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Tuesday, 23 May 2017

What is GST? Goods & Services Tax Law Explained with Facts & Examples

The Goods and Services Tax or GST is scheduled to be launched on the 1st of July, and it is set to revolutionize the way we do our taxes. But what is GST and how will it reform the current tax structure? And most importantly, why does the country need such a huge overhaul in its taxation policies? We answer these pressing questions in this in-depth article.

What is GST?
Goods & Services Tax is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition.
To understand this, we need to understand the concepts under this definition. Let us start with the term ‘Multi-stage’. Now, there are multiple steps an item goes through from manufacture or production to the final sale. Buying 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. And in the final stage, the retailer sells you – the end consumer – the product, completing its life cycle.
So, if we had to look at a pictorial description of the various stages, it would look like:

Goods and Services Tax will be levied on each of these stages, which makes it a multi-stage tax. How? We will see that shortly, but before that, let us talk about ‘Value Addition’.
Let us assume that a manufacturer wants to make a shirt. For this he must buy yarn. This gets turned into a shirt after manufacture. So, the value of the yarn is increased when it gets woven into a shirt. Then, the manufacturer sells it to the warehousing agent who attaches labels and tags to each shirt. That is another addition of value after which the warehouse sells it to the retailer who packages each shirt separately and invests in marketing of the shirt thus increasing its value.


 Now, Goods and Services Tax will be levied at every point of sale. Assume that the entire manufacture process is happening in Rajasthan and the final point of sale is in Karnataka. Since Goods & Services Tax is levied at the point of consumption, so the state of Rajasthan will get revenue in the manufacturing and warehousing stages, but lose out on the revenue when the product moves out Rajasthan and reaches the end consumer in Karnataka. This means that Karnataka will 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 Karnataka.

Why is Goods and Services Tax so Important?

So, now that we have defined GST, let us talk about why it will play such a significant role in transforming the current tax structure, and therefore, the economy.
Currently, the Indian tax structure is divided into two – Direct and Indirect Taxes. Direct Taxes are levies where the liability cannot be passed on to someone else. An example of this is Income Tax where you earn the income and you alone are liable to pay the tax on it.
In the case of Indirect Taxes, the liability of the tax can be passed on to someone else. This means that when the shopkeeper must pay VAT on his sale, he can pass on the liability to the customer. So, in effect, the customer pays the price of the item as well as the VAT on it so the shopkeeper can deposit the VAT to the government. 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?

A nationwide tax reform cannot function without strict guidelines and provisions. The GST Council has devised a fool proof method of implementing this new tax regime by dividing it into three catagories:

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

 

What is SGST, CGST & IGST?

Goods & Service Tax or GST will be levied on goods and services. It will replace all the various taxes and bring them under one umbrella to make compliance easier. It  will replace the following taxes:
(i) Taxes currently levied and collected by the Centre:
  1.  Central Excise duty
  2.  Additional Duties of Customs (commonly known as CVD)
  3.  Special Additional Duty of Customs (SAD)
  4.  Service Tax
AND
(ii) Taxes currently levied and collected by the State:
  1. State VAT
  2. Central Sales Tax
  3. Entertainment and Amusement Tax (except when levied by the local bodies)
  4. Taxes on lotteries, betting and gambling
Why are we getting 3 taxes -SGST, CGST, IGST?
India is a federal country where both the Centre and the States have been assigned the powers to levy and collect taxes. Both the levels of Government have distinct responsibilities to perform, as per the Constitution, for which they need to raise resources. A dual GST will, therefore, be keeping with the Constitutional requirement of fiscal federalism.
The Centre and States will be simultaneously levying GST.
3 taxes will be implemented to help tax-payers to take credit against each other thus ensuring “One nation one tax”.
 

What is SGST/CGST/IGST?
The GST to be levied by the Centre on intra-State supply of goods and/or services is Central GST (CGST) and that by the States is State GST (SGST).
On inter-state supply of goods and services, Integrated GST (IGST) will be collected by Centre. IGST will also apply on imports.
GST is a consumption based tax i.e. the tax should be received by the state in which the goods or services are consumed and not by the state in which such goods are manufactured. IGST is designed to ensure seamless flow of input tax credit from one state to another. One state has to deal only with the Centre government to settle the tax amounts and not with every other state, thus making the process easier.
For e.g.: – A dealer in Maharashtra sold goods to the consumer in Maharashtra worth Rs. 10,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%, in such case the dealer collects Rs. 1800 and Rs. 900 will go to the central government and Rs. 900 will go to the Maharashtra government.
Now, if the dealer in Maharashtra had sold goods to a dealer in Gujarat worth Rs. 1,00,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%. In such case the dealer has to charge Rs. 18,000 as IGST. This IGST will go to the Centre.
How will input tax credits be adjusted between states and centre?
Suppose goods worth Rs. 10,000 are sold by manufacturer A in Maharashtra to Dealer B in Maharashtra. B resells them to trader C in Rajasthan for Rs. 17,500. Trader C finally sells to End User D in Rajasthan for Rs. 30,000.
Suppose CGST= 9%, SGST=9%. Therefore, IGST=9+9=18%
Since A is selling this to B in Maharashtra itself, it is an intra-state sale and both CGST @9% and SGST@9% will apply.
B (Maharashtra) is selling to C (Rajasthan). Since it is an interstate sale, IGST@18% will apply.
C (Rajasthan) is selling to D also in Rajasthan. Once again it is an intra-state sale and both CGST @9% and SGST@9% will apply.

Summary:

The idea behind having one consolidated indirect tax to subsume multiple currently existing indirect taxes is to benefit the Indian economy in a number of ways:
  • 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
In addition to the above,
  • 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.

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