Saturday, 11 March 2017

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What is GST Bill? Goods and Service Tax | Detailed Explanation, GST in Simples Terms, Example


The goods and service tax, primarily called (GST) is considered to be the biggest tax reform in Indian Tax History. The goods and service tax, officially to be called as “The Constitution (122nd) Amendment Bill, 2014”, shall come into force from April 2017. It is one of the highly discussed bill in the Indian Parliament. With the introduction of GST, the other indirect form of taxes in Indian shall be subsumed under it. Presently, we have value added tax at both central and state level. Vat, as term suggests, is a tax on the value added to the commodity at each stage in production and distribution chain. Vat is a consumption tax because it is borne ultimately by the final consumers. It is a system to collect the tax on the value at the final and retail point of sale.

Why all this Fuss? What is VAT and what difference will GST Make?

In India, VAT is applied at both central and state levels. The central VAT or CENVAT and state VAT. In CENVAT, set-off can be claimed only against central excise duty and service tax paid up to the level of production. Also, state level VAT covers only sales. There are various flaws observed in this tax structure. But, it is anticipated that the introduction of GST, would attain a comprehensive and harmonised tax structure in India. It is aimed at creating a common domestic market, removing multiplicity of taxes, eliminating cascading effect of tax on tax, making the prices of the Indian product competitive and above all benefiting the final consumers.

Model of GST | Types of GST


A dual model of GST, has been proposed in India so that both the central (CGST) and state governments (SGST) collect taxes to raise resources to fulfil their sovereign responsibilities and duties. GST will subsume most of the indirect taxes being levied in India including Central sales tax (CST). However, for the GST to be introduced at the state level, it is essential that the states should be given power to levy tax on services. This power of levy of service tax has so long been with the centre. A constitutional amendment is purposed for giving this power to the states as well.The individual system of manufacturing, sales and services VAT are ultimately combined to form a grand system of VAT on goods and services, known as GOODS AND SERVICES TAX, i.e. GST!!
GST almost took 16 years for India, to finally bring the biggest change in Indian taxation system. Let’s look upon its journey of 16 years in brief.
It was in the year 2000, when Mr Atal Bihari Vajpayee’s Government, proposed the GST. He set up an empowered committee & announced to set up its model to integrate different indirect taxes into one- the GST!

Road to GST Bill. How it got passed?


In the year 2004, the then finance minister, Mr P. Chidambaram, established another empowered committee of state finance ministers to design the model of GST in India, with a target to implement it on April, 2010. This committee submitted its report to the government in the year 2008 and then, the first discussion paper on GST was issued in 2009.
Later, in 2014, Mr Arun Jaitley, introduced the bill in Lok Sabha, which took a year to pass in the house. This bill was later discussed in Rajya Sabha and is recently passed on 3rd august, 2016. After certain, amendments, the bill is finally passed on 8th august, 2016.
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Now, whenever we hear the term, GST, the first question that pops into our head is, what is GST? To make it more clear and precise, I would first answer, why GST?

Why GST? Example of Traditional Taxation System vs GST

Let’s, understand it with the help of an example with reference to our present tax system.
Assume, you went to shop a pair of shoes. The MRP (maximum retail price), generally includes certain taxes, on such shoes is Rs. 352.33 or say 353. What are you going to do? Simple, you’ll take it and come back. But, have you ever wondered, what is the actual price of such product? The MRP? No. generally, the price of the product, the actual cost, is unknown to the final consumers. Now, here we shall understand, what all our MRP constitutes!
MR. A, a manufacturer purchased the raw materials for the manufacturing of shoes, say leather or cotton, at rupees 200, which includes rs. 20 as tax @ 10% (assumed). Now, he adds value to such raw materials or say his margin- rs. 30. The total cost of shoe comes up to rs. 230 (200+30). Now, again tax shall be levied on output of the manufacturer @ 10% of 230 i.e. rs. 23, which makes the the shoe cost rs. 253 (230+23) to the wholesaler.

Now, similarly, wholesaler adds rs. 20 as his margin on the shoe, which makes the cost- rs. 273. Now, before selling it to the retailer, he has to pay tax on the output, again @ 10% of 273, i.e. rs. 27.3, and now, at an increased cost of rs. 300.3 (273+27.3), he shall sell it to the retailer.
The same procedure retailer shall also apply. He would purchase the shoe from wholesaler at rs. 300.3 and would add his margin, say rs. 20. The total taxable cost of the shoe to the retailer shall be rs.  320.3(300.3+20). Now, tax shall be charged on the output @ 10% of 320.3 i.e. rs. 32.03 , which makes our FINAL selling price = rs. 352.33 (320.3+32.03).

