Introduction: Sudden implementation in GST makes drastic change in Indian market and economy.
GST is not a new phenomenon. It was first implemented in France in 1954, and since then many countries have implemented this unified taxation system to become part of a global whole. Now that India is adopting this new tax regime, let us look back at the how and when of the Goods and Services Tax and its history in the nation.
What is GST? Goods & Services Tax Law Explained for Beginners.
The Goods and Services Tax or GST is scheduled to be launched on the 1st of July, and it is set to revolutionize the way we do our taxes. But what is GST and how will it reform the current tax structure? And most importantly, why does the country need such a huge overall in its taxation policies? We answer these questions in this depth article.
What is GST?
Goods & Services Tax is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition.
To understand this, we need to understand the concepts under this definition. 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. Buying of raw materials is the first stage. The second stage is production or manufacture. Then, there is the warehousing of materials. Next, comes the sale of the product to the retailer. And in the final stage, the retailer sells you – the end consumer – the product, completing its life cycle.
So, if we had to look at a pictorial description of the various stages, it would look like:
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’.
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. So, the value of the yarn is increased when it gets woven into a shirt. Then, the manufacturer sells it to the warehousing agent who 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 marketing of the shirt thus increasing its value.
There is one more term we need to talk about in the definition – Destination-Based. Goods and Services Tax will be levied on all transactions happening during 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.
So, earlier the pattern of tax levy was like this:
Why is Goods and Services Tax so Important?
So, now that we have defined GST, let us talk about why it will play such a significant role in transforming the current tax structure, and therefore, the economy.
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.
This happens because the shopkeeper has paid a tax when he bought the item from the wholesaler. To recover that amount, as well as to make up for the VAT he must pay to the government, he passes the liability to the customer who has to pay the additional amount. There is currently no other way for the shopkeeper to recover whatever he pays from his own pocket during transactions and therefore, he has no choice but to pass on the liability to the customer.
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.
How does GST work?
A nationwide tax reform cannot function without strict guidelines and provisions. The GST Council has devised a fool proof method of implementing this new tax regime by dividing it into three categories. Wondering how they work? Let us explain this to you in detail.
When Goods and Services Tax is implemented, there will be 3 kinds of applicable Goods and Services Taxes:
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:
How will GST help India and common man ...?
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. Understanding this process is crucial for businesses. A detailed explanation here.
To understand this, let us first understand what is Input Tax Credit. It is the credit an individual receives for the tax paid on the inputs used in manufacturing the product. So, if there is a 10% tax that the individual must submit to the government, he can subtract the amount he has paid in taxes at the time of purchase and submit the balance amount to the government.
Let us understand this with a hypothetical numerical example :
Say a shirt manufacturer pays Rs. 100 to buy raw materials. If the rate of taxes is set at 10%, and there is no profit or loss involved, then he has to pay Rs. 10 as tax. So, the final cost of the shirt now becomes Rs (100+10=) 110.
At the next stage, the wholesaler buys the shirt from the manufacturer at Rs. 110, and adds labels to it. When he is adding labels, he is adding value. Therefore, his cost increases by say Rs. 40. On top of this, he has to pay a 10% tax, and the final cost therefore becomes Rs. (110+40=) 150 + 10% tax = Rs. 165.
Now, the retailer pays Rs. 165 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. 30. 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. 214.5 Let us see a breakup for this:
Cost = Rs. 165 + Value add = Rs. 30 + 10% tax = Rs. 195 + Rs. 19.5 = Rs. 214.5
So, the customer pays Rs. 214.5 for a shirt the cost price of which was basically only Rs. 170 (Rs 110 + Rs. 40 + Rs. 30). Along the way the tax liability was passed on at every stage of 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.
In the case of Goods and Services Tax, there is a way to claim credit for tax paid in acquiring input. What happens in this case is, the individual who has paid a tax already can claim credit for this tax when he submits his taxes.
In our example, when the wholesaler buys from the manufacturer, he pays a 10% tax on his cost price because the liability has been passed on to him. Then he adds value of Rs. 40 on his cost price of Rs. 100 and this brings up his cost to Rs. 140. Now he has to pay 10% of this price to the government as tax. But he has already paid one tax to the manufacturer. So, this time what he does is, instead of paying Rs (10% of 140=) 14 to the government as tax, he subtracts the amount he has paid already. So, he deducts the Rs. 10 he paid on his purchase from his new liability of Rs.14, and pays only Rs.4 to the government. So, the Rs.10 becomes his input credit.
When he pays Rs. 4 to the government, he can pass on its liability to the retailer. So, the retailer pays Rs. (140+14=) 154 to him to buy the shirt. At the next stage, the retailer adds value of Rs.30 to his cost price and has to pay a 10% tax on it to the government. When he adds value, his price becomes Rs. 170. Now, if he had to pay 10% tax on it, he would pass on the liability to the customer. But he already has input credit because he has paid Rs.14 to the wholesaler as the latter’s tax. So, now he reduces Rs. 14 from his tax liability of Rs. (10% of 170=) 17 and has to pay only Rs. 3 to the government. And therefore, he can now sell the shirt for Rs. (140+30+17) 187 to the customer.
