GST Bill in India – One Step towards Simplifying the Muddled Up Tax System. The proposed Goods and Services Tax (GST) is said to replace all indirect taxes levied on goods and services by the Government, both Central and States, once it is implemented
Let’s understand what is GST, how it is different from other taxes, GST applicability, GST rates, and its impact on your business and latest updates about GST bill. To make things easy to understand, I will start with an example…
Mr Sharma is a businessman who wants to start a business. For this he needs various raw materials which have to be imported from China and will need to be brought to Gurgaon – where he has his factory – by road through various states. Once he gets down on the process of estimating his costs he is a little troubled.
First, he needs to pay a customs duty for importing the materials on top of the shipping charges. This is fine but there are a lot of other taxes which he seems to be unable to comprehend. Also he finds out that when he has his final product ready he will have paid the Central and State Governments at least 10 different taxes not all of which are exclusive of each other. On diving deeper he finds many cases where a tax is also taxed by the government.
Petrol prices are the perfect example. The price charged to dealers by the Oil Marketing Companies is Rs. 25.46 currently for a litre of petrol. Now Excise Duty is collected at Rs. 21.48 per litre by the Central Government and adding the dealer commission the price now is Rs. 49.22. This is not the end and Value Added Tax is now charged at 27% which takes the final price to Rs. 62.51 in Delhi. At first it may seem fair that both the Governments tax the product but it is not that innocuous. There is a tax on a tax here! The State Government charges 27% of the final amount in which Central Excise Duty has already been borne by the businessman.
The Goods and Services Tax promises to alleviate this problem among many others. It is being hailed as the game changer for India’s economy and is being labelled as the biggest change in the Constitution since India’s independence. The Goods and Services tax or commonly referred to as the GST will replace the indirect taxes levied by the Central and State Governments and provide for a single and streamlined process. It presents India as a unified market to business owners and also aims at bringing a lot of black money back into the mainstream economy. The tax will be implemented at every step of value creation.
Why do we need GST?
The previous tax system involved multiple taxes, complex compliance procedures, and intervention by several State and Central tax divisions. This made it highly difficult to set up and run a business in India.
Under the GST regime, instead of applying taxes on the total value of the product at each stage, the GST only imposes tax on value addition. Since it provides credit for the input tax paid at each previous stage of a supply chain, this method considerably reduces the overall cost of manufacturing and selling goods.
How can GST change this?
Instead of applying taxes on the total value of the product at each stage, the GST only imposes tax on value addition. Because it provides credit for the input tax paid at each previous stage of a supply chain, this method considerably reduces the overall manufacturing cost.
Let’s take a closer look at how this works with a simple example.
Comparison of Previous Tax Structure vs. GST
Imagine a manufacturer selling zinc-coated steel buckets to a wholesaler located in the same state (let’s call it State 1) for Rs. 1,000 each plus tax.
Note: In this example, we are assuming that all taxes associated with the manufacturing process have been paid and the selling price in the first stage is the final price set by the manufacturer (excluding VAT).
Previous Tax Structure
- The manufacturer sells the buckets to a wholesaler located in State 1 for Rs. 1,000 each plus a VAT of 10% (which adds Rs. 100 per bucket).
- The wholesaler in State 1 buys the buckets for Rs. 1,100 per piece and increases the selling price to Rs. 2,000 per bucket before selling a few of them to a retailer located in a different state (State 2). Under the pre-GST regime, this interstate sale will attract a Central Sales Tax (CST) of 12% on Rs. 2,000 (which adds Rs. 240 CST per bucket).
- The retailer pays Rs. 2,240 per bucket, increases the price by 20%, and offers the buckets to local consumers in State 2 for Rs. 2,688 plus a VAT of 15% (which adds Rs. 403.20 per bucket).
- The end consumer pays a total of Rs. 3,091.20/- per bucket.