This is the cost, which is charged by the retailer from us, the final consumers. Here, the total tax on one such pair of show = Rs. 102.33 (20+23+27.3+32.03= 102.33)!


Here, if you would observe, at every stage, manufacturer to wholesaler to retailer and to final consumers, tax is charged not only on the value of the product but also on the tax already paid at every stage. There was no bifurcation known to anyone in the chain about the value of goods and tax paid by previous seller. This has led to increased selling price of goods in our country, where we pay tax on already paid tax and yet earning no great reveneue.

To remove this major drawback, “ TAX ON TAX” , government tried to integrate different indirect taxes, i.e. value added tax (VAT) , service tax, excise duty , cess on these taxes and many more , into one simplified tax structure in India, the GST. This process of paying tax on tax is called the “cascading of taxes”. Due to this cascading of taxes, suppliers tends to evade taxes and show false invoices, which leads to tax evasion and frauds on large scale.

In GST, such system of “tax on tax “shall be eliminated by giving set-offs of tax paid. In GST, the supplier will get the benefit of tax paid by him. The tax paid by him at the earlier stage of manufacturing shall be deducted from his present tax liability and he has to only pay the net tax or effective tax.
Net tax=Present tax liability-tax paid earlier 
To understand how GST would remove this cascading effect of tax, we shall understand the same example with reference to GST.
Mr. A, a manufacturer purchases raw material for rs. 200, which includes the tax @ 10% i.e. rs. 20. Now, he shall add his margin of rs. 30, before selling it to the wholesaler. The total taxable cost of the show reaches to rs. 230(200+30). Next, he has to pay tax on the output, assuming @ 10 % , of rs. 230 i.e. rs. 23. Now, he can set-off his tax of rs. 23 against the tax he already paid on raw materials, i.e. 23-20 = 3. The effective tax that the manufacturer has to pay, shall be rs. 3.

Now, he would sell this pair of shoe at rs. 230 to the wholesaler. The wholesaler adds his margin of rs. 20 , which increases the cost of the product to rs. 250. Tax on output of the wholesaler shall be rs 25 (10 % of @ rs 250). But, the wholesaler need not pay rs. 25 as tax, he would get set- off under GST, as his liability of 25 shall be reduced by the tax he paid on such shoe, (25-23), the effective tax which falls on wholesaler is rs. 2.
The last supplier shall be retailer. The wholesaler will sell the shoe to the retailer at rs. 250. He adds the margin of rs. 20 on such shoe. The total cost of such shoe becomes rs. 270. The ouput tax @ 10 % on rs. 270 shall be rs. 27. Retailer would get set-off on the tax against the tax already paid by him on purchase of goods from the wholesaler. His effective tax shall be rs. 2 i.e. 27-25=2.

The total tax on such goods is rs. 27, (20+3+2+2=27). The FINAL price of the goods shall include net tax, i.e. rs. 7, (total tax – initial tax) 27-20=7.
Therefore, the final price to the consumer shall be rs. 267 (260+7).
Here, we can see the difference!
The same product when sold in absence of GST will amount to rs.352.33 and when the system is replaced by GST, the same product, shall amount to rs. 267. Thereby, eliminating cascading effect of tax!!

Advantages of GST

Goods and service tax, would help us in removing the cascading effect of tax and since, tax shall be paid only on the value addition of the product, thereby, more clarity shall be observed in the trade. Since, no more tax has to be paid on taxes, it will decrease the selling price of the product. Manufacturers need to add tax in their cost of production and tax shall be charged only on the value addition.
Presently, at what rate GST shall be implemented in India is uncertain. A Clash, @ 18 % rate of GST, has been observed in the parliament and therefore, no proper rate is described till now. But, if government increases this tax rate, then it will subsume its purpose of reduced prices of product, since high rate of GST would kill the purpose of reducing prices.

Second advantage of GST is observed as reduced procedural compliances. Here, procedural compliances means documents or details that needed to be preserved earlier for getting tax set-off. But, with the introduction of GST, such procedural compliances shall be reduced. As, suppliers need not to maintain detailed records for obtaining GST set-offs. But, obviously the need to maintain records of CGST (central GST), SGST (state GST) and IGST (inter-state GST).



Lastly, biggest benefit that India would derive out of GST, shall be reduced tax evasion. Since, suppliers shall get credit or set-off of taxes only against the taxes paid on their previous purchases. Also, there shall be tax on all the goods and services, therefore no product shall fall under exempted list, leading to less tax on all items instead of more tax on few items.

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