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GST has replaced many Indirect Taxes in India. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017. The Act came into effect on 1st July 2017.

In this article, we take a closer look at what is GST and the reason why it is making business and taxes simpler and easier.

Contents

  1. What is GST?
  2. History of GST in India
  3. Advantages Of GST
  4. What are the components of GST?
  5. What changes does GST bring in?

1. What is GST?

Goods & Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.

In simple words, Goods and Service Tax is an indirect tax levied on the supply of goods and services. GST Law has replaced many indirect tax laws that previously existed in India.

So, before Goods and Service Tax, the pattern of tax levy was as follows:

ClearTax GST

Under the GST regime, the tax will be levied at every point of sale.

Now let us try to understand the definition of Goods and Service Tax – “GST is a comprehensive, multi-stagedestination-based tax that will be levied on every value addition.”

Multi-stage

There are multiple change-of-hands an item goes through along its supply chain: from manufacture to final sale to the consumer.

Let us consider the following case:

  • Purchase of raw materials
  • Production or manufacture
  • Warehousing of finished goods
  • Sale to wholesaler
  • Sale of the product to the retailer
  • Sale to the end consumerGST basics

Goods and Services Tax will be levied on each of these stages, which makes it a multi-stage tax.

Value Addition

GST Value Addition

The manufacturer who makes biscuits buys flour, sugar and other material. The value of the inputs increases when the sugar and flour are mixed and baked into biscuits.

The manufacturer then sells the biscuits to the warehousing agent who packs large quantities of biscuits and labels it. That is another addition of value after which the warehouse sells it to the retailer.

The retailer packages the biscuits in smaller quantities and invests in the marketing of the biscuits thus increasing its value.

GST will be levied on these value additions i.e. the monetary worth added at each stage to achieve the final sale to the end customer.

Destination-Based

Consider goods manufactured in Maharashtra and are sold to the final consumer in Karnataka. Since Goods & Service Tax (GST) is levied at the point of consumption, in this case, Karnataka , the entire tax revenue will go to Karnataka and not Maharashtra.

2. History of GST in India


GST History

3. Advantages Of GST

GST Advantages

4. What are the components of GST?

There are 3 taxes applicable under GST: CGST, SGST & IGST.

  • CGST: Collected by the Central Government on an intra-state sale (Eg: Within Maharashtra)
  • SGST: Collected by the State Government on an intra-state sale (Eg: Within Mahaashtra)
  • IGST: Collected by the Central Government for inter-state sale (Eg: Maharashtra to Tamil Nadu)

In most cases, the tax structure under the new regime will be as follows:

Transaction New Regime Old Regime
Sale within the State CGST + SGST VAT + Central Excise/Service tax Revenue will be shared equally between the Centre and the State
Sale to another State IGST Central Sales Tax + Excise/Service Tax There will only be one type of tax (central) in case of inter-state sales. The Center will then share the IGST revenue based on the destination of goods.

Illustration: 

  • Let us assume that a dealer in Gujrat had sold the goods to a dealer in Punjab worth Rs. 50,000. The GST rate is 18% comprising of only IGST.

In such case, the dealer has to charge Rs. 9,000 as IGST. This IGST revenue will go to the Central Government.

  • The same dealer sells goods to a consumer in Gujrat worth Rs. 50,000. The GST rate on the good is 12%. This rate comprises of  CGST at 6% and SGST at 6%.

The dealer has to collect Rs. 6,000 as Goods and Service Tax. Rs. 3,000 will go to the Central Government and Rs. 3,000 will go to the Gujrat government as the sale is within the state.

 

5. What changes has GST brought in?

Cascading Effect of Taxes

In the pre-GST regime, tax on tax was calculated and paid by every purchaser including the final consumer. This tax on tax is called Cascading Effect of Taxes.

GST avoids this cascading effect as the tax is calculated only on the value-add at each stage of transfer of ownership. Understand what the cascading effect is and how GST helps by watching this simple video:

  

GST 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.

Illustration:

Based on the above example of biscuit manufacturer along with some numbers, let’s see what happens to the cost of goods and the taxes in a pre GST and GST scenarios.

 

Tax calculations in Pre GST regime:

Action Cost 10% Tax Total
Manufacturer 1,000 100 1,100
Warehouse adds label and repacks @ 300 1,400 140 1,540
Retailer advertises @ 500 2,040 204 2,244
Total 1,800 444 2,244

Along the way, the tax liability was passed on at every stage of the 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.

Tax calculations in GST regime: 

Action Cost 10% Tax Actual Liability Total
Manufacturer 1,000 100 100 1,100
Warehouse adds label and repacks @ 300 1,300 130 30 1,430
Retailer advertises @ 500 1,800 180 50 1,980
Total 1,800 180 1,980

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 the end, every time an individual is able to claim input tax credit, the sale price is reduced and the cost price for the buyer is reduced because of a lower tax liability. The final value of the biscuits is therefore reduced from Rs. 2,244 to Rs. 1,980, thus reducing the tax burden on the final customer.

For Further Information & Reading: