The Goods and Services Tax or GST is
scheduled to be launched on the 1st of July, and it is set to revolutionize the
way we do our taxes. But what is GST and how will it reform the current tax
structure? And most importantly, why does the country need such a huge overhaul
in its taxation policies? We answer these pressing questions in this in-depth
article.
Contents
What is GST?
Why is Goods and Services Tax so Important?
How does GST work?
How will GST help India and common man?
GST Law in India – A Detailed History
Summary
What is GST?
Goods & Services Tax is a comprehensive,
multi-stage, destination-based tax that will be levied on every value addition.
To understand this, we need to understand the
concepts under this definition. Let us start with the term ‘Multi-stage’. Now,
there are multiple steps an item goes through from manufacture or production to
the final sale. Buying of raw materials is the first stage. The second stage is
production or manufacture. Then, there is the warehousing of materials. Next,
comes the sale of the product to the retailer. And in the final stage, the
retailer sells you – the end consumer – the product, completing its life cycle.
So, if we had to look at a pictorial
description of the various stages, it would look like:
Goods and Services Tax will be levied on each
of these stages, which makes it a multi-stage tax. How? We will see that
shortly, but before that, let us talk about ‘Value Addition’.
Let us assume that a manufacturer wants to
make a shirt. For this he must buy yarn. This gets turned into a shirt after
manufacture. So, the value of the yarn is increased when it gets woven into a
shirt. Then, the manufacturer sells it to the warehousing agent who attaches
labels and tags to each shirt. That is another addition of value after which
the warehouse sells it to the retailer who packages each shirt separately and
invests in marketing of the shirt thus increasing its value.
GST will be levied on these value additions –
the monetary worth added at each stage to achieve the final sale to the end
customer.
There is one more term we need to talk about
in the definition – Destination-Based. Goods and Services Tax will be levied on
all transactions happening during the entire manufacturing chain. Earlier, when
a product was manufactured, the centre would levy an Excise Duty on the
manufacture, and then the state will add a VAT tax when the item is sold to the
next stage in the cycle. Then there would be a VAT at the next point of sale.
So, earlier the pattern of tax levy was like
this:
Now,
Goods and Services Tax will be levied at every point of sale. Assume that the
entire manufacture process is happening in Rajasthan and the final point of
sale is in Karnataka. Since Goods & Services Tax is levied at the point of
consumption, so the state of Rajasthan will get revenue in the manufacturing
and warehousing stages, but lose out on the revenue when the product moves out
Rajasthan and reaches the end consumer in Karnataka. This means that Karnataka
will earn that revenue on the final sale, because it is a destination-based tax
and this revenue will be collected at the final point of sale/destination which
is Karnataka.
Browse
GST articles by Topic
Registration
|
Returns
|
Invoice
|
Transition to GST
|
Composition Scheme
|
Penalties & Appeals
|
News & Announcements
|
Input Tax Credit
|
Analysis & Opinions
|
GST Software
|
Accounts & Record
|
Time, Place & Value of Supply
|
Procedure
|
Payments & Refunds
|
GST Terms
|
Why
is Goods and Services Tax so Important?
So,
now that we have defined GST, let us talk about why it will play such a
significant role in transforming the current tax structure, and therefore, the
economy.
Currently,
the Indian tax structure is divided into two – Direct and Indirect Taxes.
Direct Taxes are levies where the liability cannot be passed on to someone
else. An example of this is Income Tax where you earn the income and you alone
are liable to pay the tax on it.
In
the case of Indirect Taxes, the liability of the tax can be passed on to
someone else. This means that when the shopkeeper must pay VAT on his sale, he
can pass on the liability to the customer. So, in effect, the customer pays the
price of the item as well as the VAT on it so the shopkeeper can deposit the
VAT to the government. This means that the customer must pay not just the price
of the product, but he also pays the tax liability, and therefore, he has a
higher outlay when he buys an item.
This
happens because the shopkeeper has paid a tax when he bought the item from the
wholesaler. To recover that amount, as well as to make up for the VAT he must
pay to the government, he passes the liability to the customer who has to pay
the additional amount. There is currently no other way for the shopkeeper to
recover whatever he pays from his own pocket during transactions and therefore,
he has no choice but to pass on the liability to the customer.
Goods
and Services Tax will address this issue after it is implemented. It has a
system of Input Tax Credit which will allow sellers to claim the tax already
paid, so that the final liability on the end consumer is decreased.
How
does GST work?
A
nationwide tax reform cannot function without strict guidelines and provisions.
The GST Council has devised a fool proof method of implementing this new tax
regime by dividing it into three categories. Wondering how they work? Let our
experts explain this to you in detail.
