GST: Good & Services Tax

GST launched: All you need to know about India’s New Tax Regime

An illuminated Parliament ahead of midnight launch of 'Goods and Services Tax (GST)' in New Delhi.(PTI Photo)

Introduction

The Goods and Services Tax or GST was initiated on the first of July 2017, and it is set to alter the way we do our taxes. Be that as it may, what is GST, How will it operate in India and by what means will it change the present tax structure? What's more, above all, why does the nation need such a tremendous revamp in its taxation policies? We answer these squeezing inquiries in this inside and out article.

What is G.S.T all about?

Goods & Service Tax or GST is a value added tax which will subsume and replace all the current indirect taxes levied by the central and state government of India. Hailed as one of the biggest fiscal reforms in the country GST will be relevant to all organizations, both small and large. With GST, there will be no degree for variable taxation any longer and the whole country will take after a unified tax structure.

India will take after a dual system of GST to keep the Center and State monetarily autonomous of each other. The GST Council, comprising of the Union Finance Minister and different State Finance Ministers have formulated a four-layered duty structure for the nation with tax slabs of 5% for commodities of mass consumption, 12% & 18% for being the standard rate for goods & services and 28% rate plus Cess for luxurious items. There is a special rate of 0.25% on precious and semi-precious stones and 3% on gold.

It is believed it would make the entire taxation system more fair, transparent and efficient.It would allow seamless flow of goods & services across nation due to elimination of  Toll Tax & CST Tax for Interstate sales and even discourage Tax evasion 

Which Taxes will GST Replace?

It will replace all the following taxes and bring them under one umbrella to make compliance easier:
At the Central level, the following taxes are being subsumed:

1.      Central Excise Duty,

2.      Additional Excise Duty,

3.      Service Tax,

4.      Additional Customs Duty is commonly known as Countervailing Duty

5.      Special Additional Duty of Customs.

At the State level, the following taxes are being subsumed:

1.      Subsuming of State Value Added Tax/Sales Tax,

2.      Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States),

3.      Octroi and Entry tax,

4.      Purchase Tax,

5.      Luxury tax

6.      Taxes on the lottery, betting, and gambling.

Who is liable to pay GST?

Businesses and traders with annual sales above Rs 20 lakh are liable to pay GST. The threshold for paying GST is Rs10 lakh in the case of northeastern and special category states. However, GST is applicable on interstate trade irrespective of this threshold.

What are the products not part of GST?

Crude oil, diesel, petrol, natural gas and jet fuel are temporarily kept out of GST. The GST Council, the federal indirect tax body of state finance ministers chaired by the Union finance minister, will decide when to bring these items into GST. Liquor is kept out of GST as a constitutional provision and hence it would require an amendment to Constitution if it is to be brought into GST net.

Why is Goods and Services Tax so Important?

Now that we have defined GST, let us discuss why it will assume such a critical part in changing the present taxation, and therefore, the economy.

Currently, the Indian tax structure is divided into two – Direct and Indirect Taxes. Direct Taxes are levied where the liability cannot be passed on to someone else. An example of this is Income Tax where you earn the income and you alone are liable to pay the tax on it.

On account of Indirect Taxes, the obligation of the expense can be passed on to another person. This implies that when the retailer/seller must pay VAT on his sale, he can pass on the liability to the client/customer. Thus, as a result, the customer pays the cost of the thing and in addition the VAT on it so the seller can deposit the VAT to the Government. This implies the customer must pay not only the cost of the item, but he also pays the tax liability, and therefore, he has a higher expense when he buys the item.

Goods and Services Tax will address this issue after it is implemented. It has a system of Input Tax Credit which will allow sellers to claim the tax already paid so that the final liability on the end consumer is decreased.

What is the GST Framework and how will it operate?

When Goods and Services Tax is implemented, there will be 3 kinds of applicable Goods and Services Taxes:

CGST(Central Good & Services Tax): where the revenue will be collected by the central government

SGST(State Good & Services Tax): where the revenue will be collected by the state governments for intra-state sales (Inside State)

IGST(Integrated Good & Services Tax): where the revenue will be collected by the central government for inter-state sales (With Multiple States)

Transaction	New  Regime	Old Regime	Comments
Sale within the state	CGST + SGST	VAT + Central Excise/Service tax	Under the new system, a transaction of sale within the state shall have two taxes, SGST-which goes to the State & CGST which goes to the Centre
Sale to another State	IGST	Central Sales Tax + Excise/Service Tax	Under the new system, a transaction of sale from one state to another shall have only one type of tax, IGST- which goes to the centre

G.S.T  various cases

Case 1: Sale in one state, resale in the same state

In the example illustrated below, goods are moving from Vadodara to Ahmedabad. Since it is a sale within a state, CGST and SGST will be levied. The collection goes to the Central Government and the State Government as pointed out in the diagram. Here the rates of CGST & SGST are assumed to be 9%.Then the goods are resold from Ahmedabad to Surat. This is again a sale within a state, so CGST and SGST will be levied. Sale price is increased so tax liability will also increase. In the case of resale, the credit of input CGST and input SGST (Rs. 90) is claimed as shown; and the remaining taxes go to the respective governments.

