The present structure of Indirect Taxes is very complex in India. There are so many types of taxes that are levied by the Central and State Governments on Goods & Services.
We have to pay ‘Entertainment Tax’ for watching a movie. We have to pay Value Added Tax (VAT) on purchasing goods & services. And there are Excise duties, Import Duties, Luxury Tax, Central Sales Tax, Service Tax….hhmmm..
As of today some of these taxes are levied by the Central Government and some are by the State governments. How nice will it be if there is only one unified tax rate instead of all these taxes?
In this post, let us understand – what is Goods and Services Tax and its importance. What are the benefits of GST Bill to Corporates, common man and end consumer? What are the advantages, disadvantages and challenges?
It has been long pending issue to streamline all the different types of indirect taxes and implement a “single taxation” system. This system is called as GST ( GST is the abbreviated form of Goods & Services Tax). The main expectation from this system is to abolish all indirect taxes and only GST would be levied. As the name suggests, the GST will be levied both on Goods and Services.
GST was first introduced during 2007-08 budget session. On 17th December 2014, the current Union Cabinet ministry approved the proposal for introduction GST Constitutional Amendment Bill. On 19th of December 2014, the bill was presented on GST in Loksabha. The Bill will be tabled and taken up for discussion during the coming Budget session. The current central government is very determined to implement GST Constitutional Amendment Bill.
GST is a tax that we need to pay on supply of goods & services. Any person, who is providing or supplying goods and services is liable to charge GST.
How is GST applied?
GST is a consumption based tax/levy. It is based on the “Destination principle.” GST is applied on goods and services at the place where final/actual consumption happens.
GST is collected on value-added goods and services at each stage of sale or purchase in the supply chain. GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services.The manufacturer or wholesaler or retailer will pay the applicable GST rate but will claim back through tax credit mechanism.
But being the last person in the supply chain, the end consumer has to bear this tax and so, in many respects, GST is like a last-point retail tax. GST is going to be collected at point of Sale.
The GST is an indirect tax which means that the tax is passed on till the last stage wherein it is the customer of the goods and services who bears the tax. This is the case even today for all indirect taxes but the difference under the GST is that with streamlining of the multiple taxes the final cost to the customer will come out to be lower on the elimination of double charging in the system.
Let us understand the above supply chain of GST with an example:
The current tax structure does not allow a business person to take tax credits. There are lot of chances that double taxation takes place at every step of supply chain. This may set to change with the implementation of GST.
Indian Government is opting for Dual System GST. This system will have two components which will be known as
The current taxes like Excise duties, service tax, custom duty etc will be merged under CGST. The taxes like sales tax, entertainment tax, VAT and other state taxes will be included in SGST.
So, how is GST Levied? GST will be levied on the place of consumption of Goods and services. It can be levied on :
The rate (percentage) of GST is not yet decided. As mentioned in the above table, there might be CGST, SGST and Integrated GST rates. It is also widely believed that there will be 2 or 3 rates based on the importance of goods. Like, the rates can be lower for essential goods and could be high for precious/luxury items.
Benefits of GST Bill implementation
Challenges for implementing Goods & Services Tax system
Since GST replaces many cascading taxes, the common man may benefit after implementing it. But it all depends on ‘what rate the GST is going to be fixed at?’ Also, Small Traders (based on Annual Business turnover) may be exempted from it.
France was the first country to introduce this system in 1954. Nearly 140 countries are following this tax system. GST could be the next biggest tax reform in India. This reform could be a continuing process until it is fully evolved. We need to wait few more months for more details on Goods & Services Tax system.
Latest update (06-Apr-2017) : Rajyasabha passes GST bill. Now, the state assemblies would consider and pass their respective State GST (SGST) law.
Latest news on GST (30-Mar-2017) : GST Bill has been passed in Loksabha.
Latest update on GST Bill implementation date (28-Feb-2017) : All States now agree to roll out GST by July 2017.
Latest update on GST Rate Structure (03-Nov-2016) : A four-tier GST tax slabs have been decided by the Finance ministry. Below are the details;
Latest News on GST Bill (08-Sep-2016) – GST Bill gets President’s (Shri Pranab Mukherjee) nod. The enactment of the bill will now pave the way for the setting up of the GST council.
Latest News on GST Bill 2016 (03-August-2016) – Rajya Sabha passes GST Bill. What next? – The passage of the GST constitutional bill will lead to the setup of the GST council. The council will then deliberate upon the exact GST rate, which will be ratified by the States. The final and actual GST Bill will likely be taken up in Winter Session of the Parliament.
Latest news (14-June-2016) : Ministry of Finance releases Draft GST Bill. Click here to download GST Draft Bill 2016 PDF.
Latest News (24-Apr-2015) : Finance Minister, Arun Jaitely has tabled the GST Bill in Lok Sabha.
Do you think GST Bill is going to be the game changer for Indian economy? Do share your views and thoughts.
Related Articles :
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net)
This post was last modified on July 10, 2023 12:11 pm
Filing your Income Tax Return (ITR) is not just about meeting deadlines—it’s about choosing the…
Retirement planning in India is often misunderstood. Many people think any long-term savings or investment…
You’ve probably seen the same property quoted at different prices. One person says ₹60 lakh,…
Buying insurance is easy. Getting your claim settled—that’s where the real test begins. For any…
Gifting immovable property—like land, plots, or houses—is super common in India. Families often do it…
Most people believe that investing alone is enough to create wealth. But in reality, many…
This website uses cookies.
