GST: A quick revision before the midnight hour.

Source: The Indian Express


The twitch of a clock’s minute hand again calls for a change. No, this time it’s not Independence (I think we have already got that!!) this time it’s GST. On 30th June the midnight of India will be a witness to the biggest Tax reform this country has ever seen. PM Narendra Modi has called a special Central Hall session to launch the Goods and Service Tax (GST) on 30th June.

Among the invitees are former Tata Group Chairman Ratan Tata, veteran artists Lata Mangeshkar and Amitabh Bachchan, and legal luminaries Soli Sorabjee, KK Venugopal and Harish Salve.

Yes, it indeed will be a starry night at Parliament.

The function is expected to start at 10:45 pm on Friday night, with a 10-minute film to be screened on GST for the guests before President Pranab Mukherjee arrives. GST will be launched at the stroke of the midnight hour.

If you are still not clear about GST and what actually are the Netas in Central talking about then this article is definitely for you.

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What is GST?

Goods and Service Tax is one indirect tax for the whole nation. It is a value added tax at each stage of the supply of goods and services. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. To understand it better we need to know a little bit about the tax system.

Now, there are multiple steps that a product goes through, the lifecycle of a product, from raw materials to the manufacturing to sales. Tax is levied in each step. The first step is purchasing of raw materials. Production or manufacturing is the second stage. Next, comes the sale of the product to the retailer and the final step is selling the product to you- the consumer. Well, after sales services are also there but let’s not get into that.

So, this is the lifecycle of a product.

For example, let us assume that a manufacturer wants to make a leather bag. So, he will purchase the raw material, leather. After manufacturing, the leather will become a bag that is, the value will be added to it. Then he will sell the bag to the warehousing agent where he will attach a label to the bag.This is again the addition of value and then the agent will sell the bag to the retailer who packages and invests in the marketing of the bag.

GST will be levied on these value additions.

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Working of GST.

Any reform that targets the mass of a nation can never be a success if it does not follow some strict rules. When Goods and Service Tax is implemented, there will be three kinds of applicable Goods and Service tax.

CGST: revenue will be collected by the central

SGST: revenue will be collected by the state

IGST: revenue will be collected by the central for interstate sales.

For sales within the state, the revenue will now be shared between the Centre and the state where earlier it was VAT+ Central Excise/Service tax. For sales to another state now there will be only one type of tax, IGST.

The tax will also become destination based. Assume that the entire manufacturing of a product is being done in West Bengal and the end consumer is in Maharashtra then the state of West Bengal will get the tax till the warehousing stage (manufacturing +warehousing) and will lose on the revenue when the product moves to Maharashtra. The state of Maharashtra will earn the revenue on the final sale. This is what Destination based Tax is all about.


Direct and Indirect Taxes


There are two types of taxes Direct and Indirect. Direct Taxes are imposed when the liability cannot be passed to another person like for example Income Tax is a Direct tax where you earn the income and you are alone liable to pay it.

In the case of an Indirect Tax, the liability of the tax can be passed from one person to another. For example, the shopkeeper has to pay VAT on his sale, he passes this liability to the customers who not only pay just the price of the product but also the tax liability.

So, in a nutshell, the customer has a higher outlay when he buys the product.

GST will solve this issue with the concept of Input Tax Credit (ITC).

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Input Tax Credit

At the time of buying an item, you can reduce the tax to be paid during the output by simply subtracting the tax that has already been paid during the input.

Let us understand the whole concept with an example. Here I will also point out the benefits of GST for the common people.

So, let us take the same example of a leather bag. I will divide the example into two parts that are without GST and with GST.

Without GST

The manufacturer wants to make a leather bag. Say the bag manufacturer pays Rs 100 to buy the raw material. If the rate of taxes is set to 10%, and there is no profit or loss involved then he pays Rs 10 as a tax to the government. So, the final cost of the bag now becomes Rs100 (100+10=110)

Now, the next step is wholesaler buys the bag from the manufacturer at Rs110. He attaches some labels in the bag, he adds some value to the bag. Say, now the cost of the bag increases by Rs 50. On top of this, he pays 10% tax to the government. So the final product costs Rs(110+50)=160+10% Tax so it becomes Rs176.

Now, the retailer pays Rs176 to buy the bag from the wholesaler. The retailer has to package the bag and sell it in the market. He adds value to the bag and now the cost of the bag increases by Rs30. On top of this, he needs to pay 10% Tax to the government.

So, the final price is Rs(176+30)=206+10% Tax so it becomes Rs226.6. The consumer pays Rs 226.6 to buy the leather bag. This is how the liability of tax is passed and the consumer bears the liability to pay taxes.

With GST

In the case of Goods and Service Tax what happens is in our example when the wholesaler buys the bag from the manufacturer he pays 10% tax on his cost price as the liability is passed on to him. Then adds a value of Rs 50 on his Cost price of Rs 100 and the sum becomes Rs150.

On top of this, he has to pay 10% tax to the government. Now what he does is, instead of paying Rs(10% of 150) =15 to the government he pays Rs 5, as Rs 10 he has already paid as tax to the manufacturer. This Rs 10 is his Input Tax Credit.

When he pays Rs5 to the government he can pass the liability to the retailer. The retailer pays Rs(150+15)=165 to him to buy the bag.

At the next step, the retailer adds a value of Rs30 to his cost price. After the retailer adds value to the bag the cost becomes Rs(150+30)=180. Now he has to pay 10% tax to the government, but he has already paid Rs15 tax to the wholesaler. So, instead of paying 18(10% of 180) he pays Rs3(18-15).

Now he can sell the bag for Rs(150+30+18)=198 to the customer.

So after GST, the price of the bag reduces to become RS 198 from Rs226.6. The common mass can be at the gaining end with the implementation of GST.

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Closing lines

Like there is an existence of matter, there’s also an existence of antimatter.World’s greatest theory e=mc^2 also has a negative side to it (be it theoretical or practical). , the snake poison that can kill a person can also save some.

Lately, so much has been said and written about GST. Some are good, some are bad and some are worst but change is needed to support the phenomenon of growth. Positives and negatives are relative, let’s just not get into the debate as much of it has been done by our Netas and Abhinetas both inside and outside the Parliament.

This midnight calls for a change, accept it.

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