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GST – What is GST in India? Goods & Services Tax (GST) Full Explained -

GST – What is GST in India? Goods & Services Tax (GST) Full Explained

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GST is a comprehensive indirect tax to be levied on sale, manufacture, consumption of goods and services. It is a single tax applicable on the supply of goods from the manufacturer to the consumer. It is a tax applicable only on value addition at each stage. With the implementation of the new regime, India has become one unified market with only one indirect tax.

GST has come as a big advantage for the consumers as it mitigates the cascading effect of the older tax regime and paves the way for a common national market. In addition to this, the overall tax burden will also be reduced and it would be more transparent to the consumer.

In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of goods and services. This law has replaced many indirect tax laws that previously existed in India.
Under the GST regime, the tax is levied at every point of sale.

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Why do we need GST in India?

GST aims to replace all indirect levied on goods and services by the Indian Central and State governments. GST would subsume with a single comprehensive tax, bringing it all under a single umbrella, eliminating the cascading effect of taxes on the production and distribution prices of goods and services.

Importance of GST in Indian Economy:

GST is one of the biggest indirect tax reforms in the country. GST is expected to bring together state economies and improve overall economic growth of the nation.

GST is a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at the national level. It will replace all indirect taxes levied on goods and services by states and Central.

There are around 160 countries in the world that have GST in place. GST is a destination based taxed where the tax is collected by the State where goods are consumed. India is going to implement the GST from July 1, 2017 and it has adopted the Dual GST model in which both States and Central levies tax on Goods or Services or both.

  • SGST – State GST, collected by the State Govt.
  • CGST – Central GST, collected by the Central Govt.
  • IGST – Integrated GST, collected by the Central Govt.

What are the taxes that GST replaces?

The GST replaces numerous different indirect taxes such as:

Central Excise Duty
Service Tax
Countervailing Duty
Special Countervailing Duty
Value Added Tax (VAT)
Central Sales Tax (CST)
Entertainment Tax
Entry Tax
Purchase Tax
Luxury Tax
Advertisement taxes
Taxes applicable on lotteries.

Example Of GST Calculation

Let us assume that the GST is set at 20%. Suppose that the manufacturing cost of a Product A is 100 and assuming a GST of 20% the total amount is Rs. 120. The next step of taxation would be when the Product is sold to consumers, let’s say at a price of 150. So the GST will charge another 20% on just the difference of Rs. 150 and Rs. 120 i.e. only 20% on Rs. 30 which is equal to Rs. 6. So the final price is Rs. 150 + Rs. 6. Unlike the case of petrol pricing there is no tax on a tax now. This eliminates the cascading effect of taxes which is very prevalent in our economy and has been simplified to an elemental level in the example.

Since the GST will be applied at every step of value creation it will be very difficult for black money owners to participate anywhere in the value chain with the GST without accounting for all other transactions. The GST is estimated to provide an immediate boost of 0.9% – 1.4% of the GDP.

How would a common man be benefited by the introduction of the GST (Goods and Service Tax) in India?

How a full GST regime will work?

Stage 1: Manufacturing
Imagine a manufacturer of, say, shirts. He buys raw material or inputs - cloth, thread, buttons, tailoring equipment - worth Rs. 100, a sum that includes a tax of Rs. 10. With these raw materials, he manufactures a shirt.
In the process of creating the shirt, the manufacturer adds value to the materials he started out with. Let us take this value added by him to be Rs. 30. The gross value of his good would, then, be Rs. 100 + 30, or Rs. 130.
At a tax rate of 10%, the tax on output (this shirt) will then be Rs.13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/ inputs (Rs10). Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 - 10).

Stage 2 : Wholesale
The next stage is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs. 130, and adds on value ( which is basically his 'margin') of, say, Rs. 20. The gross value of the good he sells would then be Rs. 130 + 20 - or a total of Rs. 150.
A 10% tax on this amount will be Rs. 15. But again, under GST, he can set off the tax on his output (Rs 15) against the tax on his purchased good from the manufacturer (Rs 13) . Thus, the effective GST incidence on the wholesaler is only Rs 2 ( 15 - 13).

