GST simplified | Let's understand more about the new tax regime...!

Lucknow: At the stroke of midnight on June 30, the special session of Parliament will mark the introduction of unified tax regime of GST (goods and service tax) across the country. Here is what all you should know about the revolutionary tax regime.

Newstrack.com brings you a informative package that would help you understand your new tax system better.

GST simplified: (One Country One Tax)

The new tax regime will not only simplify the multiple tax burden but will also lead to lower prices of essential commodities.

Here is how we can look at the new tax system:

Before GST:

We would work on indirect tax liability which will be shifted to others….

(Focussing on Direct and Indirect Tax concepts)

Hypothetical example… keeping other factors of profit and loss as constant

• Let’s say a shirt manufacturer pays Rs. 100 to buy raw materials.
• If the rate of taxes is set at 10 per cent then he has to pay Rs. 10 as tax leading to final cost of the shirt at Rs (100+10=) 110.
• Now the wholesaler buys the shirt from the manufacturer at Rs. 110 and again does value addition by adding labels to it. His cost increases by say Rs. 40 and the wholesaler will also pay the rate of taxes at 10 per cent to the government again. So the final cost (110+40)= 150 + 10% tax = Rs. 165.
• Now wholesaler sells the shirt to retailer at Rs. 165 tax liability had passed on to him. Retailer again adds up the value while packaging the shirt. This time, let’s say his value add is Rs. 30. So, the final cost of the shirt becomes Rs. 214.5 (Cost = Rs. 165 + Value add = Rs. 30 = Rs. 195 + + 10% tax= Rs. 214.5)
• Now the customer will have to pay Rs. 214.5 for a shirt the cost price of which was basically only Rs. 170 (Rs 110 + Rs. 40 + Rs. 30) because the tax liability was passed on at every stage of transaction and the final liability comes to rest with the customer.
• Final product will be of Rs 214.5

Let’s see the situation after GST:

• Let’s say a shirt manufacturer pays Rs. 100 to buy raw materials.
• If the rate of taxes is set at 10 per cent then he has to pay Rs. 10 as tax leading to final cost of the shirt at Rs (100+10=) 110.
• Now when the wholesaler buys from the manufacturer, he pays a 10 per cent tax on his cost price because the liability has been passed on to him. Then he adds value of Rs. 40 on his cost price of Rs. 100 and this brings up his cost to Rs. 140 and he has to pay the 10 per cent tax to the government also but, since, he has already paid one tax to the manufacturer, so, this time instead of paying Rs (10% of 140=) 14 to the government as tax, he subtracts the amount he has paid already.
• So, he deducts the Rs. 10 that he had already paid while buying the good from the manufacturer and pays only Rs. 4 to the government.
• When he pays Rs. 4 to the government, he can pass on its liability to the retailer. No the retailer has to pay Rs. (140+14=) 154 to him to buy the shirt.
• After adding the value of Rs 30 to the shirt at the next stage, now the retailer will also have to pay the tax of 10 per cent.
• So, when he adds value, his price becomes Rs. 170 plus the amount of tax. But he already has paid the tax of Rs 14. So, now he reduces Rs. 14 from his tax liability of Rs. (10% of 170=) 17 and has to pay only Rs. 3 to the government.
• So the product will be sold at (140+30+17) Rs 187 to the customer.
• Final product will be of Rs 187

So from Rs 214.5 to Rs 187, the new tax regime will not only reduce the cascading effect of taxes, it will reduce the burden of taxes and, hopefully, prices.

Also read: Nitish Kumar to skip GST rollout in Parliament

GST defined:

Goods and Services Tax is a comprehensive, multi-stage and destination-based tax that will be levied on every value addition.

According to this definition the GST will focus on four major things:

Being comprehensive-- The tax system allows the customer not to pay taxes in different forms. It focuses on One Country, One Tax. Comprehensive tax system will allow thenation to have a simplified process of paying the tax that will help country grow out from Tax terrorism.

Multi-Stage tax-- Goods and Services Tax will be levied on each of the stages that a product goes through, which makes it a multi-stage tax. These stages will be buying of raw materials, production or manufacture, warehousing of materials , sale of the product to the retailer, the retailer sells to the end consumer. Goods and Services Tax will be levied on all transactions happening during the entire manufacturing chain.

Destination Based tax-- Goods and Services Tax will be levied at every point of sale. Let us understand this: If a manufacture process happens in Rajasthan and the final point of sale is in Karnataka, Goods & Services Tax will be levied at the point of consumption, so the state of Rajasthan will get revenue in the manufacturing and warehousing stages, but lose out on the revenue when the product moves out Rajasthan and reaches the end consumer in Karnataka.

This means that Karnataka will earn that revenue on the final sale, because it is a destination-based tax and this revenue will be collected at the final destination.

You may also read: GST will benefit general consumers: Goa CM Manohar Parrikar

More about the Goods and Service Tax (GST)

• The GST, officially known as ‘The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014’, proposes a Uniform tax regime to be implemented in India. There will be uniform 18 per cent tax throughout the country if the amendment is finally made.
• The government has proposed the plan ion three parts, namely ,the Central GST that will include all the taxes that countrymen pay to the Central government (for example: Excise duty), State GST that includes all the taxes that are imposed by the state government (such as royalty of Coal mines) and Integrated GST which will include all payable taxes that are proportionately distributed between the Centre and the state governments.
• According to the bill presented by government in Lok Sabha, the new amendment will free the nation from unnecessary twenty-odd types of taxes and will replace them with a single tax system that would mitigate cascading or double taxation and facilitate a common national market.

Take a look at: GST may cause some pain in first three months, Hasmukh Adhia

Central taxes That The GST will replace:

• Central Excise Duty
• Duties of Excise (medicinal and toilet preparations)
• Additional Duties of Excise (goods of special importance)
• Additional Duties of Excise (textiles and textile products)
• Additional Duties of Customs (commonly known as CVD)
• Special Additional Duty of Customs (SAD)
• Service Tax
• Cesses and surcharges in so far as they relate to supply of goods or services

State taxes that The GST will subsume:

• State VAT
• Central Sales Tax
• Purchase Tax
• Luxury Tax
• Entry Tax (all forms)
• Entertainment Tax (not levied by local bodies)
• Taxes on advertisement
• Taxes on lotteries, betting and gambling
• State cesses and surcharges

The GST Council:

• The council consisted of the Union Finance Minister who will be the chairman, Minister of State of Revenue, Minister in charge of Finance or Taxation or any other Minister, nominated by each state.
• The decisions were made by three-fourths majority of votes cast in which Centre shall have a third of votes cast, states shall together have two-third.
• Mechanism for the disputes aroused out of its recommendations were decided by the Council itself.

The levy of GST:

• The bill that has been presented in Lok Sabha clearly state that both Parliament, state Houses will have the power to make laws on the taxation of goods and services but the Prliament’s Law will not override a state law on GST.
• The Integrated GST (IGST) will provide the central government with an exclusive power to levy, collect the general sales tax in the course of interstate trade or commerce and imports.
• The integrated GST will be shared among the Centre and State according to the manner prescribed by the central law based on GST Council’s views.

Who will benefit and how:

The general impact of GST is termed as positive. Analysts say that after the bill is passed, a manufacturer knows he will get the raw materials without any additional tax and will have to bear the same excise duty all over the country and a household knows that they do not have to pay different indirect taxes to the government.

So, less burden, happy taxpayers and wealthy government will result in a fast growing developed economy.