Goods and Services Tax - GST
Goods and Services Tax - GST By Paayi

GST is the ‘Goods and Service Tax’ is a comprehensive multistage, destination-based tax that will be imposed on every value addition.

 

All About GST, Goods & Services Tax Law Explained

To understand this better you should understand the main concept behind the definition of GST. Let us understand the term ‘multi-stage,’ it can be defined as the there are multiple numbers of steps when an item goes from production or manufacturer to the final stage of stage of the sale.

In these multiple steps the first step involves when the process of buying raw material has happened, then there are several steps are in between like production or manufacturing to warehousing of the material and then the sale of the products or items to the retailers.

And in the final step, the product is being sold to the consumers or customers, and this is the final step which completes the process.    

You can see all these steps as given below:

Buying Of Raw Material

Manufacturing

Sale To The Wholesaler

Sale To Retailer

Final Sale To The Consumer

The goods and service tax will be imposed on each step or level of the above-described process, a which results in multi=stage taxation on the product. And how the tax is imposed upon each step we will discuss it in detail below, let’s talk about and understand what is ‘Value Addition.’

Let us assume that the manufacturer wants to make a shirt and to make the shirt he need to buy the yarn, and this will be the first step of making the shirt then the next step would be to the manufacturing of the shirt.

So, the value of yarn got increased when it is woven into the shirt. Then the shirt is being sold out to the wholesaler or into the warehouse and in this step tags and labels are attached to each shirt, and again the value of shirt will be increased. Then in next step, the shirt is being sold to the retailer where the packaging is done and its advertising and marketing, which again add the value to the shirt.

And on these steps, the GST will be imposed on each step and then monetary worth added to each step to achieve the final sale to the consumers.

In the definition there is one more term – ‘Destination-Based,’ and again Goods & service TAX will be imposed on all the transactions happening during the entire manufacturing process. So before the GST imposed on earlier, it was the process that Central Excise Tax would be imposed on the manufacture and then again the state will add VAT tax when an item is sold to the step in the process, and again on every step, the VAT will be imposed on each step.

So, before imposing the GST earlier pattern of the tax was like as given below:

Buying Of Raw Material

↓ – VAT

Manufacturing

↓ – VAT + Excise Duty

Sale To The Wholesaler

↓ – VAT

Sale To Retailer

↓ – VAT

Final Sale To The Consumer

As you seen above the tax is imposed on every level of sale. So, assume what will happen if entire process of manufacturing & any of the good is being done in Punjab and then the final sale is happening in the state of Maharashtra.

As we all know by now, Goods & Services Tax is imposed on the point of consumption, so Punjab will get the revenue in the manufacturing and warehousing stages but also lose out the revenue when the product is moved out of the state and reaches the state of Maharashtra. So, it means that Maharashtra will earn the revenue at the stage of final sale as we have discussed above that it is the destination-based taxation and Maharashtra will collect the revenue for the final stage as the sale is happening in Maharashtra.

 

Importance Of Goods & Service Taxes

In the above sections we have discussed what exactly GST is, now we will understand why it will play a significant role in transforming the current tax system and there the whole economy.

In the present scenario, the current tax system is based and divided into two – Direct & Indirect Tax. A direct tax is the kind of tax imposed when the liability cannon is passed on to someone else, so it basically for the individual, organization or company for which the tax is imposed upon will be only responsible for paying the taxes.

Income tax is the best example of the direct tax as the individual, or the organization which earns the income is solely responsible for paying the taxes.

The liability of the taxes can be passed on to someone else but in the case of Indirect Taxes. For example in the case shopkeeper need to pay the VAT on the sale, but he can pass the liability to the customer and which is almost the trend in major transactions in the Indian subcontinent.

As, a result the consumer or customer use to pay the price of the item, also, the VAT imposed on that particular item so that that shopkeeper can deposit the VAT amount to the government. Which exactly means that the customer has not only paid the price of the product but also the VAT was imposed upon him by the shopkeeper which results in the higher rates of the products when he buys the particular item.

This whole thing happens just because the shopkeeper pays the VAT to the wholesaler. When he bought an item from the wholesaler and to recover the VAT amount as well as to make up for the VAT he should pay to the government; he passes the liability to the customer and which results from the higher rate for the customers who have to pay the additional amount for that particular product.

Presently, there is no other way for the shopkeeper in which he can recover the amount he paid from his pocket during transactions and there the only choice with which he has left with is to pass the liability to the customers.

