GST is the biggest tax reform that has taken place in the country. By virtue of The Constitution (One Hundred and First Amendment) Act, 2016, a new tax regime has commenced in the country replacing the old one.
It is meant to be a unified indirect tax across the country on products and services. In the current system in India, tax is levied at each stage separately, by the Centre and States, at varying rates, on the full value of the goods. But in the GST system, tax will be levied only on the VALUE ADDED at each stage.
Do you know: J&K passes bill to implement GST in the State
So let’s try to understand, through an illustration, how GST will work:
Imagine a manufacturer of, say, shirts. He buys raw material or inputs — cloth, thread, buttons, tailoring equipment — worth Rs 100, a sum that includes a tax of Rs 10. With these raw materials, he manufactures a shirt.
In the process of creating the shirt, the manufacturer adds value to the materials he started out with. Let us take this value added by him to be Rs 30. The gross value of his good would, then, be Rs 100 + 30, or Rs 130.
At a tax rate of 10%, the tax on output (this shirt) will then be Rs 13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs (Rs 10). Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10).
The next stage is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs 130, and adds on value (which is basically his ‘margin’) of, say, Rs 20. The gross value of the good he sells would then be Rs 130 + 20 — or a total of Rs 150.
A 10% tax on this amount will be Rs 15. But again, under GST, he can set off the tax on his output (Rs 15) against the tax on his purchased good from the manufacturer (Rs 13). Thus, the effective GST incidence on the wholesaler is only Rs 2 (15 – 13).
In the final stage, a retailer buys the shirt from the wholesaler. To his purchase price of Rs 150, he adds value, or margin, of, say, Rs 10. The gross value of what he sells, therefore, goes up to Rs 150 + 10, or Rs 160. The tax on this, at 10%, will be Rs 16. But by setting off this tax (Rs 16) against the tax on his purchase from the wholesaler (Rs 15), the retailer brings down the effective GST incidence on himself to Re 1 (16 –15).
Thus, the total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs 10 + 3 +2 + 1, or Rs 16.
HENCE, GOODS AND SERVICES TAX (GST) WOULD BE LEVIED AND COLLECTED AT EACH STAGE OF SALE OR PURCHASE OF GOODS OR SERVICE BASED ON INPUT TAX CREDIT SYSTEM.
HOW THINGS WORKED IN A NON-GST REGIME?
In a full non-GST system, there is a cascading burden of “tax on tax”, as there were no set-offs for taxes paid on inputs or on previous purchases (set-offs were only available in very limited no. of cases). Thus, if we consider the same example as above:
The manufacturer buys raw materials/inputs at Rs. 100 after paying tax of Rs. 10. The gross value of the shirt (good) he manufactures would be Rs. 130, on which he pays a tax of Rs. 13. But since there is no set-off against the Rs. 10 he has already paid as tax on raw materials/inputs, the good is sold to wholesaler at Rs. 143 (130+13).
With the wholesaler adding value of Rs.20, the gross value of goods sold by him is, then, Rs. 163. On this, the tax of Rs. 16.30 (at 10%) takes the sale value of the good to Rs. 179.30. The wholesaler, again, cannot set off the tax on the sale of his good against the tax paid on his purchases from the manufacturer.
The retailer, thus, buys the good at Rs. 179.30, and sells it at a gross value of Rs. 208.23, which includes his value addition of Rs. 10 and a tax of 18.93 (at 10% of Rs. 189.30). Again, there is no mechanism for setting off the tax on the retailer’s sale against the tax paid on his previous purchase.
The total tax on the chain from the raw material/input suppliers to the final retailer in this full non-GST regime will, thus, work out to Rs. 10 + 13 + 16.30 + 18.93 = Rs.58.23. For the final consumer the price would be Rs. 208.23 which is way higher than the final prices under GST.
From the above illustration, it is evident that the credits of input taxes paid at each stage is available in the subsequent stage of value addition, which makes GST essentially a tax only on the value addition at each stage. The final consumer will thus only bear the GST charged by the last dealer in the supply chain, with setoff stages at all the previous stages.
Thus, GST is another name of VAT. Then, what is the difference b/w the both the tax regimes?
In the previous tax regime, along with VAT (with limited set-offs on inputs or on previous purchases), there were multiple indirect taxes levied by the Centre, States as well as the Local Bodies. Collectively, all these taxes made (applied at varied rates) the compliance (by business) complex, inhibited smooth trade across the country, and was a heavy burden on consumers.
In the GST regime, all these taxes like Value Added Tax (VAT), Central Sales Tax (CST), Central Excise Duty, Additional Customs Duty (CVD), Service Tax, Octroi of Local Self Governing Bodies (eg; Municipal Corporation), Luxury Tax, Entertainment Tax, etc will be subsumed into it.
SALIENT FEATURES OF THE ACT
- It provide for a dual GST with the Centre and the States simultaneously levying it on a common base. The GST to be levied by the Centre would be called Central GST (CGST) and that to be levied by the States [including Union territories with legislature] would be called State GST (SGST). Union territories without legislature would levy Union territory GST (UTGST).
- CGST, SGST /UTGST& IGST would be levied at rates to be mutually agreed upon by the Centre and the States under the aegis of the GSTC
- Both the Centre and States now have “concurrent” powers to make laws with respect to goods and services tax.
- Parliament has the exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
- Goods and Services Tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned b/w the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.
- Import of goods, or services, or both would be treated as inter-State supplies and would be subject to IGST in addition to the applicable custom duties.
- The amount apportioned to State out of IGST shall not form part of the Consolidated Fund of India.
- The article provides for constitution of a GST council by the President within sixty days from this act coming into force. The GST council will constitute the following members:
- Union Finance Minister as Chairman of the council;
- Union Minister of State (MoS) in charge of Revenue or Finance;
- One nominated member from each state who is incharge of finance or taxation.
- GST would replace the following taxes currently levied and collected by the Centre:
- a) Central Excise Duty;
- b) Duties of Excise (Medicinal and Toilet Preparations);
- c) Additional Duties of Excise (Goods of Special Importance);
- d) Additional Duties of Excise (Textiles and Textile Products);
- e) Additional Duties of Customs (commonly known as CVD);
- f) Special Additional Duty of Customs (SAD);
- g) Service Tax;
- h) Cesses and surcharges insofar as they relate to supply of goods or services.
- State taxes that would be subsumed within the GST are:
- a) State VAT;
- b) Sales Tax;
- c) Purchase Tax;
- d) Luxury Tax;
- e) Entry Tax (All forms);
- f) Entertainment Tax (except those levied by the local bodies);
- g) Taxes on advertisements;
- h) Taxes on lotteries, betting and gambling;
- i) State cesses and surcharges insofar as they relate to supply of goods or services
- GST would apply to all goods and services except Alcohol for human consumption.
- GST on five specified petroleum products (Crude, Petrol, Diesel, ATF & Natural gas) would be applicable from a date to be recommended by the GSTC.
- Tobacco and tobacco products would be subject to GST. In addition, the Centre would continue to levy Central Excise duty on them.