When
Goods and Services Tax is implemented, there will be 3 kinds of applicable
Goods and Services Taxes:
CGST: where the revenue
will be collected by the central government
SGST: where the revenue
will be collected by the state governments for intra-state sales
IGST: where the revenue
will be collected by the central government for inter-state sales
In
most cases, the tax structure under the new regime will be as follows:
Transaction
|
New
Regime
|
Old
Regime
|
Comments
|
Sale
within the state
|
CGST
+ SGST
|
VAT
+ Central Excise/Service tax
|
Revenue
will now be shared between the Centre and the State
|
Sale
to another State
|
IGST
|
Central
Sales Tax + Excise/Service Tax
|
There
will only be one type of tax (central) now in case of inter-state sales.
|
Example
A
dealer in Maharashtra sold goods to a consumer in Maharashtra worth Rs. 10,000.
The Goods and Services Tax rate is 18% comprising CGST rate of 9% and SGST rate
of 9%. In such cases the dealer collects Rs. 1800 and of this amount, Rs. 900
will go to the central government and Rs. 900 will go to the Maharashtra
government.
Now,
let us assume the dealer in Maharashtra had sold goods to a dealer in Gujarat
worth Rs. 10,000. The GST rate is 18% comprising of CGST rate of 9% and SGST
rate of 9%. In such case the dealer has to charge Rs. 1800 as IGST. This IGST
will go to the Centre. There will no longer be any need to pay CGST and SGST.
How
will GST help India and common man?
The
basis of Goods and Services Tax is the seamless flow of Input Tax Credit (ITC)
along the entire value addition chain. At every step of the manufacturing
process, businesses will have the option to claim the tax already paid in the
previous transaction. Understanding this process is crucial for businesses. A
detailed explanation here.
To understand
this, let us first understand what Input Tax Credit is. It is the credit an
individual receives for the tax paid on the inputs used in manufacturing
the product. So, if there is a 10% tax that the individual must submit to the
government, he can subtract the amount he has paid in taxes at the time of
purchase and submit the balance amount to the government.
Let
us understand this with a hypothetical numerical example.
Say
a shirt manufacturer pays Rs. 100 to buy raw materials. If the rate of taxes is
set at 10%, and there is no profit or loss involved, then he has to pay Rs. 10
as tax. So, the final cost of the shirt now becomes Rs (100+10=) 110.
At
the next stage, the wholesaler buys the shirt from the manufacturer at Rs. 110,
and adds labels to it. When he is adding labels, he is adding value. Therefore,
his cost increases by say Rs. 40. On top of this, he has to pay a 10% tax, and
the final cost therefore becomes Rs. (110+40=) 150 + 10% tax = Rs. 165.
Now,
the retailer pays Rs. 165 to buy the shirt from the wholesaler because the tax
liability had passed on to him. He has to package the shirt, and when he does
that, he is adding value again. This time, let’s say his value add is Rs. 30.
Now when he sells the shirt, he adds this value (plus the VAT he has to pay the
government) to the final cost. So, the cost of the shirt becomes Rs. 214.5 Let
us see a breakup for this:
Cost
= Rs. 165 + Value add = Rs. 30 + 10% tax = Rs. 195 + Rs. 19.5 = Rs. 214.5
So,
the customer pays Rs. 214.5 for a shirt the cost price of which was basically
only Rs. 170 (Rs 110 + Rs. 40 + Rs. 30). Along the way the tax liability was
passed on at every stage of transaction and the final liability comes to rest
with the customer. This is called the Cascading Effect of Taxes where
a tax is paid on tax and the value of the item keeps increasing every time this
happens.
Action
|
Cost
|
10%
Tax
|
Total
|
Buys
Raw Material @ 100
|
100
|
10
|
110
|
Manufactures
@ 40
|
150
|
15
|
165
|
Adds
value @ 30
|
195
|
19.5
|
214.5
|
Total
|
170
|
44.5
|
214.5
|
In the case of Goods and Services Tax, there is a way to claim credit for tax paid in acquiring input. What happens in this case is, the individual who has paid a tax already can claim credit for this tax when he submits his taxes.
In
our example, when the wholesaler buys from the manufacturer, he pays a 10% tax
on his cost price because the liability has been passed on to him. Then he adds
value of Rs. 40 on his cost price of Rs. 100 and this brings up his cost to Rs.
140. Now he has to pay 10% of this price to the government as tax. But he has
already paid one tax to the manufacturer. So, this time what he does is,
instead of paying Rs (10% of 140=) 14 to the government as tax, he subtracts
the amount he has paid already. So, he deducts the Rs. 10 he paid on his
purchase from his new liability of Rs. 14, and pays only Rs. 4 to the
government. So, the Rs. 10 becomes his input credit.
When
he pays Rs. 4 to the government, he can pass on its liability to the retailer.