But when Goods & Services Tax is implemented from the 1st of July 2017, it will address this issue. It has offered a system of Input Tax Credit which will allow the seller to claim the amount as a tax which he has already paid, so the final liability at the end of the customer will be decreased and which will result in lowering the rates of products.

 

How Will GST Work

The nationwide GST will work successfully when it functions with strict guidelines and provisions. The GST Council has devised a foolproof and effective method of implementing this new taxation system and divided into three main categories. We will discuss all these three categories as given below when Goods & Services TAX will be implemented:

CGST: In this method, the revenue will be collected by the central government.

SGST: In this method, the revenue on the good and products will be collected by the state governments for all the intra-state sale transactions.

IGST: In this method, the revenue will be collected by the central government inter-state sales. And in most of the cases, the new tax regime will be as under:

TRANSACTION NEW TAX SYSTEM OLD TAX SYSTEM DESCRIPTION
For all the sale within the state CGST + SGST VAT  + Central Excise/Service tax Revenue will now be shared with Center & the State.
For all the sale to another state IGST Central  Sales Tax +

Excise/ Service Tax

It will be only one type of tax now, that will be a central tax for all inter-state sales.

 

Let’s, understand this by the following example: A deal in the state of Rajasthan sold goods to the customer in Rajasthan only, (Inter-State Sale)which worth about 20,000 INR. The Goods & Service Tax rate is 18% which includes 9% percent of CGST and 9% of SGST. In the cases like this, the dealer will 3,600 INR of which 1,800 INR will go into the account of central government and remaining 1,800 INR will go the state of Rajasthan.  

Now let’s assume that the same dealer is selling the good to the state of Gujarat (Intra-State Sale) of the same amount of 2000 INR. The GST rate will be 18% which again includes CGST at the rate of 9% and SGST at the rate of 9%. In these types of cases, the dealer has to charge 3,600 INR as an IGST. This amount in the form of IGST will go the central government, and there will not be any need to pay CGST and SGST.

 

The Benefit of GST To The Indian Economy & Common Man

The one of the main basic component involved for the smooth flow of Goods & Service Tax is Input Tax Credit (ITC) along with the entire value-added chain. At every stage of the manufacturing process business involved will have the option to claim the amount in the form of taxes which they have already paid in the previous transaction.

It is recommended for the businesses to understand this taxation process and also common man should also have knowledge about it so that they won’t have to pay the higher rates to the retailers. You can understand this in detail through the explanation given below:

To understand the new taxation system in a better way you must first need to understand what exactly Input Tax Credit (ITC) is. It is the credit which is received by the individual for the tax paid on the inputs used in the process of manufacturing the product.

So, now whatever will be the percentages of the tax that the individual need to submit to the government, he can now subtract the amount he has paid in the form of taxes incurred by him at the time of purchases and submit the balance amount to the government.

 

Numerical Example For The Above Explanation

For example, if any shirt manufacturer pays about 200 INR to buy the raw materials to manufacture the shirt. And the tax rate is set upon is 10%, and if there is no profit or loss involved, then he has to pay about 20 INR as a tax. And in this way, the final amount of the shirt will be now (200 + 20) = 220 INR.

In the next step of the business transaction, the wholesaler buys the shirt from the manufacturer at the rate of 220 INR and added labels to the shirts and adding labels usually means he is adding value to the shirts. There just assume that the cost of shirts increases by 60 INR and in addition to that he has also to pay the tax at the rate of 10%,  and the final cost of the shirt will now become (220 + 60) = 280 INR, plus 10% of taxes the price will now become (280+28) = 308 INR.

Now let’s move to the next step of the business transaction, and in this case, the retailer buys the shirts from the wholesaler at the rate of 308 INR because the tax liability is passed to him. The retailer now at this stage need to package and market the shirts and doing so he is again adding the value to the shirt.

This time let’s assume the value added to the shirt by the retailer is 40 INR. And when the retailer sells the same shirt to the customers, he will add this additional value of 40 INR plus the tax of 10% which he needs to pay to the government. So the final cost of the shirt for the end customer will become now (308 + 40)= 348 INR, and add 10% to the value, it will become (348 + 10%)= 382.8 INR or 382 Rs.

