The Government of India officially announced the implementation of GST at the stroke of Midnight on July 1, 2017 which is said to revolutionize the Tax System in our country by simplification of a number of taxes.
I did a research across some credible websites and these are some important things you need to know about GST.
First of all, before discussing the pros and cons of GST, first we need to understand what exactly GST is.
GST is a form of taxation which is a comprehensive, multi-stage, destination based tax levied on every value addition. So what do we understand from this definition? We need to go step by step.
MULTI STAGE
There are multiple steps a product goes through before coming into use. Buy 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 thus completing the cycle.
Goods and Services Tax will be levied on every stage of transaction during a manufacture, thus adding value to it and increasing the value of the end product to the customer. Value will be added after the raw material gets transformed into the warehouse product. The retailer will again add value to the product by assigning several labels to it.
DESTINATION BASED
Earlier the taxes levied on all destinations were unequal. 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.
VAT was charged after the Manufacturer bought the raw materials, VAT + Excise Duty was charged after the product was sold to the Warehouse. VAT was again charged after Retailer bought the product from the Warehouse. The Consumer was again charged VAT on buying.
After GST came into effect, an equal amount of taxes would be charged at all stages of transaction thus simplifying the taxation structure in business.
GST would affect the revenue earned by various states during Inter-State Trade. Asume that the entire manufacture process is happening in State A and the final point of sale is in State B Since Goods & Services Tax is levied at the point of consumption, so the State A will get revenue in the manufacturing and warehousing stages, but lose out on the revenue when the product moves out of State A and reaches the end consumer in State B. This means that State Bwill 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 State B.
WHY IS GOODS AND SERVICES TAX SO IMPORTANT?
Before GST came into effect, the Indian Taxation System was divided into two. 'Direct and Indirect' Tax. Direct Taxes are those taxes whose liability cant be passed on to any other man for ex. Income Tax, i.e only you are entitled to pay it.
In case of Indirect Taxes, the tax payee can shift the liability onto someone else, like if a shopkeeper is entitled to pay certain amount of tax to the Government of India (preferably VAT) can pass on the liability to the customer. 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?
There are three kinds of 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
This will affect Inter State Trade.
SITUATION 1 : SALE WITHIN THE STATE
When a trade is made within a state, the taxes applicable would be CGST+SGST which replaces the older regime of VAT + Central Excise/Service Tax which enables both the State and Central Governments to share the revenue. The GST levied is 18% so the State Government and Central Governments gets a 9% share each.
STITUATION 2 : SALE ACROSS STATES
When a trade is made across couple of states, the tax applicable would be IGST which replaces the older regime of Central Sales Tax+Excise/Service Tax. There would be only one type of tax which would be collected by the Central Government. The whole 18% GST would go to the Central Government.
HOW WILL GST HELP THE COMMON MAN?
The basis of Goods and Services Taxes is a seamless flow of Input Tax Credit. First of all what exactly 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.
GST would replace the Cascading Effect of Taxes which levied a certain percentage of tax on every transaction made on the final amount which sky rockets the final value of the Product.
For Example, if a product is in its cycle of manufacturing and Retail, the taxes levied on each transaction supposedly is 10% of the final amount which makes a Raw Material costing Rs.100 to Rs. 214.5 (Raw Material 100 + Manufacturing Costs 40 + Value Added 30). So a Product costing Rs.170 would be sold at Rs.214.5 to the Consumer.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.
For Example. if a product is its cycle of manufacturing and Retail, the taxes levied on each transaction would be subtracted from the already paid tax to the previous seller. A Product costing 100 would reach Rs.187 (Raw Material 100+40+30). So a Product costing Rs.100 would now be sold at Rs.187 thus decreasing the burden of budget on the consumer.
TAXES REPLACED Central Excise Duty
Commercial Tax
Value Added Tax (VAT)
Food Tax
Central Sales Tax (CST)
Introit
Octroi
Entertainment Tax
Entry Tax
Purchase Tax
Luxury Tax
Advertisement tax
Service Tax
Customs Duty
Surcharges
SUMMARY
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
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.
WEBSITES BROWSED WHILE COLLECTING INFORMATION : ClearTax, Wikipedia, GSTIndia, FOLLOW ME ON TWITTER (@imsayak_dd) AND INSTAGRAM (@sayak.dipta)
Fantastic work! Keep up!
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