GST: One Nation, One Tax, One Market
Goods and Service Tax (GST) is the single comprehensive indirect tax, operational from 1 July 2017, on supply of goods and services, right from the manufacturer/ service provider to the consumer. It is a destination based consumption tax with facility of Input Tax Credit in the supply chain. It is applicable throughout the country with one rate for one type of goods/service.
It has amalgamated a large number of Central and State taxes and cesses. It has replaced large number of taxes on goods and services levied on production/ sale of goods or provision of service. As there have been a number of intermediate goods/services, which were manufactured/provided in the economy, the pre GST tax regime imposed taxes not on the value added at each stage but on were manufactured/provided in the economy, the pre GST tax regime imposed taxes not on the value added at each stage but the total value of the commodity/service with minimal facility of utilisation of Input Tax Credit (ITC). The total value included taxes paid on intermediate goods/services.
This amounted to cascading of tax. Under GST, the tax is discharged at every stage of supply and the credit of tax paid at the previous stage is available for set off at the next stage of supply of goods and/or services. It is thus effectively a tax on value addition at each stage of supply. In view of our large and fast growing economy, it addresses to establish parity in taxation across the country, and extend principles of 'value- added taxation' to all goods and services. It has replaced various types of taxes/cesses, levied by the Central and State/UT Governments.
Some of the major taxes that were levied by Centre were Central Excise Duty, Service Tax, Central Sales Tax, Cesses like KKC and SBC. The major State taxes were VAT/Sales Tax, Entry Tax, Luxury Tax, Octroi, Entertainment Tax, Taxes on Advertisements, Taxes on Lottery /Betting/ Gambling, State Cesses on goods etc. These have been subsumed in GST.
Q) Which of the following feature of GST removes/reduces the cascading effect?
Correct Answer :
Input Tax Credit(ITC)
Solution :
The correct option/answer is Input Tax Credit(ITC).
Here is the step-by-step explanation of why this option is correct based on the provided text:
1. Understanding Cascading Effect:
The cascading effect of tax refers to a situation where a tax is levied on a tax, also known as double taxation. In the pre-GST tax regime, taxes were imposed on the total value of the commodity or service at each stage of production and distribution (including the taxes already paid on intermediate goods and services), rather than only on the value added at that specific stage. This occurred due to the minimal facility of utilizing tax credits for taxes paid on inputs.
2. How GST Addresses This:
Under the GST regime, tax is discharged at every stage of the supply chain. However, the system allows the credit of tax paid at the previous stage to be available for set-off at the next stage of supply. This mechanism is known as the Input Tax Credit (ITC).
3. Conclusion:
By allowing businesses to deduct the tax they have already paid on inputs (purchases) from the tax they collect on outputs (sales), the tax is effectively levied only on the value addition at each stage. Thus, the Input Tax Credit (ITC) is the specific feature of GST that directly removes or reduces the cascading effect of taxes.
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