So at the final stage of the sale, the end customer has paid the value of Rs. 382 for the same shirt which was valued earlier only  280 INR ( 200 + 20 + 60). And in addition to that, the tax liability was passed down at every stage of the transaction, and final liability comes to rest with the end customer. This economic or taxation terms is known as Cascading Effect Of Taxes, where the tax is being paid on the tax, and the value of the particular goods or products keeps on increasing everytime this happens.

But in the case of Goods & Services Tax, there is a way devised to claim the credit for the amount in the form of taxes paid in acquiring input. What exactly happening, in this case, is that the individual who has already paid the tax can claim credit for this tax when he submits his taxes.

In the example which we have seen above when the wholesaler buys from the manufacturer, he has to pay the 10% on the price of the shirt as liability was passed to him. Then he adds the value of 60 INR to the 200 INR and brings up the cost up to 260 INR. And now he has to pay 10% of this price in the form of tax to the government, but as already he has paid one tax to the manufacturer.

So at this time what he does will be instead of paying (10% of 260)which will be 26 INR he will subtract that amount which he has paid already. So, he will deduct the amount which is 20 INR which he has already paid to the manufacturer and will pay only the 6 INR to the government. So, in this case, the amount of Rs. 20 becomes his input credit.

In the same way in every stage, the amount of a tax which is paid to the government will be reduced which will result in lowering the rates of goods and products for the end consumers and customers. So, at the time everytime an individual was able to claim ‘Input Tax Claim,’ the sale tax for him get reduced, and at the same time, the cost price person buying the product is also reduced because of lower tax liability.

As in the above example, the final price of the shirt will get reduced and which will benefit the customer in reducing his burden in the form of taxes and also reduces the price of the shirt.

It is clear now that when the Goods & Services Tax is implemented, it will have two prolonged effect – first, it will reduce the cascading effect of the taxes and secondly by allowing the input tax credit it will help to reduce the burden of taxes and result in reducing the end price for the consumers and customers.

 

Brief History Of GST Law In India  

As we are now aware of the GST and when it will be implemented on the Indian subcontinent, but this concept is not the new phenomenon, it was first implemented in France in the year 1954, and after these many other countries have also followed this method of taxation in their economy to become a part of a global whole. Now India is going to adopt the new tax regime let us look back and understand how and when we have reached the point of implementing the GST.

When France adopted the GST in their country in 1954 and became the first country to do so after that about 159 other countries also adopted the GST law in some form or the other. Many other countries have implemented VAT as the substitute for the GST, but this VAT was very different than Indian VAT system as these countries which implemented VAT had single VAT tax which fulfills the same purpose as GST does.

In India, the first time the GST was flagged when Prime Minister of that time Atal Bihari Vajpayee brought introduced this concept of GST on the table.

 

GST History – Year By Year

Year – 2000: PM Atal Bihari Vajpayee set up the committee to draft the bill for the GST and also to set up the technical and logistical backup for the same.

Year – 2004: The task force and the committee completed the work on the GST and also advised for its implementation so that the current tax structure can get improved.

Year – 2006: Finance Minister at that time introduced GST bill and wished to get it implemented from 1st of April 2010.

Year – 2007: Empowered Committee of State Finance Ministers formed a joint working group for the implementation of the GST. Also, it was suggested that CST is phased out and rates to be reduced from 4% to 3%.

Year – 2008: EC ends up finalizing the dual GST structure to have separate levy legislation.

Year – 2010: Project to computerize commercial taxes launched but it results in the postpone of the GST implementation.

Year – 2011: For the implementation of the GST bill the Constitution Amendment Bill was introduced.

Year – 2012: Parliamentary Standing Committee begins discussion on GST, but it was halted as per the clause 279B.

Year – 2013: Standing committee tables it reports on GST.

Year – 2014: In this year the GST bill was reintroduced in the parliament by the finance minister.

Year – 2015: GST bill got passed in the Lok Sabha, and petroleum products were isolated from the bill. But GST bill was not able to get a pass from Rajya Sabha.

Year – 2016: Amended Model GST passed in both the houses and President gives assent, GSTN gets live.

Year – 2017: For supplementary GST bills passed in Lok Sabha and approved by the cabinet.

Year – 2017: Rajya Sabha passes four supplementary GST Bills, and final GST bill to be implemented on July 1-2017.   

 

Advantages Of GST On Indian Economy, Businessperson & Consumers

The idea behind implementing one consolidated indirect tax is to subsume existing current multiple indirect taxes so that it can benefit the economy of the country in various ways.

