Have you been hearing the word GST a lot, lately? That’s because India is all set for one of the biggest tax reforms from July 1. The new system of taxation called - the Goods and Services Tax or GST is popularly endorsed as a ‘One Nation, One Tax’ system. A host of indirect taxes will be replaced by one single tax, the GST, which will be levied when a consumer buys a product or avail himself of a service.

What’s up?

With only a few days to go, traders and the governments are racing against time to get the infrastructure ready to be GST compliant. The transition is proving to be a challenging task for the traders and shopkeepers, as they have to overhaul their accounting systems, which may involve one-time investment costs. Until the government gets the GSTN network and the software up and running, initial chaos is inevitable. It is one reason why small traders protest the system.

The finance ministry has set up systems to explain the new regime, but its success depends on how well it reaches out to traders in every nook and corner of the country.

Meanwhile, retailers and car manufacturers offered attractive discounts to consumers to ensure that their stock is cleared before the GST roll out.

What’s the background?

Tax is the charge levied by the government on citizens for a product, income or activity. Taxes on personal or corporate income are called direct tax and those levied on the price of goods and services are called indirect tax. In India, taxes are levied by the central and state governments. Some are levied by corporations and municipalities. And it is not the first time India is to reform the system. Many taxes have been introduced and repealed since the British Raj.

Why should we pay tax?

Let me explain this with the example of income tax. Income tax is imposed by the Government of India on anybody who earns an income that exceeds a certain limit.

Imagine you earn Rs. 1000 on your summer project and your parents insist that you pay 1% of this income to meet the family’s expenses. They may use this towards paying the house rent, or for buying food, water or provisions. They basically use it to run the family. Fair enough, right?

This is exactly what is being done by the government. The revenue from tax is used to meet expenses on welfare and infrastructure. Paying tax, just like casting votes, is one of the main responsibilities of a citizen.

The purpose of taxation is to finance government expenditure such as towards street lighting, sanitation, or building a hospital or a school. Tax collection also helps bridge the gap between the haves and the have nots.

Why should you pay tax when you are buying things? Aren’t you already paying for the product and service you avail yourself of?

The end product you purchase at an apparel shop has gone through a number of processes before reaching you. You pay a tax for the cotton dress you get, so that everyone involved -- from the farmer who grew cotton to the person who stitched the dress get their due.