View Comments
Dear Sir,
Please explain,
1. what GST tax components(I.e CGST, SGST , IGST) will comec for bank charge service tax , travel service tax , insurance premium service tax and etc .
2. Whether reverse charge mechanism is available in GST
3. Whether GTA concept is available in GST
Thanks in advance
Arul
It is a welcome move to make it simpler to do business in India
Stage 1
Imagine a manufacturer of, say, shirts. He buys raw material or inputs — cloth, thread, buttons, tailoring equipment — worth Rs 100, a sum that includes a tax of Rs 10. With these raw materials, he manufactures a shirt.
In the process of creating the shirt, the manufacturer adds value to the materials he started out with. Let us take this value added by him to be Rs 30. The gross value of his good would, then, be Rs 100 + 30, or Rs 130.
At a tax rate of 10%, the tax on output (this shirt) will then be Rs 13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs (Rs 10). Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10).
Stage 2
The next stage is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs 130, and adds on value (which is basically his ‘margin’) of, say, Rs 20. The gross value of the good he sells would then be Rs 130 + 20 — or a total of Rs 150.
A 10% tax on this amount will be Rs 15. But again, under GST, he can set off the tax on his output (Rs 15) against the tax on his purchased good from the manufacturer (Rs 13). Thus, the effective GST incidence on the wholesaler is only Rs 2 (15 – 13).
Stage 3
In the final stage, a retailer buys the shirt from the wholesaler. To his purchase price of Rs 150, he adds value, or margin, of, say, Rs 10. The gross value of what he sells, therefore, goes up to Rs 150 + 10, or Rs 160. The tax on this, at 10%, will be Rs 16. But by setting off this tax (Rs 16) against the tax on his purchase from the wholesaler (Rs 15), the retailer brings down the effective GST incidence on himself to Re 1 (16 –15).
Thus, the total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs 10 + 3 +2 + 1, or Rs 16.
How it would be in a non-GST regime?
In a full non-GST system, there is a cascading burden of “tax on tax”, as there are no set-offs for taxes paid on inputs or on previous purchases.
Thus, if we consider the same example as above, the manufacturer buys raw materials/inputs at Rs 100 after paying tax of Rs 10. The gross value of the shirt (good) he manufacturers would be Rs 130, on which he pays a tax of Rs 13. But since there is no set-off against the Rs 10 he has already paid as tax on raw materials/inputs, the good is sold to the wholesaler at Rs 143 (130 + 13).
With the wholesaler adding value of Rs 20, the gross value of the good sold by him is, then, Rs 163. On this, the tax of Rs 16.30 (at 10%) takes the sale value of the good to Rs 179.30. The wholesaler, again, cannot set off the tax on the sale of his good against the tax paid on his purchase from the manufacturer.
The retailer, thus, buys the good at Rs 179.30, and sells it at a gross value of Rs 208.23, which includes his value addition of Rs 10 and a tax of Rs 18.93 (at 10% of Rs 179.30). Again, there is no mechanism for setting off the tax on the retailer’s sale against the tax paid on his previous purchase.
The total tax on the chain from the raw material/input suppliers to the final retailer in this full no-GST regime will, thus, work out to Rs 10 + 13 + 16.30 + 18.93 = Rs 58.23. For the final consumer, the price of the good would then be Rs 150 + 58.23 = Rs 208.23.
Compare this Rs 208.23 — with a tax of Rs 58.23 — to the final price of Rs 166, which includes a total tax of Rs 16, under GST.
Dear chirag,
Thank you for explaining the GST mechanism in a detailed way.
The key point is 'GST tax Rate' here. Also, some for some sectors it can have a negative impact.
But overall, it is a positive factor for our economy in long-run.
And a much needed tax reform.
Good information for GST is more important in india
Hi Sreekanth
In your example let us say weaver is Mumbai. Retailer and customer are in Kolkata.
1) Will weaver get tax credit from Mumbai state government ?
2) Will the GST paid by customer Kolkata state government revenue?
If answer to the above questions are yes, then will producer state loose revenue and consumer states will gain revenues?
Please advise.
Dear Manoj,
That's the reason why Centre is proposing to provide financial assistance to the States for loss of revenue for the next 5 years or so.
This is one of the main reasons why some State Govts are opposing the GST bill.
Thanks for nice article,
Since stock market is down from last 5 days so Sreekanth, do you think its nice time to do the lumpsum investment, considering GST will have positive impact on economy in long term.
Thanks
Dear Prem,
GST can be considered as a major tax reform but the benefits may be seen over a long run.
Also, kindly do not try to time the market based on just one or two events.
Kindly invest in Equity markets for long-term and anytime can be a good time to invest :)
Nice article... I have one doubt. Basic custom duty include in Gst. Please advise us. Thanks in advance..
Dear Sridharan.. I believe that 'Customs Duty' is not going to be replaced by GST.
Now I apply voluntary vat for my ecommerce in maharashtra, so how i collect my deposit back after gst,
Sir
please let us know in exemted area like Himachal pradesh, shikim, Assam is GST aplicable?
Dear Biswajit .. Yes it will be applicable .
This article was very simple to understand as well as informative. I am a post graduate student in commerce & i am currently looking for a dissertation topic. Do you think GST is a researchable topic ?
Why not dear Dhanalakshmi.
SIR
PLS TELL ME HOW WAS CHARGED GST IN TRANSPORTER