Case 2: Sale within the state and resale in another state

In this case, goods are moving from Vadodara to Ahmedabad. Since it is a sale within a state, CGST and SGST will be levied. The collection goes to the Central Government and the State Government as pointed out in the diagram. Later the goods are resold from Ahmedabad to Lucknow (outside the state). Therefore, IGST will be levied. The whole IGST goes to the central government.

Against IGST, both the input taxes are taken as credit. But we see that SGST never went to the central government, still, the credit is claimed. This is the crux of GST. Since this amounts to a loss to the Central Government, the state government compensates the central government by transferring the credit to the central government.

Case 3: Sale outside the state and resale in the same state

In this case, goods are moving from Delhi to Vadodara. Since it is an interstate sale, IGST will be levied on the goods and therefore the collection goes to the Central Government. Later the goods are resold from to Ahmedabad (sale within the state). Therefore, CGST and SGST will be levied. Hence, both State, as well as Central government, will collect the tax.

Against CGST and SGST, 50% of the IGST, that is Rs. 8 is taken as a credit. But we see that IGST never went to the state government, still, the credit is claimed against SGST. Since this amounts to a loss to the State Government, the Central government compensates the State government by transferring the credit to the State government.

How does GST impact the Imports and Exports of the Country?

Under GST Regime the Exports are not taxable because the place of consumption is outside India. Imports are taxable because the place of consumption is in India. The tax on imported goods will, therefore, be just the same as domestically-produced goods. Imports would be costlier because of additional customs duties. Thus, the export industry will become more competitive. Also, domestic goods will be protected by making imports at par with domestic goods.

 What is the GST tax rate structure?

                                                                                       

We definitely realize that the GST slabs are pegged at 5%, 12%, 18% and 28%. As per the most recent news from the GST Council, the duty structure for basic commodities is as under:

Tax Rates	Products	Products
0%	Curd	Unpacked Food grains
	Eggs	Educations Services
	Salt	Health Services
	Fresh Vegetables	Children’s Drawing & Colouring Books
	Kajal	Unbranded Maida
	Unpacked Paneer	Unbranded Atta
	Besan	Gur
	Unbranded Natural Honey	Prasad
	Lassi	Palmyra Jaggery
	Milk	Phool Bhari Jhadoo
5%	Skimmed Milk Powder	Tea
	Packed Paneer	Edible Oils
	Coal	Raisin
	Domestic LPG	Roasted Coffee Beans
	PDS Kerosene	Sugar
	Cashew Nuts	Footwear (< Rs.500)
	Milk Food for Babies	Apparels (< Rs.1000)
	Fabric	Coir Mats, Matting & Floor Covering
	Spices	Agarbatti
	Coal	Mishti/Mithai (Indian Sweets)
	Life-saving drugs	Coffee (except instant)
12%	Butter	Computers
	Ghee	Processed food
	Almonds	Mobiles
	Fruit Juice	Preparations of Vegetables, Fruits, Nuts or other parts of Plants including Pickle Murabba, Chutney, Jam, Jelly
	Packed Coconut Water	Umbrella
18%	Hair Oil	Capital goods
	Toothpaste	Industrial Intermediaries
	Soap	Ice-cream
	Pasta	Toiletries
	Corn Flakes	Computers
	Soups	Printers
28%	Small cars (+1% or 3% cess)	High-end motorcycles (+15% cess)
	Consumer durables such as AC and fridge	Beedis are NOT included here
		Luxury & sin items like BMWs, cigarettes and aerated drinks (+15% cess)

 What are the benefits of GST?

 For business and industry  

                       

- GST will allow easy compliance: GST will be supported by a robust IT network-GSTN-

which would be the foundation of GST regime in India. All taxpayer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.

-Uniformity of tax rates and structures: GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.

-Removal of cascading: The GST system will provide seamless tax credits throughout the value chain of a product, and across boundaries of States, which would ensure that there is minimal cascading of taxes and would reduce hidden costs of doing business.