  • It will help the businesses in the country to gain the level of playing field, which is not only beneficial for the businesses but the consumers too and government can also have better revenue in the form of GST.
  • It will help the Indian economy to be par with the global nations, which are already having more structured economy than India.
  • The reasonable rates will benefit the end customers, and they will not need to pay cascading taxes anymore.
  • After the implementation of the GST, there will be a single tax on the goods and services.

 

In addition to the above advantages of GST, there are various other benefits as given below:

  • The Goods & Services Tax Law aims to streamline the indirect tax system. As we have understood above GST will help to subsume various indirect taxes levied on goods and services, which includes State & Central level taxes. It should be noted here that the GST mechanism is an extended version of the VAT system, the idea of having one tax all over the nation will surely help to create seamless market nationwide.
  • After implementation of the GST, it is expected that the collection of taxes in the form of ‘Goods & Service Tax’ will be improved and which results in the further development of Indian economy by removing the indirect tax barriers between states and help in integrating the country with one uniform taxation system.

 

FAQ’s Related With GST

What is GST? & How does it works?

GST is one indirect for all the nation, which will help India to be one unified common market. GST will be the only one single tax which will be applied to the goods and the services, which cover the every business transaction from manufacturing lever to sale level.

Credits of input taxes paid at each stage will be available in all the subsequent stages of value addition, which makes a GST a tax only on value addition at each stage of business transaction from the manufacturing stage to the last stage of sale to the consumers and customers. The consumer at the last sale stage will then bear only the GST charged by the last dealer in the supply chain, in addition to set-off benefits at all the previous stages.

 

What are the major benefits of the GST?

The GST will be benefited mainly to three sectors – Business & Industry, State & Central Governments and finally the Consumers.

Benefits For Business & Industry:

  • Easy Compliance.
  • Uniformity of tax rates and structure.
  • Removal of cascading nature of taxation.
  • Improvement in the competition among the business & industry.
  • The gain from manufacturers & exporters.

Benefits For Central & State Governments:

  • Because there is uniformity in taxation and its structure it will be easy to monitor and administration.
  • Better and efficient control over the leakage at any lever stage from the manufacturing level to sale level.
  • Higher revenue can be collected with GST.

Benefits For The Consumers & Customers:

  • Single & transparent tax offered which will be proportionate to the value of goods and the services.
  • Relief in overall tax burden for the consumers and also the reasonable rates for the goods and the services.  

Which taxes at the center and state level are being subsumed into GST?

At the Center level the following taxes are being subsumed:

  • Central Excise Duty
  • Additional Excise Duty
  • Service Tax
  • Additional Customers Duty which is commonly known as Countervailing Duty
  • Special Additional Duties of Customs

At the State level the following taxes are being subsumed:

  • Subsuming of State Value Added Tax/Sales Tax.
  • Entertainment Tax (other than tax imposed by the local bodies), Central Sales Tax ( imposed by the Center and collected by the States).
  • Octroi and Entry tax
  • Purchase Tax
  • Luxury Tax
  • Taxes on Lottery, Betting & Gambling.

 

After the implementation of the GST how it will be administrated in India?

As India has the federal structure, there will be two major components of the GST – Center GST (CGST) and the State GST (SGST). Both the State and the Center will simultaneously impose GST across the value chain. The tax will be levied on every supply of goods and services.

Centre will focus to collect the Center Goods & Service Tax (CGST), and the states will focus to collect State Goods & Service Tax (SGST) on all the transactions within a State. Input Tax Credit of CGST will be available for discharging the CGST liability on the output of each stage. In the same way, the credit of SGST paid on inputs would be allowed for paying SGST on output. In this method, no cross-utilization of the credit would be permitted.   

 

What are the major features of the proposed registration processes under GST?

The major steps to register under proposed registration procedures under GST are as follows:

  1. Existing Dealers: For all those who are already registered under VAT/Central Excise/Service Tax players will not need to apply afresh for registration under GST.
  2. New Dealers: For all the new users who want to get registered under GST will have to fill up just one application form online. The registration process will be PAN-based and will serve the purpose of Centre and State.
  • Unified application to both the tax authorities.
  • Each dealer will be given unique ID GSTIN.
  • Deemed approval within three days of filling the application form.

Post registration verifications can be done in risk-based cases only.

Financial Accounting Standards Board

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