Goods and service Tax
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| Goods and Services Tax |
Goods and service
Tax
GST stands for Goods and service Tax, is an Indirect tax model
which has replaced almost all tax laws which were previously in India. It has
passed in parliament on 29, March, 2017, and came into effect on 1, July 2017.
It is a multi-stage and destination-based tax model which levied only on each
value addition.
GST was implemented all sudden into
entire country as one single indirect tax instead to many different including
states taxes.
So, before Goods and Service Tax, the
pattern of tax levy was as follows
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| Multi Structure Tax |
There are multiple change-of-hands an item goes through along its supply
chain: from manufacture to final sale to the consumer.
-
Purchase of raw material
-
Production or manufacture
-
Warehousing of finished goods
-
Sale to wholesaler
-
Sale of the product to the retailer
-
Sale to the end consumer
Finished goods passed through various
level of its development and each level there were a different tax implemented
on it. its journey starts from a raw material supplier and then Manufacture so
on the supplier end there was VAT and on the manufacturer end there were VAT+
excise duty. At the second level when finished goods transported to
warehouse/wholesaler and then to retailer there were sale tax and VAT again. After
passed these stages the finished goods will delivered to the consumer.
Now you can see there were four time VAT, sale tax (state and centre),
excise duty implemented on it.
Goods and Services Tax will be levied on each of
these stages which makes it a multi-stage tax. As earlier there were different
different taxes implemented now here is only one tax work at here and it is
only depend upon the value addition on each stage
Value addition
The manufacturer who makes any
product let suppose biscuit. He purchases flour, sugar, baking equipment and
other materials. Now he will add something in this raw material by mixing and
baking and then he sale it to the warehousing agent who packs large quantities
of biscuits and labels it. That is another addition of value after which the
warehouse sells it to the retailer. The Retailer invest on these biscuits,
manage inventory, distribute and sale it to consumer. You can see at every
stage someone were adding something it the raw material and then prepared finished
market ready product to consume by consumer. GST will be levied on these value
additions i.e. the monetary worth added at each stage to achieve the final sale
to the end customer.
Destination-Based
Consider goods manufactured in
Rajasthan and are sold to the final consumer in Haryana. Since Goods &
Service Tax is levied at the point of consumption, in this case, Haryana, the
entire tax revenue will go to Haryana and not Rajasthan.
Components of GST
There are three taxes components
under this system: CGST, SGST & IGST.
CGST:
Collected by the Central Government when all transaction were made in same
state.
SGST: Collected
by the State Government in which state revenue generated by the consume the
product.
IGST: Collected
by the Central Government for inter-state sales transactions.
Benefits of GST
· GST will bring one
country one tax concept. This will prevent unhealthy competition among states.
It will be beneficial to do interstate business.
· Ease to filling
return
· GST is a single tax
which will include various taxes, making the system efficient with very little
chances of corruption and Tax Evasion.
Changes after GST
Earlier every
purchaser including the final consumer paid tax on tax. This tax on tax is
called Cascading Effect of Taxes.
GST avoids
this cascading effect as the tax is calculated only on the value-add at each
stage of product or service development phases.
This indirect tax
system under GST 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.
Example:
Based on the above
example of biscuit manufacturer along with some business partners, let’s see
what happens to the cost of goods and the taxes in the earlier taxation
Tax calculations pre GST.
Action
|
Cost
|
10%
Tax
|
Total
|
Manufacturer
|
1000
|
100
|
1,100
|
Warehouse adds label and repacks @ 30
|
1400
|
140
|
1,540
|
Retailer advertises @ 50
|
2,040
|
204
|
2,244
|
Total
|
1,800
|
444
|
2,244
|
With the above example you can see how tax is implemented upon saleing
price every time, and not on added value in the product.
Tax calculations with GST:
|
In GST, all trading partners
(who are taking part in entire transactions) at every level of development of
finished goods, can claim credit for tax paid in acquiring input. In this case
the individual who has paid a part of tax already can claim credit when he
submitted his taxes.
In the end every trading partners can
claim their credit, which helps to reduce taxes and less tax reduce cost price
of product.
In above you can see the difference
between the cost price of the Biscuits in two different taxation system, in Pre
GST it was Rs, 2,244/- and in GST Rs. 1,980/-
With the above discussion and example
I hope you are able to understand very basic calculation of GST and how
it may useful to reduce cost price of products.
In my next article I will come with
few more details on GST which my help you in your business.
If you have any query please write me
on comment, I will try to help you
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