GST rolls out from 1st July 2017
Ever since the idea of GST has been moved in the Indian parliament, a fair number of political gimmicks have found its way to the galore. When initiated by the center, it got struck at the state legislature and was always been subject to numerous objections and faced umpteen roadblocks and hurdles. With Uttar Pradesh Assembly finally passing the much hyped Bill and lead by the Finance Minister of Mr. Arun Jaitley, GST has finally made its way and is ready to be implemented from 1st July 2017. Let’s talk in detail what actually is GST and how it will work in India.
GST means Goods and Service tax, a forthcoming tax regime which would replace Indirect Taxation system in India. It has merged several central and state taxes into one single tax. A comprehensive system covering taxes levied on Manufacture, Sale, consumption and Services throughout India. Unlike earlier taxation system, where the ultimate buyer, along with paying his part of the tax on a product, was subject to trickled cost of services plus taxes owing to unanticipated series of events from manufacturing till final consumption. This was also termed as cascading effect of tax (tax on tax).
Prior to this, Indian Taxation system was defined in two categories, namely Direct Tax and Indirect Tax. Direct Tax, where the incidence of tax was directly over the person earning income. Income Tax, Corporate Tax and wealth tax came under this. Likewise, Service tax, VAT, Sales Tax, Entertainment Tax Excise Duty, Anti-dumping and Counter Veiling duties were enumerated under Indirect tax. From 1st July 2017, all the indirect taxes will lose their status with only one tax coming to fore, i.e. GST.
How GST works?
A product lifecycle goes through four stages before consumption by the consumer: Manufacturer -> Distributors -> Wholesalers -> Retailers. Where under indirect taxation, the consumer has to bear a part of taxes already levied on previous stages; under GST scheme the tax shall only be levied on the value addition (profit margin) at each stage. Take an example at a simplified rate of tax 10%.
Under Old Scheme:
- The Manufacturer purchases the raw material for INR 50 and adds his profit margin of Rs. 50 per shirt. Upon this, he is liable to pay tax of 10%, which means the total value of shirt is 50+50=100 and at a tax of 10%, the final price for the next stage will be 100+10=110.
- The Distributor will buy this short for Rs. 110 and after a value addition of Rs. 20 and tax @ 10%, the cost price for Wholesaler will be 110+20+13= 143.
- Likewise for Retailer, at a value addition of Rs. 20 and tax @ 10%, he will sell it to the retailer for 143+20+16.3=179.3.
- To Retailer, it will cost Rs. 219.23 (179.3+20+19.93), i.e. the final market price.
The cost of Manufacturing being 50 and value addition of 50 makes the price Rs. 100, but in this case, as per GST, the manufacturer will only pay a tax @ 10% on Rs. 50 ( 5), i.e. on his profit margin, which is his real income. Since the tax previous to this stage will be paid solely by the person manufacturing the raw material. Hence there will no trickling of taxes on an ineligible person.
Similarly, for a distributor, the price of shirt remains Rs. 100 and as above at a profit margin of Rs. 20, his tax will be 2.
For a wholesaler, the cost price would be Rs. 120 and his share of tax on a value addition of Rs. 20 become 2 again. Cost price for next stage Rs. 140.
The tax for a retailer would be Rs. 2 at a profit margin of Rs. 20 at cost price of Rs 140, making the final market price to be Rs. 160.
If you see the difference in the final market price under both the schemes, the product under previous indirect taxation is almost 60 Rs greater than final price under GST scheme. This difference was to be borne by the ultimate consumer and termed as tax on tax (cascading effect). The stages prior to the consumer were able to make out their profits even after paying the taxes levied on them as a result, but unfortunately, a customer being the final consumer couldn’t pass it on any further and had to pay for it.
Getting back to GST, there would three-tier tax categories:
- CGST – Central Goods and Service Tax (to be paid to central government)
- SGST – State Goods and service Tax (to be paid to state government for intrastate movement of goods and services)
- IGST – Integrated Goods and Service Tax (to be paid or divided among states in case of interstate movement of goods)
Rate of GST and exempted areas:
GST shall be levied under following categories:
- For grains and ancillary products, the rate category would be 0%
- For commonly and widely used items, the rate category is 5%
- For Standard/Normal /non-luxurious items, the rate category is 12% and 18%
- For Luxurious items and service, the rate category is 28%
A majority of taxed items will fall into 12% & 18% category while sitting in a luxurious resort would cost a fortune to the massed. Consequential to the moderate rates of tax under GST, Country might not face inflation too, since it relieves India of unfortunate loopholes proffered in the old taxation system. It has now bridged the unaccounted gap between the manufacturer and the consumer.
|TAX RATE CLASSIFICATION UNDER GST|
Oil, Sugar, spice, tea, coffee
|Food Items and Computer||FMCG products such as toiletries and personal care||Consumer Durables such AC, Refrigerator, Oven, Electrical Appliances
Vehicles including small and luxurious cars, high end bikes
The exempted areas would be Alcohol, Crude Oil, Petrol, High-Speed Diesel, Natural Gas, and Aviation Fuel. Along with it, taxes such as Stamp Duty, Property Tax, Toll Tax, and Electricity Duty would not come under the purview of GST. Education and health care have also been exempted from GST.
In a nutshell, the comparison would look like this
GST was once India’s far-fetched dream at one point of time and with the incessant efforts and inputs of central and state governments, the dream has come to reality and India is ready to climb a notch up on Global trajectory.