Nowadays everyone is talking about GST which is scheduled to be launched on 1 July 2017. People are of a stereotypical image that GST will increase the tax burden, it will make goods unaffordable for lower and medium class. Let me clear some points regarding this new tax system.
What is GST?
GST is a type of indirect tax levied on the supply of goods and services on every subsequent stage of value addition. GST is a substitute for other indirect taxes levied by the central and the state governments and it will also remove tax cascading. Let’s support this point with a diagram:
The owner of a sugar mill buys sugarcanes to produce sugar, it means he add some value to the sugarcane i.e. value of sugarcane is increased when it is converted into sugar. Then the owner of sugar mill sells his product to a chocolate maker who adds more value to sugar by converting it into chocolate, again value of sugar increases in the similar way. Finally those chocolates are purchased by retailers who add value to chocolates in the form of packing and then sell it to the consumer.
GST will be levied on each stage whenever some monetary value is added to the produce or I say until the good is intermediate.
How GST is different from current tax system?
Currently there are two types of tax levied by the Indian government:
1) Direct tax, which is only paid by the person who is liable to pay the tax.
2) Indirect tax whose liability can be passed to someone else.
Let’s understand the different between earlier tax system and GST with an example.
Example
Current tax System
Let’s take an example of the figure showed above. Let’s assume that the sugar mill owner pays Rs 200 to buy sugarcane. If the tax rate is 15% and there is no profit and loss involved, then he has to pay Rs. 30 as tax. Now market price of sugar is Rs. (200 + 30) = 230.
Now, chocolate maker buys sugar from the sugar mill owner at Rs. 230 and adds value of Rs. 100 to the sugar by producing it in the form of chocolate. Cost of chocolate is now Rs.(230 + 100) = 330 plus producer has to pay 15% tax as well. Hence, market price of sugar is Rs. ( 330 + 49.5) = 379.5.
At the next stage, retailer buys chocolate from chocolate maker at Rs. 379.5 and adds value of Rs. 20.5 through packing. Market price of chocolate is now Rs. 400 plus tax of 15%. Hence, retailer sell packed chocolate to consumer at a price of Rs. (400 + 60) = 460.
Consumer pay Rs. 460 for a chocolate whose basic cost was only Rs. (230+100+20.5) = 350.5
GST
Let’s take the same amount in case of GST and when the tax rate is 15%.
Sugar mill owner pay Rs. (200+30) =230 to buy sugarcanes.
At the next stage, the chocolate owner pays Rs. 230 to the sugar mill owner and adds value of Rs.100 to produce chocolates. Chocolate owner has to pay 15% tax on Rs. 330 but he already has paid some tax to the sugar mill owner. This time he subtracts the amount that he already paid to sugar mill owner when he pay only Rs. 19.5 ( 15% of 330 – 30) as a tax to government.
As he pay only Rs. 19.5 to government, chocolate owner carry forward his liability of Rs. 49.5 to retailer means retailer has to pay Rs. (330 + 15% of 330) = 379.5 to chocolate owner.
Now, retailer adds value of Rs. 20.5 to Rs. 330 as packing and has to pay 15% tax to government on Rs. 350.5 but retailer already has input credit because he has paid Rs. 49.5 to the chocolate maker as tax so, he subtracts the amount of tax that he has already paid to the chocolate maker and pays only Rs. (52.6 – 49.5) = 3.1 as a tax to government.
Retailer carries forward his liability of 15% to the consumer, so now price of chocolate for the consumer is Rs.(350.5 + 52.6) = 403.1.
Total cost = Rs. (230+100+20.5+52.6) = 403.1.
If we compare both the tax systems, then consumer will pay only Rs. 403.6 for the chocolate for which he is paying Rs. 460 now.
After reading the above example you are now able to answer that how GST reduces the cascading effects of tax and cost to the consumer.
Types of GST
GST council divides GST into three categories:
1) CGST 2) SGST 3) IGST
CGST and SGST will be collected in case of intrastate transaction and IGST will be collected in case of interstate transaction. Let’s discuss this with an example:
Intrastate
When sale of good is happens within state then it is called intrastate transaction. Suppose goods and service tax is 15% comprising CGST and SGST rate of 7.5 %. In this case if dealer sold goods to consumer worth Rs. 10,000, he collects Rs. 1500 as tax from which Rs. 750 will go to Central Government and Rs. 750 will go to State Government.
Interstate
When sale of goods is taking place between two states, it’s called interstate transaction. If a producer from Delhi sells his products worth Rs. 10,000 to a retailer in Gujarat and GST is 15%, he collects Rs. 1500 as IGST which will be credited to the account of Central Government. This time CGST and SGST will not be included.
"Just like every coin has two faces, similarly we are sure to have both pros and cons of GST. But what we can confidently say is that GST will reduce the pain of paying taxes in different forms at different places. Moreover, time has always been the witness to the consequences of any new change and let time decide whether GST proves to be a boon or bane for the people."
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