In the end, every time an individual was able to claim input tax credit, the sale price for him reduced and the cost price for the person buying his product reduced because of a lower tax liability. The final value of the shirt also therefore reduced from Rs. 214.5 to Rs. 187, thus reducing the tax burden on the final customer.
So essentially, Goods & Services Tax is going to have a two-pronged benefit.
1. It will reduce the cascading effect of taxes,
2. By allowing input tax credit, it will reduce the burden of taxes and, hopefully, prices.
GST Law in India – A Detailed History :
Nearly, 159 countries have adopted the GST Law in some form or other. In many countries, VAT is the substitute for GST, but unlike the Indian VAT system, these countries have a single VAT tax which fulfills the same purpose as GST.
In India, the discussion on GST Law was flagged off in the year 2000, when the then Prime Minister Atal Bihari Vajpayee brought the issue to the table.
History of GST in India – Year by Year Events
Summary
The idea behind having one consolidated indirect tax to subsume multiple currently existing indirect taxes is to benefit the Indian economy in a number of ways:
It will help the country’s businesses gain a level playing field
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 have to pay cascading taxes any more
There will now be a single tax on goods and services
In addition to the above,
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.
List of GST Tax Rates 2017 |
GST Rate in India: Here are the tax rates for all goods and services. GST Rates in India 2017 (Item Wise GST List PDF) GST tax slabs range from 0% (Nil ) to 31%.
Update of 19 June 2017:
GST Council relaxes filing norms for 2 months – GST Council has announced the relaxation of 2 months for filing GST returns by the taxpayers. It means no late fees will be charged till September, 2017 from the taxpayers who going to fill GST.
SCHEDULE OF GST RATES FOR SERVICES AS APPROVED BY GST COUNCIL :
The fitment of rates of services were discussed on 19 May 2017 during the 14th GST Council meeting held at Srinagar, Jammu & Kashmir. The Council has broadly approved the GST rates for services at Nil, 5%, 12%, 18% and 28% as listed below. The information is being uploaded immediately after the GST Council’s decision and it will be subject to further vetting during which the list may undergo some changes. The decisions of the GST Council are being communicated for general information and will be given effect to through gazette notifications which shall have force of law.
Description of Services
GST RATE with ITC of input services
SCHEDULE OF GST RATES FOR GOODS AS APPROVED BY GST COUNCIL:
Service Tax Exemptions to be continued in GST as decided by GST Council:
Services by Government or a local authority excluding the following services—
Services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Government.
Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport.
Transport of goods or passengers.
Any service, other than services covered under clauses (i) to (iii) above, provided to business entities.
Services by the Reserve Bank of India.
Services by a foreign diplomatic mission located in India.
Services relating to cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products.
Service by way of access to a road or a bridge on payment of toll charges.
Transmission or distribution of electricity by an electricity transmission or distribution utility.
Services by way of renting of residential dwelling for use as residence.
Services by a veterinary clinic in relation to health care of animals or birds.
Services by an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) by way of charitable activities, Charitable activities may be defined as presently in notification No 25/2012-ST.
Services provided by a tour operator to a foreign tourist in relation to a tour conducted wholly outside India.
Services by way of public conveniences such as provision of facilities of bathroom, washrooms, lavatories, urinal or toilets.
Services by way of pre-conditioning, pre-cooling, ripening, waxing, retail packing, labelling of fruits and vegetables which do not change or alter the essential characteristics of the said fruits or vegetables.
Services provided by Employees Provident Fund Organisation (EPFO) to persons governed under the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952).
GST Return Filing Details
Guide to filing GST returns ( News Date 27 June 2017 )
Those who need not bother at all about the details
Nearly 80 per cent of all businesses will either not have to file any return or just once in three months. Yes, that’s all.
a) Those with a turnover below Rs 20 lakh need not file any return. Their life will not change at all after July 1.
b) If your turnover is more than Rs 20 lakh and below Rs 75 lakh, you can plain ignore all the details. Why? Because you need to file just one return in three months —yes, just four returns in a year. And you need not give any details of invoices. If you opt for the composition scheme, you will deposit a lumpsum amount in tax without giving too many details to the government. You need to disclose just the total turnover.
Auto Industry Prices after GST 2017:
The Advantages of GST:
1. It removes multiple taxation
2. It creates India as a single market
3. It taxes goods and services at the same rates so many disputes are eliminated on tax matter.
4. It reduces taxes on manufactueres. hence it increases their business and make them more competitive at national and international level.
5. A seamless flow of Credit is available throughout the country. Hence evasion is minimised.
The Disadvanteges of GST:
1. The Tax on services would go up substantially from 14% to 20%
2. Tax on retails would be almost double.
3. Imported goods would be taxed at higher rate by around 6%
4. There will be dual control on every business by Central and State Government. So compliance cost will go up.
5. All credit will be available on from online connectivity with GST Network. Hence, small businesses may find it difficult to use the system
Conclusion:
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.
Most of them are not opposing GST, instead they are opposing GST Slab Rates which is higher than any other countries. We think that at present situation GST is good for Corporates and High Level Traders but it is a worst case scenario to most of the consumers and low Level traders.
In 2018 Indian Goverment is planning to implement "One Nation One Product One Rate." - MODI
We do not know what is going to happen after implementing this? Mention your valuable comments below to know us your point of view.
