How GST works

Now a day’s GST is the most important topic to discuss .As our prevailing Government has change the total indirect tax structure through GST. All we know the full form of GST is Good and service tax but the confusion arises when some commodity is cheaper and some are dearer.

In our federal structure there are two types of tax, direct tax and indirect tax. Income tax, interest tax, wealth tax corporation tax all are fall under the direct tax regime &custom duty, excise duty, sales tax, service tax all are example of service tax. As GST is implemented on indirect tax so we have to clear it that our income tax is not takes effect through it.

Indirect tax is called regressive tax because when a tax levied to someone it will be passed to the other & the weaker section bear a heavy tax burden than the richer section. So to minimize the tax burden & for more transparency GST is a better way.

GST is a single tax system which unified our tax structure &give us more transparency on taxses.GST will also remove the cascading of taxes& boost up Indian economy towards equality of tax burden.

How GST brings more transparency?

GST is likely to replace service tax, surcharge related to supply of good &services, central excise duty, other hidden tax & for transparency introduced, CGST-Central good &service tax, SGST-stae good &service tax, IGST-Integrated  good &service tax UGST-Union territory good and service tax CGST &SGST have levied when a product is produced & sale within the state .For interstate sale there will be now only IGST levied. Earlier if a product is produced within a state ,state Govt levied VAT ,excise duty, custom duty, service tax,octroi duty(local tax).More over central Govt  levied CENVAT(central value added tax) on some product. So GST gives us more transparency which is simple & easy to administer backed by a robust IT system.

Ø  SGST   ---------    State good &service tax(Collected by state) Ø  CGST    --------    Central good &service tax(Collected by central) Ø  IGST      --------    Integrated good &service tax(collected by central)

What is cascading of taxation?

When a product is produced it crossed multiple stages& ultimately reached to the hand of final consumer. Firstly manufacturer buys the raw material for the product. He produced product with this raw material. Secondly, wholesaler buys this finished product & tag labels on it.Thirdly, retailer buys this product from the wholesaler & after packing, it reached to the hand of final consumer. In each stage where the value is added Govt levied tax on it. Let’s take an example, 

Suppose a pair of shoe is produced & the tax rate is fixed at 10% at each stage & there are no profits or loss involve in it. Suppose, the manufacturer buys RS100 of leather as a raw material & pay RS 10 as a tax. So now the raw material cost is RS110.Manufacturer produced product  with this raw material & his production cost is R S 50.so the total cost is now RS(110+50)=RS160.Wholesaler pay 10% VAT when he buy it. So wholesaler pay RS160+RS16=RS176 for this product. Again wholesaler spent RS40 on it due to labeling cost & sell it to retailer at RS (176+40)=RS216+10% tax=RS237.6.Retailer packed this finished product & add Rs30 for packaging cost. Now the finished product go to the hand of final consumer at RS (237.6+30) =RS267.6+10 %( which is mentioned on the bill).For simplicity here we are not adding the tax of excise duty, custom duty, service tax, local tax. But in reality all tax are added with this pair of shoe. Currently, a consumer is not aware the total amount of taxes s/he pays for the product.

How GST eliminates cascading effect of tax?

GST address this cascading effect of tax and introduce input tax credit which will allow seller to claim the tax already paid. So the final liability to the end of the consumer decreased.

At first when manufacturer buy raw material he pay10% tax on it& pay Rs110.secondly manufacturer added Rs 50 for production cost. Now wholesaler buy the product from the manufacturer at Rs160+10%tax=Rs (160+16) =Rs176.Here we have to need a look back, here the tax of raw material paid earlier when manufacturer buy it. So like double counting we are double count tax here .To revised it, GST introduced the tax system where tax is levied only on, where value is added.

Here manufacturer added value Rs50 as a production cost. So tax is levied on Rs50 only rather thanRs160.Now the value of the pair of shoe is Rs (110+50+50*10%) =Rs (110+50+5) =Rs165.Likewise wholesaler added value Rs40.Here the tax is Rs4 only & comes in the hand of retailer at Rs (165+40+4) =Rs209.Finally retailer added Rs30 & the tax levied 10% on Rs 30 isRs3 so the final cost is Rs (209+30+3) =Rs242.

Total cost of the pair of shoe is -------------------100+50+40+30=220           Actual taxes as10% rate is-------------------10+5+4+3=        22                                            Final cost is--------------Rs220+Rs22=Rs242

So it is clear that GST is an initiative to eliminate cascading of tax & create a unified national market, which boost up our export &improve our competitiveness.