Goods and Services Tax

Goods and Services Tax

The Goods and Services Tax (GST), the biggest reform in India’s indirect tax structure since the economy began to be opened up 25 years ago, at last, becomes a reality.

The Working of GST

The Manufacturing Stage:

Step 1) Imagine a Producer of Shoe. He buys raw materials like leather, cloth, thread etc., worth Re 1000. The Re 1000 includes a tax of Re 100. He manufactures a pair shoe using these raw materials.

Step 2) The manufacturer by converting raw material into a finished good (Shoe) has added value to the product. The raw leather is being converted into the wearable shoe.

Step 3) Let us assume that the value added by the manufacturer is Re 300 (After conversion the shoe is sold in the market at Re 1300). The gross value added of the shoe will be now Re 1300 (1000+300).

Step 4) Prior to GST, assuming an excise duty of 10%, the tax that the manufacturer has paid would be Re 130 (10/100*1300).

But under GST, the manufacturer could set off Re 130 as input credit as the tax already paid by him on inputs Re 100(SEE Step 1)

The effective tax paid by the manufacturer under GST regime is thus, Re 30 (130-100) only.

The Wholesale Stage:

Step 1) The Wholesaler purchases the shoe from the manufacturer at Re 1300. The Wholesaler adds value to the shoe (his profit margin) of Re 200. The gross value of the shoe has now become Re 1500 (1300+200).

Step 2) Assuming a tax of 10% on purchase of shoe, the tax that the wholesaler has paid prior to GST regime would be Re 150 (10/100*1500).

But under GST, the wholesaler also could set off Re 150 as input credit as the tax already paid on the purchase of shoe from the manufacturer Re 130.

Thus, the effective GST paid by the Wholesaler under GST regime is Re 20(150-130) only.

The Retail Stage

Step 1) The Retailer buys the shoe from the wholesaler at Re 1500. The Retailer adds value to the shoe (his profit margin) of Re 500. The gross value of the shoe has now become Re 2000 (1500+500).

Step 2) Assuming a tax of 10% on the sale of the shoe, the tax that the retailer has paid prior to GST regime would be Re 200 (10/100*2000).

But under GST, the retailer also could set off Re 200 as input credit as the tax already paid by him on the previous stage Re 150.

Thus, the effective GST paid by the retailer under GST regime is Re 50 (200-150) only.

Step 3) 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 100+30+20+50= 200 only.

Pre and Post GST a comparison

Pre-GST Scenario Post GST Scenario
Input Stage Rs 1000 (Initial Price) including 10% tax Rs 1000 (Initial Price) including 10% tax
Manufacturing Stage Rs 1300 (value added) at tax 0f 10%, tax=130, Final price including tax (1300+130) =1430 Rs 1300 (value added) at tax 0f 10%, tax=130, Final price including tax under GST (1300+30) =1330
Wholesale Stage Rs 1630 (1430+200) after value added.

Tax at 10%, tax=163.

Final price including tax 1630+163= 1793

Rs 1500 after value added.

Tax at 10%, tax=150.

Final price including GST 1500+20= 1520.

Retail Stage Rs 1793+500) =2293, after value added.

Tax at 10%, tax= 229.3

Final Price including tax

2293+229.3= 2522.3

Rs 2000 after value added.

Tax at 10%, tax=200.

Final price including GST

2000+50=2050.

The Difference Total Tax= 100+130+163+229.3= 622.3 Total Tax

100+30+20+50= 200

Final Price Rs 2522.3 Rs 2050

Taxes to be subsumed under GST

Central Taxes State Taxes
Central Excise duty State VAT
Service Tax Central Sales Tax
Duties of Excise (Medicinal and Toilet Preparations) Purchase Tax
Additional Duties of Excise (Goods of Special Importance) Luxury Tax
Additional Duties of Excise (Textile) Octroy Tax
Counter Vailing Duties Entertainment Tax
Additional duty on Customs Taxes on advertisement, Lottery, Betting, Gambling

The Three Tier Structure of GST

The Parliament and the state legislatures will have the power to levy GST. There will be complete separation of power between Centre and State.

The centre will have the power to levy GST when it comes to interstate trade and exports, imports. The sharing of IGST between centre and state will be based on the views of GST Council.

Suppose a trader in Maharashtra sells goods to another trader in Maharashtra itself. In this case, the trade is of intrastate in nature. If the applicable GST rate is 18%, then 9% will go to the centre as CGST, and 9% will go to the Maharashtra as SGST.

Now, suppose the same trader in Maharashtra sells goods to a trader in Tamil Nadu. In this case, the trade is off interstate nature. If the applicable GST rate is 18%, then the entire 18% GST will be charged as IGST.

The GST Council

The Council will have the representation of both Centre and State.

  • The council will be headed by Union Finance Minister.
  • The Minister of State for Revenue (Central Government) will be a member.
  • The Minister of Finance from each State or Minister nominated by the States will be its member.
  • The decision will be made by the majority of 3/4th members.
  • The Centre government will have a 1/3rd voting share in the council.
  • The State government will have a 2/3rd voting share in the council.

Advantages of GST

Limitation of GST

 

By
Himanshu Arora
Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru University

 

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