GST (Goods and Services Tax) will be rolled out in India in few days which will revolutionize the way we do our taxes. Most of us are not very clear about what and how GST will work and impact us? I have not covered indepth details about GST like Input Tax Credit.Aim of this article is to make people understand what is GST and how it works in a simple way.
Before moving to GST let us understand the current tax system in india.
What is Tax?
A sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc. The purpose of taxation is to finance government expenditure.
Types Of Tax
What is GST?
Goods and Services Tax (GST) is applicable on supply of goods and services. GST will replace all the current Indirect taxes.
“Only one” indirect tax has to be paid by the trade and industry and all the other indirect taxes will be subsumed in GST. The mantra is “One Nation One Tax”
How GST works?
First let us understand the Distribution channel.
A distribution channel is a chain of businesses or intermediaries through which goods or service passes until it reaches the end consumer. It can include wholesalers, retailers, distributors and even the internet itself.
When goods move from one party to another in the distribution channel, tax will be imposed at each stage.
Let us see how the taxation works at each stage in the distribution channel before GST and after GST implementation with Tax@10% as an example.
At each stage one has to show his Input Tax Credit(ITC) to pay tax only on value additions ie. Profit and not on the total. Iam not covering about ITC here as it will make it more complex. Aim of this article is to make people understand GST in a layman’s term.
Note:
- Before GST, tax is levied on the total cost ie. Cost price + profit at each stage and resulted in cascading effect which is tax on tax.
- After GST, tax will be levied on value additions which is the profit added at each stage in the distribution channel assuming one claims his input credit.
- Note the below calculation is just an example to understand about GST. In reality, the invoice raised by each participant in distribution channel will be different from what you see here. In invoice, tax will be on the total cost and not on the profit. But while paying tax one has to show his input credit — which is the tax paid by the previous party in the distribution channel — in the below eg: wholesaler has to show the input credit ie. tax paid by the manufacturer in order to pay his tax on the value addition and not on the total.
Tax system without GST results in cascading effect
- In the above example before GST, wholesaler pays 10% tax on his (cost price + profit) in which his cost price includes 10% tax already paid by the manufacturer.
- Similarly, Retailer also pays 10% tax on his (cost price + profit) in which his cost price includes 10% tax already paid by the wholesaler and manufacturer.
This is known as cascading effect which is tax on tax.
In GST, tax is levied on the value addition ie. Profit, hence the cascading effect is removed.
- In the above example — After GST — the wholesaler pays 10% tax on the profit but not on the cost because his cost price includes the tax paid by the manufacturer (10% on his total cost price). Similarly with the retailer
Types of GST
GST Rates
Comparison of rates before and after GST
Check for latest GST rates
Alcohol for human consumption, petroleum products,tobacco and Electricity bill are the items which does not fall under GST in India. Why?
- For many states major revenue comes from alcohol. For eg: Tamilnadu- major revenue for state government is from alcohol. So if it comes under GST states will loose their revenue.
- Petrol — For Indian government nearly 40% revenue comes from petrol. GST is a revolutionary change and one need to wait and see its impact on our economy. It will take at least 2 years to smell the essence of GST. If petrol comes under GST then 40% revenue will be lost for the government. So they do not want to take risk now. But after one or two years once GST implementation is stabilized then the government will bring it under GST.
Will GST increase revenue for the government or not?
Remember increase in revenue will happen only if there is more burden on the people. Now after GST, there is more burden on the people who escaped from paying tax before GST. So number of people paying tax will increase now for various reasons.
- Presently the exemption limit under excise duty is 1.5 crore i.e a manufacturer need not pay excise until his turnover crosses 1.5 crore. In GST , the exemption limit will be 10 lakhs( Northeastern India) and 20 lakhs for other area of India. This will increase number of people paying tax.
- One has to show his input credit to pay tax on value addition and not on cost. In order to avail input credit all the participants in the distribution channel must be registered under GST. This will also bring more people under tax and increases revenue.
- Initially ,whether revenue for the government increases or not is questionable as it’s a revolutionary change. That’s the reason why they did not bring petrol under GST because for indian government nearly 40% revenue comes from petrol. So they want to maintain this 40% revenue till GST implementation is stabilized.
GST will have greater impact on our economy and its progress.
Some Facts About GST
- Presently,there are around 160 countries that have implemented GST/VAT in some form or other. In some countries,VAT is the substitute for GST
- GST was first introduced in France in the year 1954. It was consequently after France that countries like Japan, South Korea, UK and Australia implemented the GST law.
- GST in India was first conceptualized and given a go ahead in 1999 during a meeting between the then PM AtalBihariVajpayee and his economic advisory panel which included three former RBI governors IG Patel, Bimal Jalan and C Rangarajan.
- In 2000 vajpayee government started full fledged discussion on GST by setting up an expert panel
- In 2006 congress government — Finance minister P.Chidambaram in his budget speech sets an ambitious April 1, 2010 as deadline for GST implementation. Later congress could not implement because of BJP and other oppositions opposed it during congress regime.
- Now in 2017, during BJP rule it is implemented.
- Why GST called as Second Generation Reform? (An interesting question asked by a reader of my blog). Check the below link to know my answer
My Other Articles
Links to refer
What will Happen to your online shopping after GST?
