Goods and Services Tax (GST): Demystified


GST
Image credits: //www.flickr.com/photos/macprohawaii/

Goods and Services Tax (GST) has been touted as the biggest tax reform in India since independence.  The Government has set 1 April 2015 as the deadline for the roll-out of the tax. This article explains GST and its impact in a simplified manner.

What is Goods and Services Tax (GST)?

  • GST is a single tax that will replace all the existing indirect taxes levied in India. These taxes include sales tax (VAT), excise duty (CENVAT), service tax, octroi, entertainment tax, luxury tax etc.
  • GST is proposed to have a dual structure. It will have two components: Central GSTand State GST. Central GST will replace Central excise duty, services tax and additional customs duties etc. and will be levied by the centre. State GST will replace VAT, entertainment tax, luxury tax, lottery tax, electricity duty etc. and will be levied by the states.
  • GST will be charged on the value-added at each stage of sale/ purchase in the supply chain. Levy at each stage will be set-off against taxes paid by the supplier in the previous stage.
  • State GST will follow the destination principle that is it would be applied in the state where the product is sold. It would lead to revenue loss to the states where the goods originate. To compensate for the loss, a tax not exceeding 1% will be imposed on interstate trade in goods for two years. This tax will be assigned to the states from where supply originates.
  • GST will be levied on all goods and services except petroleum, alcohol and tobacco.

What are the benefits of GST?

  • Simplified tax regime: Currently there are multiple indirect taxes levied by the Government and they differ across states. GST will bring in a regime of a single and uniform  tax.
  • Increased revenues: A simple tax regime will reduce the cost of compliance and hence increase the number of taxpayers. This will help increase tax revenues. Also, the tax base will become wider as all goods and services will be taxable with a few exemptions.
  • Reduce cascading effect of taxation: As mentioned earlier, GST is a uniform tax levied on value-added. Levy at each stage of sale/ purchase will be set-off against taxes paid by the supplier in the previous stage. To illustrate: Let’s say GST is 10 %. If you make a packet of chips and sell it for Rs. 30, your GST should come out to be Rs 3 (10 % of Rs. 30). But, this tax is levied only on value-addition and so you’ll be allowed to claim a tax credit to the value of GST already paid on the purchase of raw materials. Let’s say you bought raw materials (potatoes etc.) worth Rs. 10 for making chips. The supplier of the raw materials has already paid Re. 1 (10 % of Rs. 10) as GST. So, the chips manufacturer can claim a tax credit of Re. 1 and pay only the remaining Rs. 2 as GST. Thus, there is no cascading effect and no burden of ‘tax on tax’.
  • Lower tax burden: Combined burden of indirect taxes on goods in India is estimated to be around 20%. GST is expected to be in the range of 14-16 %. Thus, the tax burden will decrease. It will lead to a reduction in prices of goods with a positive impact on consumer demand.
  • Boost GDP:  Economists and analysts claim that the roll-out of GST will boost GDP by around 2%. This is because of the positive impact on tax revenues and consumer demand.
  • Boost exports:   Exports will become more competitive due to a decrease in cost of manufacturing.  The Cost of manufacturing will decline due to reduced tax burden and also because GST will not be levied on exports. ( Import will be taxed at the same rate as domestic goods and services.)

GST has been adopted by over 150 countries in the world and the Government has set a deadline of 1st April 2016 for its roll-out in India.

Why do the states not want the GST to be implemented?

Because of the fear of loss of fiscal autonomy and revenues.To allay the concerns, the centre has agreed to fully compensate the states for the first 3 years for any revenue loss and 75 % and 50 % in the fourth and the fifth year respectively.

When will the GST bill be passed in the parliament?

Loksabha has already passed the Constitutional amendment bill in May 2015, but it was stalled in the Rajya Sabha. The bill is expected to be passed in the Rajya Sabha in the upcoming budget session of the parliament.

In conclusion, GST is a step in the right direction, but its success will eventually depend on its successful implementation.

The topic for this post was suggested by a reader on this page.

If you find this article useful, please use the social media buttons at the bottom to share it with your friends

Have any Question or Comment?

5 comments on “Goods and Services Tax (GST): Demystified

Sameer

Can you plz explain, preferabley with an illustration, how the present indirect tax system works?
For eg if i need to ship some goods that i purchased in State A to State D and the vehicle(a truck) has to move across State B and State C to reach State D, then how will it work legally?

Reply
Mridusmita

Firstly, no indirect tax will be paid on the goods in state B and state C. Let’s say, a good is manufactured in Rajasthan and sold in Assam.
1. The manufacturer of the goods will have to pay excise duty levied by the Central Governnment.
2. He will have to pay Central sales tax (CST) levied by the centre on the interstate trade in goods
3. He will have to VAT to the Government of Assam on the sale of goods in the state.
4. He might have to pay entry tax to the Government of Assam. This tax is imposed only on some goods.
5. He will not have to pay Octroi (similar to entry taxes), as it is applicable only in the states of Maharashtra and Gujarat.

If GST is implemented, all the above taxes will be replaced by a single tax.

Reply
Sameer

All of these taxes you mentioned above will have to be borne by the manufacturer and none by the purchaser?
Apart from CENVAT and CST which are levied by the Central Govt arent there taxes levied by both these states i.e. Rajasthan and Assam?
Thanks

Reply
Mridusmita

There are two types of taxes- direct and indirect. “An indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax”- Wikipedia. The very concept of indirect tax delineates that ultimately it is consumers who will have to bear the burden of the tax. Let’s take another illustration. A manufacturer produces a good in Rajasthan and sells it to a retailer in Assam. The manufacturer will pay excise, CST and Assam VAT. The price charged by the manufacturers from the retailers will be inclusive of these taxes. Now, if the retailer sells this to the consumers he will have to pay VAT. He can claim a tax credit on VAT already paid by the manufacturer. The price charged to the consumers will be inclusive of VAT. I suggest you to watch this video by Investopedia on what is indirect tax: //www.investopedia.com/video/play/indirect-tax/. An indirect tax is levied on goods or services rather than on an individual or a company.
As far as my knowledge goes, there will be no taxes levied by both the states.

Reply
Sameer

Hmm…thanks for bearing with me and elaborating it.:-)

Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

Subscribe to Economyria by Email

Please enter your email address:

Subscribe to Economyria’s Feed