Stage 3 : Retail
In the final stage, a retailer buys the shirt from the wholesaler. To his purchase price of Rs. 150, he adds value, or margin, say, Rs. 10. The gross value of what he sells, therefore, goes up to Rs. 150 + 10, or Rs. 160.
The tax on this, at 10%, will be Rs. 16. But, by setting off this (Rs 16) against the tax on his purchase from the wholesaler (Rs 15), the retailer brings down the effective GST incidence on himself to Re 1 (16 - 15).
Thus, the total GST on the entire value chain from the raw material/input suppliers ( who can claim no tax credit since they haven't purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs 10+3+2+1, or Rs 16.
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How it would be in a non- GST regime?

In a full non-GST system, there is a cascading burden of "tax on tax", as there are no setoffs for taxes paid on inputs or on previous purchases.
Thus, if we consider the same example as above, the manufacturer buys raw materials/inputs at Rs 100 after paying tax of Rs 10. The gross value of the shirt (good) he manufactures would be Rs 130 on which he pays a tax of Rs. 13. But since there is no set-off against the Rs 10 he has already paid as tax on raw materials/inputs, the good is sold to the wholesaler at Rs 143 (130+13).
With the wholesaler adding value of Rs 20, the gross value of the good sold by him is, then Rs 163. On this, the tax of Rs. 16.30 (at 10%) takes the sale value of the good to Rs. 179.30. The wholesaler, again, cannot setoff the tax on the sale of his good against the tax paid on his purchase from the manufacturer.

The retailer, thus, buys the good at Rs. 179.30, and sells it at a gross value of Rs. 208.23, which includes his value addition of Rs 10 and a tax of Rs 18.93 ( at 10% of Rs 179.30). Again, there is no mechanism for setting off the tax on the retailer's sale against the tax paid on his previous purchase.
Th total tax on the chain from the raw material/input suppliers to the final retailer in this full no-GST regime will, thus, workout to Rs 10+13+16.30+18.93 = Rs 58.23. For the final consumer, the price of good would then be Rs 150+58.23= Rs 208.23.

Compare this 208.23 - with a tax of Rs 58.23 - to the final price of Rs 166, which includes a total tax of Rs 16, under GST.

Biggest benefit is that it will disincentivise tax exasion. If you don't pay tax on what you sell, you don't get credit for taxes on your inputs. Also, you will buy only from those who have already paid taxes on what they are supplying. Result - a lot of currently underground transactions will come overground.

GST is made for all the common man out there in order to make things easier and smoother.

How can it?

1. Tax Evasion: GST will result in all traders to take bills which will create a paper trail and ultimately curb tax evasion. If tax evasion is controlled, the consumers can gain from it as it may result in government making more money and reducing income tax. This is long foresightedness but possible.

2. Eliminating Cascading Effect/Products become cheaper:
We all know about the current tax regime where tax is paid on tax and it is added in each chain that the ultimate product becomes much costlier. This will be thrown straight out by the GST introduction. And in turn, products will become cheaper. 

Another perspective is that the local/Indian products get promoted as well. IN the current scenario where there is CST and all, which is all meant to go away with intro of GST, consumers will be able to enjoy the local products as these local industries will also try to make superior products at same price and compete with international giants.

3. Sustainable development in states:
It may sound long shot, but in GST regime, the poor states and rich states will more or less be on the same page with regards to sharing of revenue. This will grow the inflow of funds in poor states and they will in turn develop their infrastructures. Current consumption based tax style will be eliminated technically.

4. Make in India: Consumers are fond of international products as always. When the local players will compete them due to advantage of GST, consumers may go local. Chinese companies have outdone every major companies in the last decade or so. THis is time for India.

GST will allow India to better negotiate its terms in the international trade forums.GST aimed at increasing the taxpayer base by bringing SMEs and the unorganized sector under its compliance. This will make the Indian market more stable than before and Indian companies can compete with foreign companies.

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