Note: Here we have assumed the VAT rate in state 1 to be 10% while the VAT rate in state is 15%. This is because under the pre-GST system, the VAT rates are different across different states.
In the above example, you can see that at every stage of the process, the application of tax is non-uniform. The tax rate and type are different each time, and getting ITC is difficult or impossible because the different taxes are governed by different authorities.
Bottomline – Sellers lose money on taxes at every stage as they don’t get input tax credit or refund on the tax paid on purchase whenever they make a sale.
Now, let’s take the same example, but instead apply the GST model.
- The manufacturer sells the buckets to a wholesaler located in State 1 for Rs. 1,000 each plus a GST of 10% (which adds Rs. 100 per bucket).
- The wholesaler in State 1 buys them for Rs. 1,100 per piece and increases the total selling price to Rs. 2,000 per bucket before selling a few of them to a retailer located in a different state (State 2). Under the GST regime, this interstate sale will attract an IGST of 10% on Rs. 2,000 (which adds Rs. 200 per bucket).
- The retailer pays Rs. 2,200 per bucket, increases the price by 20%, and offers the buckets to local consumers in State 2 for Rs. 2,640 plus a GST of 10% (which adds another Rs. 264 per bucket).
- The end consumer pays a total of Rs.2,904/-.
Note: Here, we have assumed the GST on zinc-coated steel buckets to be 10%. GST for the bucket will stay the same throughout India, irrespective of whether it is an intra-state sale or inter-state sale.
Components of GST
Since July 2017, India has been following the dual-GST model, which is made up of the following components:
- SGST – A form of GST collected by the state government
- CGST – A form of GST collected by the central government
When the sale of goods and services takes place within the same state, both taxes will be levied.
If the movement of goods occurs between two different states (i.e., an interstate transaction), a combined tax called the IGST or the Integrated GST (SGST + CGST) will be collected by the central government. The IGST will replace the previously levied Central Sales Tax (CST) of 2%.
The tax amount collected as IGST will later be distributed to respective state governments.
To understand the dual-GST model better, let’s take a look at the following scenarios:
Scenario 1: Levy of SGST and CGST
Let us assume that you’re a distributor in Chennai and you buy goods from a manufacturer in Tirupur, Tamil Nadu. Since the sale and movement of goods happen within the state, SGST and CGST will be levied on the sale. You, as the distributor, will get tax credit on the input SGST and CGST.
Scenario 2: Levy of IGST
Let us assume that you’re a distributor in Belgaum, Karnataka, and you buy goods from a manufacturer in Tirupur, Tamil Nadu. Here, the sale and movement of goods happen between two different states, IGST will be levied on the sale.
GST Tax Structure
The four-tier tax structure of GST has the following slabs: a zero rate, a lower rate, two standard rates, and a higher rate. Here’s a brief overview of each GST rate.
The zero rate tax is a nil tax that is applied on goods and services. Zero rated items include milk, eggs, curd, unpacked foodgrains and health & educational services.
A lower rate of 5% will be applied on items like sugar, tea, edible oil, coal, spices, and cotton fabric. This, along with the zero rate, will help prevent inflation from having much of an impact on the prices of essential items.
There are two standard rates that have been finalized by the GST Council: 12% and 18%.
Processed food, butter, and mobile phones will be taxed at 12%. Capital goods, industry intermediaries, toiletries, computers and printers will be taxed the second standard rate of 18%.
A higher rate of 28% will be levied on white goods. This includes items such as washing machines, high-end motorcycles, air conditioners, refrigerators, small cars, etc.
The additional cess, which has been a topic of debate since the GST rates were proposed, is now finalized. It was feared that demerit goods such as tobacco products and aerated drinks, which were previously taxed at 65% and 40%, would become cheaper and too easily accessible if the highest rate of GST was set at 28%. To keep this from happening, the new GST structure will collect an additional cess on top of the 28% GST. The cess will only be applied on demerit goods like like coal, paan masala, tobacco, aerated drinks, and motor vehicles.