- Improved competitiveness: Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.

- Gain to manufacturers and exporters: The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give a boost to exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.

For Central and State Governments 
        

-Simple and easy to administer: Multiple indirect taxes at the Central and State levels are

being replaced by GST. Backed with a robust end-to-end IT system, GST would be simpler and easier to administer than all other indirect taxes of the Centre and State levied so far.

-Better controls on leakage: GST will result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an inbuilt mechanism in the design of GST that would incentivize tax compliance by traders.

-Higher revenue efficiency: GST is expected to decrease the cost of collection of tax revenues of the Government, and will, therefore, lead to higher revenue efficiency.

 For the Consumer

-Single and transparent tax proportionate to the value of goods and services: 

Due to multiple indirect taxes being levied by the Centre and State with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today are laden with many hidden taxes. Under GST, there would be only one tax from the manufacturer to the consumer, leading to the transparency taxes paid to the final consumer.

-Relief in overall tax burden: Because of efficiency gains and prevention of leakages, the overall tax burden on most commodities will come down, which will benefit consumers.

Explain the various terminologies of GST?

GST is a comprehensive, multi-stage, destination-based consumption tax on levied at every stage of value addition in the lifecycle of a product.

To understand this concept better, let us take a gander at each of the terms in detail. Let’s start with Comprehensive which means that GST will subsume all of the current indirect taxes. Furthermore, by getting a unified tax assessment framework, the nation over, it will guarantee that there are no more arbitraries in tax rates.

The next term is Multistage which means that GST is levied at each stage of the supply chain, where a transaction takes place. These stages of an item range from the manufacture or production to the final sale. Buying of raw materials is the primary stage. The second stage is production or manufacture. Then, there is the warehousing of these materials. Next, comes the sale of the product to the retailer. And in the last & final stage, the retailer sells the end product to the customer, thereby finishing its life cycle.

Here’s a pictorial description of the above-said matter

Goods and Services Tax will be levied on each of these stages, which makes it a multi-stage tax. How? We will see that shortly, but before that, let us talk about ‘Value Addition’.

Value-addition is the process of addition to the value of a product/ service at each stage of its production, exclusive of initial costs. Under GST, the tax is levied only on the value added.

For example: Let us assume that a manufacturer wants to make a shirt. For this, he must buy yarn. This gets turned into a shirt after manufacture. Along these lines, the value of the yarn is expanded when it gets woven into a shirt. Then, the manufacturer sells it to the warehousing agent who then attaches labels and tags to each shirt. That is another addition of value after which the warehouse sells it to the retailer who packages each shirt separately and invests in the marketing of the shirt thus increasing its value.

And last but not least Destination-based consumption: Unlike the current indirect taxes, GST will be collected at the point of consumption. The taxing authority with appropriate jurisdiction in the place where the goods/ services are finally consumed will collect the tax.

For example:

Assume that the whole manufacture process is going to happen in Delhi and the final point of sale is in Gujrat. Since Goods & Services Tax is levied at the point of consumption, so the state of Delhi will get revenue in the manufacturing and warehousing stages, however, miss out on the revenue when the item moves out of Delhi and reaches the end consumer in Gujrat.This means that Gujrat will earn that revenue on the final sale because it is a destination-based tax and this revenue will be collected at the final point of sale/destination which is Gujrat.

How GST Ensures Value-Addition across the Production Chain of Product /Life Cycle of a Product

Consider a typical scenario of the manufacturing of a shirt. GST ensures that there is value addition across every chain from manufacturing stage till it reaches the end user.

GST REGIME

The basis of Goods and Services Tax is the seamless flow of Input Tax Credit (ITC) along the entire value addition chain. At every step of the manufacturing process, businesses will have the option to claim the tax already paid in the previous transaction.

Manufacturer

Imagine a manufacturer who produces shirt spends a total of Rs 100 on various raw materials or inputs — cloth, thread, buttons, tailoring equipment, which is inclusive of the taxes of say Rs 10 he has paid. In the process of manufacturing shirt, there is a value addition, of say Rs 30, making the gross value of the product to be Rs 100+30=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).

Wholesaler

At the next stage, the wholesaler buys the shirt from the manufacturer at Rs.130 and adds labels to it. When he is adding labels, he is adding value. Therefore, his cost increases by say Rs.20. On top of this, he has to pay a 10% tax, and the final cost, therefore, becomes Rs. (130+20) 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).

