An overview of GST

GST is being hailed as the game changer for India’s economy and is being labelled as the biggest change in the Constitution since India’s independence. The Goods and Services tax or commonly referred to as the GST will replace the indirect taxes levied by the Central and State Governments and provide for a single and streamlined process. It presents India as a unified market to business owners and also aims at bringing a lot of black money back into the mainstream economy. The tax will be implemented at every step of value creation.

Goods & Services Tax is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition. To understand it better, we need to deep dive into definitions under this concept.

Let us start with the term ‘Multi-stage’. Now, there are multiple steps an item goes through from manufacture or production to the final sale. Goods and Services Tax will be levied on each of below mentioned stages, which makes it a multi-stage tax.

  

Let’s explore our next term – Destination-Based. Goods and Services Tax will be levied on all transactions happening throughout the entire manufacturing chain. Earlier, when a product was manufactured, the centre would levy an Excise Duty on the manufacture, and then the state will add a VAT tax when the item is sold to the next stage in the cycle. Then there would be a VAT at the next point of sale.

 

Importance of GST-

Currently, the Indian tax structure is divided into two – Direct and Indirect Taxes. Direct Taxes are levies 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.

In the case of Indirect Taxes, the liability of the tax can be passed on to someone else. This means that when the shopkeeper must pay VAT on his sale, he can pass on the liability to the customer. So, in effect, the customer pays the price of the item as well as the VAT on it so the shopkeeper can deposit the VAT to the government. This means that the customer must pay not just the price of the product, but he also pays the tax liability, and therefore, he has a higher outlay when he buys an item.

The GST replaces numerous different indirect taxes such as:

1.    Central Excise Duty

2.    Service Tax

3.    Countervailing Duty

4.    Special Countervailing Duty

5.    Value Added Tax (VAT)

6.    Central Sales Tax (CST)

7.    Octroi

8.    Entertainment Tax

9.    Entry Tax

10. Purchase Tax

11. Luxury Tax

12. Advertisement taxes

13. Taxes applicable on lotteries.

How does GST works-

There will be 3 kinds of applicable goods and service taxes- CGST, SGST and IGST.

CGST: where the revenue will be collected by the central government

SGST: where the revenue will be collected by the state governments for intra-state sales

IGST: where the revenue will be collected by the central government for inter-state sales

In most cases, the tax structure under the new regime will be as follows:

Transaction	After GST	Before GST	Remark
Sale within the state	CGST + SGST	VAT + Central Excise/Service tax	Revenue will now be shared between the Centre  and the State
Sale to another State	IGST	Central Sales Tax + Excise/Service Tax	There will only be one type of tax (central)  now in case of inter-state sales.

Example of GST calculation-

Let us assume that the GST is set at 20%. Suppose that the manufacturing cost of a Product A is ₹100 and assuming a GST of 20% the total amount is ₹120. The next step of taxation would be when the Product is sold to consumers, let’s say at a price of ₹150. So, the GST will charge another 20% on just the difference of ₹150 and ₹120 i.e. only 20% on ₹30 which is equal to ₹6. So, the closing price is ₹150 + ₹6. Unlike the case of petrol pricing there is no tax on a tax now. This eliminates the cascading effect of taxes which is very prevalent in our economy and has been simplified to an elemental level in the example.

What will become costlier and cheaper?

According to experts, these items could become costlier:

• ·         Cigarette prices likely to go up as GST rate for tobacco will be higher than current duties
• ·         Commercial vehicles such as trucks will become costlier
• ·         Mobile phone calls may get costlier as service tax will go up
• ·         Textile and branded jewelry may become costlier

And these could become cheaper:

• ·         Auto: Prices of entry-level cars, two-wheeler, SUVs may fall
• ·         Car batteries likely to get cheaper
• ·         Paint, cement prices likely to fall
• ·         Movie ticket prices likely to fall as entertainment tax will come down
• ·         Electronics items like fans, lighting, water heaters, air coolers, etc. will get cheaper