So, the retailer pays Rs. (140+14=) 154 to him to buy the shirt. At the next
stage, the retailer adds value of Rs. 30 to his cost price and has to pay a 10%
tax on it to the government. When he adds value, his price becomes Rs. 170.
Now, if he had to pay 10% tax on it, he would pass on the liability to the
customer. But he already has input credit because he has paid Rs.14 to the
wholesaler as the latter’s tax. So, now he reduces Rs. 14 from his tax
liability of Rs. (10% of 170=) 17 and has to pay only Rs. 3 to the government.
And therefore, he can now sell the shirt for Rs. (140+30+17) 187 to the
customer.
Action
|
Cost
|
10%
Tax
|
Actual
Liability
|
Total
|
Buys
Raw Material
|
100
|
10
|
10
|
110
|
Manufactures
@ 40
|
140
|
14
|
4
|
154
|
Adds
Value @ 30
|
170
|
17
|
3
|
187
|
Total
|
170
|
17
|
187
|
In
the end, every time an individual was able to claim input tax credit, the sale price for him
reduced and the cost price for the person buying his product reduced because of
a lower tax liability. The final value of the shirt also therefore reduced from
Rs. 214.5 to Rs. 187, thus reducing the tax burden on the final customer.
So
essentially, Goods & Services Tax is going to have a two-pronged benefit.
One, it will reduce the cascading effect of taxes, and second, by allowing
input tax credit, it will reduce the burden of taxes and, hopefully,
prices.
GST
Law in India – A Detailed History
GST
is not a new phenomenon. It was first implemented in France in 1954, and since
then many countries have implemented this unified taxation system to become
part of a global whole. Now that India is adopting this new tax regime, let us
look back at the how and when of the Goods and Services Tax and its history in
the nation.
France
was the world’s first country to implement GST Law in the year 1954. Since
then, 159 other countries have adopted the GST Law in some form or other. In
many countries, VAT is the substitute for GST, but unlike the Indian VAT
system, these countries have a single VAT tax which fulfills the same purpose
as GST.
In
India, the discussion on GST Law was flagged off in the year 2000, when the
then Prime Minister Atal Bihari Vajpayee brought the issue to the table.
History
of GST in India – Year by Year Events
Summary
The
idea behind having one consolidated indirect tax to subsume multiple currently
existing indirect taxes is to benefit the Indian economy in a number of ways:
It
will help the country’s businesses gain a level playing field
It
will put us on par with foreign nations who have a more structured tax system
It
will also translate into gains for the end consumer who not has to pay
cascading taxes any more
There
will now be a single tax on goods and services
In
addition to the above,
The
Goods and Services Tax Law aims at streamlining the indirect taxation regime.
As mentioned above, GST will subsume all indirect taxes levied on goods and
service, including State and Central level taxes. The GST mechanism is advancement
on the VAT system, the idea being that a unified GST Law will create a seamless
nationwide market.
It
is also expected that Goods and Services Tax will improve the collection of
taxes as well as boost the development of Indian economy by removing the
indirect tax barriers between states and integrating the country through a
uniform tax rate.
Further
Reading:
Is
GST applicable to you?
Types
of GST Returns and their Due Dates
GST
Bill: Major Amendments Proposed
Goods and Services Tax |
Twitter reactions
New Delhi : President Pranab Mukherjee and Prime Minister Narendra Modi on Friday midnight launched GST from Central Hall of Parliament. GST has come into force after 17 years of long wait.
Here are Twitter reaction on the mega launch:
# Dharmendra Pradhan
At the stroke of the midnight, when all Indians are awake along with the people from East to West, India marches towards
# Shahnawaz Hussain
Congrats to the Indian Parliament, PM Narendra Modi and FM Arun Jaitley on achieving the Goal of One Nation One Tax
# Sadananda Gowda
It is a historic and emotional moment in central hall of parliament during the launch of GST the New Tax administration system
# VK Singh
Historical moment for economic reform- launch of GST in Central hall of Parliament
# Dr Jitendra Singh
Privileged to be witness to this historic midnight moment at Central Hall of Parliament
# Jayant Sinha
Historic moments in Central Hall of Parliament with GST being launched for the benefit of our beloved country!
# Harsimrat Kaur Badal
As rightly put by PM Narendra Modi ji GST is a Good & Simple Tax that will reduce corruption and tax burden; & will increase transparency.
# M venkaiah Naidu
Congratulations India for embarking on the path of a Good, Simple Tax, GST. It's a historic moment.
# Suresh Prabhu
GST will pave way for economic unification of the country by replacing layers of indirect taxes with one single tax
# Vasundhara Raje
GST For New India -- a reform that is in the interest of the citizens, traders, businesses, industry & future of the Nation.
# Shivraj Singh Chouhan
A new chapter in Indian history is being written tonight. One Nation One Tax is the biggest tax reform since independence.
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