Decoding Goods and Services Tax

Goods and Services Taxes  (GST) in indirect taxes. It is levied on value addition achieved at each stage of the supply of goods and services. It is a comprehensive, multi-stage, and destination-based tax.

To decipher GST, we need to first understand what the term “multi-stage” means.

Before you buy any goods from the market it has to go through various stages starting from manufacture or production till the final stage. The first stage is buying of raw materials leading to the second stage which is the production or manufacturing of the goods leading to storing and warehousing of the goods so produced and then they are finally sold to the consumers. Tax is levied on each of these stages.

Now let’s understand what is meant by value addition. Let’s consider if the manufacturer wants to make a car. To start with the manufacturer will first purchase raw materials, virgin steel, petroleum-based products, or other components from the supplier. Post this, he will start making the chassis and the body of the car. So the value of the raw materials or components is increased once it gets converted into the car. Then the car is sent to the warehouse for painting, labeling, and internal assembly which further adds value to the car. GST is levied on each of these value additions.

How is GST  levied?

Let’s understand the application of GST via a hypothetical example.

Assume that the manufacturer of a shirt pays Rs.100 to buy yarn and other raw materials. Assume that the rate of the tax is 10% and there is no profit or loss then he has to pay Rs 10 as tax, hence the cost of the shirt becomes Rs. 110.

The wholesaler buys the shirt from the manufacturer, and adds values of Rs. 40. Now the cost of the shirt has increased by Rs.40 and he also pays a tax @ 10% on this and therefore the final cost of the shirt becomes Rs 165 (110+40=150, tax @of 10% =15).

The retailer buys the shirt from the wholesaler of Rs. 165 and adds a value of Rs.30. Now the cost of the shirt including tax becomes Rs. 214.5. (165+30+ tax @10%= 195 + 19.5 = 214.5).

Under this scenario, the customer pays Rs. 214.5 for a shirt that technically costs only Rs. 170 (100+40+30).

This is called the cascading effect of taxes meaning tax is paid to overtax.

With the rollout of GST cascading effect of taxes will be mitigated. As per the new taxation, regime credit will be available for the tax paid in the acquiring input. Hence, the individual who has paid taxes already can claim credit for the taxes which he has already paid.

In this shirt example, when the wholesaler buys the shirt from the manufacturer he has already paid a tax of Rs.10 because that was included in the cost. Further, when he adds the value of Rs. 40 his cost price becomes Rs. 140 and then he pays a tax @ 10% i.e. Rs. 14 but since a tax of Rs. 10 has already been paid he can get the credit of Rs. 10 and his net tax liability will be Rs. 4.

Now the retailer will pay Rs.154 to buy the shirt (140+14). He adds the value of worth Rs. 30 so now the cost of the shirt becomes Rs. 170( 100+40+30). The retailer will pay tax over this @ 10%, i.e, Rs 17 but he will pay only Rs. 3 to the government as he will get a credit of Rs. 14.

Under the GST framework, the cost of the shirt to the consumer will finally be Rs. 187, i.e. Rs 170 as the total cost and Rs. 17 as the total tax. From Rs. 214.5 the cost of the shirt has come down to Rs. 187.

Hence, GST will reduce the burden of taxes from the consumer as he will not have to pay tax on tax. He will only be liable to pay the net taxes after availing of the tax credit for the taxes which have already been paid in the manufacturing process.

In a nutshell, it can be said that the GST framework will bring two-fold benefits, it will reduce the cascading effect of the taxes and by allowing input tax credit, it will reduce the burden of taxes and hopefully the price of goods and services.

Why is GST considered so important?

GST is considered the most important tax reform since 1947 because of the following reasons -

1. Simplified Tax Structure- In the current framework multiple taxes are exposed but after GST all these taxes will be eliminated and only GST will be levied which is way more simpler and easier to understand. A simple taxation system will lead to ease in compliance and leave the manufacturers with more time.  

2. A catalyst for exports- When the cost of production reduces in the domestic market, Indian goods and services will become more competitive in other in foreign markets and hence help in increasing the exports. 

3. Competitive Prices - GST will subsume all other types of indirect taxes. A fall in prices will lead to an increase in consumption which in turn will be beneficial to the companies.

4. Increased revenues to government- A simpler tax structure will lead to ease of compliance and thus reducing the number of defaulters and in turn, there will be an increase in the revenue from the government.

How will GST help India and the common man?
The common man has no idea about the amount of taxes he pays on goods currently. When we get a bill after buying a product, it gives the VAT we have paid which is actually an understatement of the total taxes paid. Therefore, the consumers today pay around 20% tax for every product they buy.

After GST kicks in it will help the consumer in two ways. All the taxes will be collected at the point of consumption and there will be no taxes on taxes.

Few products and services will become expensive like currently, mobile bills are attached with a Service Tax of 15% but after the implementation phone bills will attract a tax at 18%. Cosmetics such as shampoos, perfumes, and makeup items will be taxed at the rate of 28% as opposed to the current rate of 22%.

All necessities and a lot of products will go cheaper like the tax on smartphones will come down from 13.5% to 12%. Or next time you go for a movie you can spend more on popcorn as the entertainment tax levied by the state has been subsumed under GST and the effective rate has been kept at 18%. Transport services will also get cheaper as the effective GST rate for cab rides will be 5% as against the present rate of 6%. Your monthly grocery bill will give you happiness as food grains are exempted from taxes under the GST regime.

GST will be replacing about 20 central and state taxes such as factory gate duties, service, and local taxes. 