Retailer

Now, the retailer pays Rs. 150 to buy the shirt from the wholesaler because the tax liability had passed on to him. He has to package the shirt, and when he does that, he is adding value again. This time, let’s say his value add is Rs. 10. Now when he sells the shirt, he adds this value. So, the cost of the shirt becomes Rs.160 Let us see a breakup for this: (150+10). 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 are , Rs 10 + 3 +2 + 1, or Rs 16. Final price of Rs 166(150+10+3+2+1) which includes a total tax of Rs 16 payable under the GST.

Customer

So, the customer pays Rs. 166 for the shirt at the retail price for the breakup is tabulated below.

Action	Cost	10% Tax	Actual Liability	Total
Buys Raw Material	100	10 (Inclusive)	10	100
Manufactures @ 30	130	13	3	143
Wholesaler adds Value @ 20	150	15	2	165
Retailer adds Value @ 10	160	16	1	166

So essentially, Goods & Services Tax is going to have a two-pronged benefit. One, it will reduce the cascading effect of taxes, and second, by allowing input tax credit, it will reduce the burden of taxes and, hopefully, prices. 

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.

Manufacturer

Imagine a manufacturer who produces shirt spends a total of Rs 100 on various raw materials or inputs — cloth, thread, buttons, tailoring equipment, which is inclusive of the taxes of say Rs 10 he has paid. In the process of manufacturing shirt, there is a value addition, of say Rs 30, making the gross value of the product to be Rs 143((100+30)+10% tax). But since there is no set-off against the Rs 10 he has already paid as a tax on raw materials/inputs, the good is sold to the wholesaler at Rs 143 (130 + 13).

Wholesaler

At the next stage, the wholesaler buys the shirt from the manufacturer at Rs. 143 and adds labels to it. When he is adding labels, he is adding value. Therefore, his cost increases by say Rs.20. On top of this, he has to pay a 10% tax, and the final cost, therefore, becomes Rs. (143+20=) 163 + 10% tax = 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.

Retailer

Now, the retailer pays Rs. 179.30 to buy the shirt from the wholesaler because the tax liability had passed on to him. He has to package the shirt, and when he does that, he is adding value again. This time, let’s say his value add is Rs. 10. Now when he sells the shirt, he adds this value (plus the VAT he has to pay the government to the final cost). So, the cost of the shirt becomes Rs.208.23 Let us see a breakup for this: (179.30+10)189.30+ 10 % Tax=208.23. Again, there is no mechanism for setting off the tax on the retailer’s sale against the tax paid on his previous purchase.

Customer

So, the customer pays Rs. 208.23 including tax of Rs 58.3(10 + 13 + 16.30 + 18.93) for a shirt the cost price of which was basically only Rs. 160(Rs 100 + 30 + Rs. 20 + Rs.10). Along the way, the tax liability was passed on at every stage of the transaction and the final liability comes to rest with the customer. This is called the Cascading Effect of Taxes where a tax is paid on tax and the value of the item keeps increasing every time this happens.

So, the customer pays Rs. 208.23 for the shirt at the retail price for the breakup is tabulated below.

Action	Cost	10% Tax	Total
Buys Raw Material @ 100	100	10(Inclusive)	100
Manufactures add value @ 30	130(100+30)	13	143
Wholesaler adds value @ 20	163(143+20)	16.3	179.30
Retailer adds value @ 10	189.30(179.30)	18.93	208.23

                                                                                                                                                         



 Summary

The whole idea behind having one indirect tax to subsume multiple currently existing indirect taxes is to benefit the Indian economy in a number of ways:

• It will allow a seamless flow of Goods & services across the nation due to the elimination of octroi charges  
• It will help the country’s businesses gain a level playing field as it will put us on par with foreign nations who have a more structured tax system

• It will also translate into gains for the end consumer who not need to pay cascading taxes any longer 
• There will now be a single tax on goods and services 

In addition to the above,

• Earlier businessmen needed to get registered with the various tax authorities, maintain various papers and file tax returns to different authorities but after GST they would be relieved as it is supported by robust IT network and will require only single registration, single return, and single paperwork so that businessmen will be able to utilize his time and energy on doing business rather than complying with various tax laws.

• It will prudent for Govt. at various levels to promote & encourage small to large & manufacturing services firm to maintain their production statistics up to date instead of putting an undue burden of much litigation on them later as well as unnecessary interference of tax inspectors      

• The Goods and Services Tax Law aims at streamlining the indirect taxation regime. As mentioned above, GST will subsume all indirect taxes levied on goods and service, including State and Central level taxes. The GST mechanism is an advancement on the VAT system, the idea being that a unified GST Law will create a seamless nationwide market.

• It is also expected that Goods and Services Tax will 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.