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GST (Goods and Services Tax) is the biggest indirect tax reform of India. GST is a single tax on the supply of goods and services. It is a destination based tax. GST has subsumed taxes like Central Excise Law, Service Tax Law, VAT, Entry Tax, Octroi, etc. 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. Businesses are required to obtain a GST Identification Number in every state they are registered.
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. GST has been implemented in India 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.
- UTGST – Union territory GST, collected by union territory government
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Introduction of GST is considered to be a significant step in the reform of indirect taxation in India. Amalgamating of various Central and State taxes into a single tax would help mitigate the double taxation, cascading, a multiplicity of taxes, classification issues, taxable event, etc., and leading to a common national market.
VAT rates and regulations differ from state to state. On the other hand, GST brings in uniform tax system across all the states. Here, the taxes would be divided between the Central and State government.
Impact of GST on Indian Economy
GST offers several benefits to our economy. Here are some key advantages:
- Create unified common national market for India, giving a boost to Foreign investment and “Make in India” campaign
- Boost export and manufacturing activity and leading to substantive economic growth
- Help in poverty eradication by generating more employment
- Uniform SGST and IGST rates to reduce the incentive for tax evasion
Impact of GST on Consumers
GST is also beneficial for consumers. Here is how it impacts the Indian consumers:
- Simpler Tax system
- Reduction in prices of goods & services due to elimination of cascading
- Uniform prices throughout the country
- Transparency in taxation system
- Increase in employment opportunities
Impact of GST on Traders
GST is also has some positive impact on traders. Let’s see how it affects the traders:
- Reduction in multiplicity of taxes
- Mitigation of cascading/ double taxation through input tax credit
- More efficient neutralisation of taxes especially for exports
- Development of common national market
- Simpler tax regime
- Fewer rates and exemptions
- Distinction between Goods & Services no longer required
GST Explained with the Help of Example
Let’s assume that a manufacturer of shirts buys raw materials like cloth, zips, thread, buttons and other equipment that is required to stitch the pants. This raw material costs the manufacturer Rs 200. This Rs 200 includes a 10% tax of Rs 20. Once the shirt is made, the manufacturer has added his own value to the input material. As a part of this example, if one were to assume that the value added is Rs 60, then the total cost of the trouser is now Rs 260 (Rs 200 + Rs 60). With a 10% tax rate, the tax on this trouser would be Rs 26. However, since the manufacturer has already paid Rs 20 as tax while purchasing raw material, under GST, the tax incidence will now be only Rs 6 (Rs 26 – Rs 20).Now, let’s see how GST works at the second stage, which is for the wholesaler. Now, the wholesaler would buy the shirts at Rs 260 and would keep a margin on it to make a profit. Assuming that the margin is kept at Rs 40, the cost of the clothing item now becomes Rs 300. Applying the same 10% principle, the tax would amount to Rs 30. But, out of this Rs 30, Rs 26 are already accounted for from stage one. So the effective tax incidence for the wholesaler would be Rs 4 (Rs 30 – Rs 26).
The final stage is that of the retailer. Now that the retailer has bought the shirts at Rs 300, he would also keep a profit margin. Say the margin that the retailer decides on is Rs 20. The total cost now becomes Rs 320. Using the 10% rule, the tax would be Rs 32. However, with Rs 30 already accounted for in the earlier two stages, the tax incidence would be Rs 2 (Rs 32 – Rs 30). To sum up, the total GST for the entire chain, from manufacturer to retailer is Rs (20 + 6 + 4 + 2 = 32). The suppliers of inputs would be able to claim no tax credit, given the fact that they have themselves not purchased any item.
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Goods and Services Tax (GST) is the biggest indirect tax reform of India. GST will subsume Central Excise Law, Service Tax Law, State VATs, Entry Tax, Luxury Taxes, Octroi etc. Earlier, there were so many taxes which were levied on goods such as Excise, VAR, entry tax, octroi. Similarly, service tax, entertainment tax, luxury tax were levied on services. Now, there will be only single tax i.e. GST and it will make dream of One Nation, One Tax feasible.
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