Goods and Services Taxes (GST) in indirect taxes. It is levied on value addition achieved at each stage of the supply of goods and services. It is a comprehensive, multi-stage, and destination-based tax.

To decipher GST, we need to first understand what the term “multi-stage” means.

Before you buy any goods from the market it has to go through various stages starting from manufacture or production till the final stage. The first stage is buying of raw materials leading to the second stage which is the production or manufacturing of the goods leading to storing and warehousing of the goods so produced and then they are finally sold to the consumers. Tax is levied on each of these stages.

Now let’s understand what is meant by value addition. Let’s consider if the manufacturer wants to make a car. To start with the manufacturer will first purchase raw materials, virgin steel, petroleum-based products, or other components from the supplier. Post this, he will start making the chassis and the body of the car. So the value of the raw materials or components is increased once it gets converted into the car. Then the car is sent to the warehouse for painting, labeling, and internal assembly which further adds value to the car. GST is levied on each of these value additions.

How is GST levied?

Let’s understand the application of GST via a hypothetical example.

Assume that the manufacturer of a shirt pays Rs.100 to buy yarn and other raw materials. Assume that the rate of the tax is 10% and there is no profit or loss then he has to pay Rs 10 as tax, hence the cost of the shirt becomes Rs. 110.

The wholesaler buys the shirt from the manufacturer, and adds values of Rs. 40. Now the cost of the shirt has increased by Rs.40 and he also pays a tax @ 10% on this and therefore the final cost of the shirt becomes Rs 165 (110+40=150, tax @of 10% =15).

The retailer buys the shirt from the wholesaler of Rs. 165 and adds a value of Rs.30. Now the cost of the shirt including tax becomes Rs. 214.5. (165+30+ tax @10%= 195 + 19.5 = 214.5).

Under this scenario, the customer pays Rs. 214.5 for a shirt that technically costs only Rs. 170 (100+40+30).

This is called the cascading effect of taxes meaning tax is paid to overtax.

With the rollout of GST cascading effect of taxes will be mitigated. As per the new taxation, regime credit will be available for the tax paid in the acquiring input. Hence, the individual who has paid taxes already can claim credit for the taxes which he has already paid.

In this shirt example, when the wholesaler buys the shirt from the manufacturer he has already paid a tax of Rs.10 because that was included in the cost. Further, when he adds the value of Rs. 40 his cost price becomes Rs. 140 and then he pays a tax @ 10% i.e. Rs. 14 but since a tax of Rs. 10 has already been paid he can get the credit of Rs. 10 and his net tax liability will be Rs. 4.

Now the retailer will pay Rs.154 to buy the shirt (140+14). He adds the value of worth Rs. 30 so now the cost of the shirt becomes Rs. 170( 100+40+30). The retailer will pay tax over this @ 10%, i.e, Rs 17 but he will pay only Rs. 3 to the government as he will get a credit of Rs. 14.

Under the GST framework, the cost of the shirt to the consumer will finally be Rs. 187, i.e. Rs 170 as the total cost and Rs. 17 as the total tax. From Rs. 214.5 the cost of the shirt has come down to Rs. 187.

Hence, GST will reduce the burden of taxes from the consumer as he will not have to pay tax on tax. He will only be liable to pay the net taxes after availing of the tax credit for the taxes which have already been paid in the manufacturing process.

In a nutshell, it can be said that the GST framework will bring two-fold benefits, it will reduce the cascading effect of the taxes and by allowing input tax credit, it will reduce the burden of taxes and hopefully the price of goods and services.

Why is GST considered so important?

GST is considered the most important tax reform since 1947 because of the following reasons -

1. Simplified Tax Structure- In the current framework multiple taxes are exposed but after GST all these taxes will be eliminated and only GST will be levied which is way more simpler and easier to understand. A simple taxation system will lead to ease in compliance and leave the manufacturers with more time.

2. A catalyst for exports- When the cost of production reduces in the domestic market, Indian goods and services will become more competitive in other in foreign markets and hence help in increasing the exports.

3. Competitive Prices - GST will subsume all other types of indirect taxes. A fall in prices will lead to an increase in consumption which in turn will be beneficial to the companies.

4. Increased revenues to government- A simpler tax structure will lead to ease of compliance and thus reducing the number of defaulters and in turn, there will be an increase in the revenue from the government.

How will GST help India and the common man?
The common man has no idea about the amount of taxes he pays on goods currently. When we get a bill after buying a product, it gives the VAT we have paid which is actually an understatement of the total taxes paid. Therefore, the consumers today pay around 20% tax for every product they buy.

After GST kicks in it will help the consumer in two ways. All the taxes will be collected at the point of consumption and there will be no taxes on taxes.

Few products and services will become expensive like currently, mobile bills are attached with a Service Tax of 15% but after the implementation phone bills will attract a tax at 18%. Cosmetics such as shampoos, perfumes, and makeup items will be taxed at the rate of 28% as opposed to the current rate of 22%.

All necessities and a lot of products will go cheaper like the tax on smartphones will come down from 13.5% to 12%. Or next time you go for a movie you can spend more on popcorn as the entertainment tax levied by the state has been subsumed under GST and the effective rate has been kept at 18%. Transport services will also get cheaper as the effective GST rate for cab rides will be 5% as against the present rate of 6%. Your monthly grocery bill will give you happiness as food grains are exempted from taxes under the GST regime.

GST will be replacing about 20 central and state taxes such as factory gate duties, service, and local taxes.