The Dual GST Approach
Crafting a destination-based Goods and Services Tax (GST) system presents intricate challenges in a country like India, where the authority to tax domestic trade is divided between the state and central governments. Implementing a conventional nationwide GST without undermining state autonomy is unfeasible. This dilemma is resolved through India’s adoption of the dual GST framework, where both the central and state governments apply GST to the supply of goods and services. According to the constitutional structure of the dual GST model, the power to tax is divided between the central and state authorities.
In certain transaction scenarios, the central government possesses the taxation authority, while in others, the state government takes precedence. This duality in taxation power within the GST framework leads to its classification as the Dual GST model. This model is embraced as a practical solution tailored to the Indian context. This discussion delves into comprehending the fundamental characteristics and operations of the dual GST model, along with its significant components.
Understanding the Dual GST Model
Due to India’s federal system, a dual GST model has been embraced. In this model, both the state and central governments simultaneously levy GST on the taxable supply of goods and services within a state or union territory. Consequently, taxation occurs in parallel from both the state and central perspectives. The GST imposed by states or union territories is termed as State GST (SGST) or Union Territory GST (UTGST), while the GST applied by the central government to intrastate transactions is known as Central GST (CGST). For interstate transactions, the Integrated GST (IGST) is enacted and managed by the central government. IGST aggregates the SGST/UTGST and CGST levied by the central government on all interstate supplies.
What is the Dual GST System in India?
Understanding the Necessity and Implementation of Dual GST
In the context of India, a federal nation, both the states and the central government possess the authority to impose and gather taxes through appropriate legal frameworks. This arrangement addresses the dual aspect of the GST system, which has been drawn from another country’s model. Each level of governance holds distinct responsibilities, as delineated by the Indian Constitution, necessitating them to generate resources independently. Thus, a dual GST system has been instituted across the country as a well-suited model that aligns with the constitutional mandates of the nation. This system entails the simultaneous imposition of State GST and Central GST on every transaction involving the supply of goods and services, except for:
- Items not subject to GST.
- Goods and services granted exemptions.
- Transactions falling below the predetermined threshold limits.
Additionally, both these taxes are levied on the same base value or price (excluding the tax value), which contrasts with the previous state VAT system where tax was applied to the value of the goods, inclusive of CENVAT.
Legal Framework and Administrative Mechanism
The legal structure incorporates a single legislation – the CGST Act of 2017 – responsible for imposing the Central GST (CGST). Similarly, Union Territories without their own state-level legislation have enacted the UTGST Act of 2017 for levying UTGST. States and Union Territories, equipped with their individual legislations, have introduced GST laws for implementing the State GST (SGST). The essential components of these laws, encompassing the definition of taxable events, taxable individuals, charge ability, classification, and valuation, maintain a consistent framework across all SGST regulations, even in the presence of multiple SGST interpretations. This consistency is vital to preserving the fundamental essence of the dual GST system. The respective states and Union Territories manage and levy UTGST or SGST, while the central government administers and imposes CGST and IGST.
What is the Dual GST System in India?
As we’ve explored, India, functioning as a federal nation, has vested the authority to impose and amass taxes upon both states and the central government through suitable legislation. This answers the query about the origin of the dual GST model, drawn from which country’s framework. These two tiers each carry distinct responsibilities as dictated by the division of powers outlined in the Indian Constitution. This division necessitates them to generate funds autonomously. Consequently, a dual GST system has been rolled out nationwide, representing an exemplary model that aligns with the country’s constitutional requisites.
Operatively, the State GST and the Central GST run in parallel for each transaction encompassing the exchange of goods and services, with the exception of:
- Goods lying beyond the scope of GST.
- Goods and services that have been granted exemptions.
- Transactions falling below the specified threshold limits.
Furthermore, both taxes are imposed on the same value or price (exclusive of the tax amount), unlike the previous state VAT system, which was based on the value of goods, encompassing CENVAT.
Legal Structure and Administrative Mechanism
In the realm of legal arrangements and administrative procedures, a sole statute holds sway – the CGST Act of 2017, a tool for the imposition of CGST. Likewise, in territories devoid of their own legislative powers, the UTGST Act of 2017 has been adopted. Regions both comprising states and union territories have crafted their distinct GST legislation, under their respective legislative authorities, to apply SGST. Despite the existence of multiple rulings under SGST, fundamental tenets of the law, such as the definition of the event subject to taxation, the entity liable for taxation, the point of taxation, categorization, and assessment methods, remain consistent across all SGST legislations. This congruence is pivotal in safeguarding the fundamental principles of the dual GST system. Pertinent states shoulder the responsibility of both administering and imposing UTGST or SGST, whereas the central authority manages the imposition and administration of CGST and IGST.
The Dual GST framework in India exhibits a set of distinctive characteristics that warrant attention and appreciation.
01. Clarity and Simplicity in Taxation
The Dual GST approach emerges as the most fitting solution for India, streamlining the array of taxes levied by both state and central authorities. This strategic alignment not only reduces the complexity of the tax system but also ensures its practical and efficient implementation while enhancing accountability.
02. Reduction in Tax Burden
Under the Dual GST model, the effective tax rates on a multitude of goods and services experience a noteworthy reduction. This shift results in a more favorable economic environment, benefitting both consumers and producers alike.
03. Simplified Adherence
Dual GST contributes to a simplified landscape of tax compliance by diminishing transaction costs for taxpayers. This reduction directly translates into a more straightforward and manageable process for adhering to tax regulations.
04. Elimination of Tax Layering
The integration of the Dual GST structure effectively eradicates the cascading impact that was inherent in the previous indirect tax system. This significant achievement aids in optimizing the tax regime’s overall efficiency.
05. Harmonizing a Federal Nation
The Dual Model GST aligns harmoniously with India’s diverse federal structure, fostering unity amid diversity. Contrary to a single-point GST which would amalgamate sales tax, central excise duty, and service tax, the Dual Model retains a more practicable and economically desirable approach.
07. Striking an Equilibrium
The Dual GST model aptly balances the imperatives of fiscal autonomy and the unification of states and the Centre. It empowers both tiers of governance to impose taxes at various stages of the supply chain, thereby promoting a harmonious coexistence.
08. Enhanced Viability and Efficiency
Unlike the potential for unhealthy competition that a single GST could spur among states to attract industries through tax structure manipulation, the Dual Model operates as a more effective and viable solution. Moreover, a complete withdrawal of the Centre from State taxation could disrupt symmetric revenue collection by the latter.
In sum, the Dual GST framework stands as a testament to the wisdom of a holistic and strategic approach to taxation, offering India a system that is not only more comprehensible but also more advantageous from economic, administrative, and cooperative standpoints.
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