Goods and Services Tax – All you need to know about it

Goods and Services Tax – All you need to know about it

Goods and Services Tax – All you need to know about it

by June 15, 2017

Goods and Services Tax

The Goods and Services Tax (GST) is set to be launched on 1st July,2017 and it will revolutionize taxes in our country for ever. It is essential to understand what GST is and how it will impact each one of us.

What is GST?

Traditionally, taxes were levied at both the buying stage and the selling stage. The burden of taxes is always passed on to the customer (buyer) in the sale so that the seller’s margin doesn’t shrink. The result is that, the longer the supply chain, the longer is the cascading effect of taxes and hence the end-customer must pay more than the actual cost of the product because of the additional taxes incurred at each stage of the manufacturing process.

GST aims to reduce the cascading effect of taxes and create a uniform tax structure across the nation for all goods and services. GST is an end-to-end taxation structure and tax is levied at every stage wherein there is a value addition and a corresponding increase in cost.

For instance: Let us look at the supply chain in case of clothes:

  1. A manufacturer will buy the raw material such as yarn, buttons etc. from the raw material dealers.

  2. The manufacturer will then produce the shirts and send it to a warehouse/ wholesaler.

  3. The wholesaler will add the necessary branding and sell the shirts to the retailer.

  4. The retailer will then package it, add the essential elements of the brand and then sell it to the end user/ consumer.

In the entire process, the product is bought/ sold at least three times from the raw material to the end-product stage. During each stage, some value addition happens to the product so its cost goes up and accordingly the taxes at each stage go up.

With GST however, the taxes are levied at each point of consumption and accordingly, the central or the state taxes come into being. As of now, there is a central duty on manufacturing and a Value Added Tax (VAT) is added at each stage by the state.

Now, however, with taxes being levied at the point of sale, let’s look at the effect on taxes. If a product, say tea, is manufactured and stored in “Assam” and then transported and sold in Maharashtra, the state of Assam will get the taxes levied on manufacturing and storage of the product and the state of Maharashtra will enjoy the taxes levied on final sale of the product.

What will change?

With GST coming into the picture, the following taxes will be levied:

  1. CGST: Collected by central government

  2. SGST: Collected by state government for intra-state sales

  3. IGST: collected by central government for inter-state sales

How will it help the end-user?

Let’s assume a manufacturer of clothes buys the raw material at Rs. 200 and pays a 10% service tax on it. The total cost for him becomes Rs. 220. Now, if he creates a suite from it and adds another Rs. 80 to it, the total cost comes to Rs. 300. However, when he sells it to a wholesale dealer, he will sell it at Rs. 330 (@10% tax). Imagine the retailer purchases it from the wholesaler, adds his brand tag, packages it and puts it up at a showroom for the end-customer. If he decides that Rs. 70 is the value addition and sells it at Rs. 400, then he will have to bear a 10% tax. He passes this on to the customer who must pay Rs. 440 for the suite. (Please note that the prices mentioned here are hypothetical and used for explanatory purpose only).

Now, with GST coming into the picture, this scenario will change as follows:

The manufacturer has already bought the raw material at Rs. 220, which includes a 10% tax. Now, when he creates a finished good for the wholesaler by adding Rs. 80 to the cost price. The price of the suite thus becomes Rs. 280 as in this scenario, he adds the value on to the cost price. The tax of Rs. 28 is the liability of the wholesaler. However, he subtracts the Rs. 20 paid earlier and pays only Rs. 8 to the government. He passed the 10% burden to the retailer. The retailer pays 10% on Rs. 280 and the cost of the product now is Rs. 302. The retailer adds the brand logo and labels and sells it with a value addition of Rs. 70. The total cost now is Rs. 372. However, when he sells to the end customer, he adds the 10% tax so the final cost borne by end user would be Rs. 409.2. The retailer now pays only Rs. 37.2-28 i.e Rs. 9.2 to the government.

The end-user also ends up paying less as is evident (Rs. 409.2 instead of Rs. 440 for the same suite as shown above.)

One Tax. One Nation.

In addition to saving the end-customers from cascading effect of taxes levied at each point in the supply chain, the entire taxation would be into slabs from 0% to 28%. It would be 0% for essential food items and 28% for luxury goods. GST will ease the burden on common man with regards to taxes for products of mass consumption.

It will go a long way in streamlining the indirect tax regime in the country. It will augment collection of taxes and will create a uniform tax structure so that business and trade between different states in India can be as seamless as possible.