in tax rates, with some services becoming more expensive and others cheaper, depending on the pre-GST tax regime compared to the current GST rates.
• Exporters: The Dual GST model has improved the competitiveness of Indian exporters by relieving them of GST charges on exported goods and services, and allowing for the refund of input tax credit.

Administrative Implications

• Increased Administrative Efficiency: The centralized registration and filing system under GST has improved administrative efficiency but also requires significant resources for enforcement and compliance monitoring.
• Inter-Governmental Coordination: The Dual GST model necessitates a high level of coordination between the central and state governments to ensure smooth implementation and operation, including the distribution of IGST revenue.

Dual GST vs. Single GST

Comparing Dual GST with Single GST reveals the trade-offs between complexity and fiscal autonomy. While Dual GST allows for tailored tax policies and revenue streams for different levels of government, Single GST offers simplicity and ease of administration.

The choice between the two depends on the specific needs and governance structure of the country. Below is a comparative overview of Dual GST and Single GST in tabular form, highlighting their key differences:

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Conclusion

The Dual GST system presents a nuanced approach to taxation, balancing the needs for revenue generation, fiscal autonomy, and economic efficiency. Despite its challenges, the benefits of reduced tax cascading, enhanced compliance, and increased revenue make it a compelling option for countries with complex federal tax rate and structures.

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