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 in-depth 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 GST?
Goods
and Services Tax (GST) is applicable on supply of goods and services. GST will
replace all the current Indirect taxes.
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 i.e. Profit and not on the total. I am 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 i.e. 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 i.e. tax paid by the manufacturer in order to pay his tax on the value addition and not on the total.
·
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.
·
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.
GST
Rates
Alcohol for human consumption, petroleum products, to banco 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: Tamil Nadu- 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.
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 Atal Bihari Vajpayee 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.
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