Goods and Services Tax

A Comprehensive analysis of GST: india’s biggest tax reform

The moment, which India had waited for more than a decade, is finally beckoning. Since 1 July, a single indirect tax regime kicked into force in Asia’s third largest economy, dismantling inter-state barriers to trade in goods and services.

“The rollout of the goods and services tax on 1 July will, in a single stroke, will convert India into a unified, continent-sized market of 1.3 billion people,” said Prime Minister Narendra Modi.

Essentially, our $2.3-trillion economy is making a bold attempt to transform itself by removing internal tariff barriers and collapsing 17 central, state and local body taxes into a single GST.

GST is intended to help achieve various economic goals in one stroke—promoting the manufacturing sector, boosting exports by making production more competitive, creating more jobs, improving the investment climate, cutting down tax evasion and lowering the compliance cost to businesses. Akin to a free trade agreement and accelerating the gross domestic product (GDP) growth rate.

GST seeks to move away from a system in which tax is added on to the post-tax value of goods from the previous stage in the value chain, which has led to a compounding effect of tax-on-tax on commodities and services. The reform seeks to remove this anomaly by giving full credit for taxes paid at the previous stage. Under GST, interstate supplies will be taxed across the country at a uniform rate specified for the item with full credit settlement.

It can put an end to a multi-layered tax system, dismantling border check posts and eliminating the need for face-to-face meetings between executives and field officers of the tax department, will contribute to that. Ushering in transparency which is much needed in the Indian Financial System.

In the pre-GST regime, the federal government taxed production of goods and supply of services, while states got to tax sale of goods but not supply of services. In GST, this barrier is removed and both the federal and state governments get to tax the entire value chain of goods and services thus increasing compliance.

 Consumers, on the other hand, will for the first time get a measure of the total central and state taxes levied on a product, bringing to an end the host of hidden and embedded taxes they were paying so far. In the case of many goods, there could be a reduction in tax burden as the GST Council, the federal indirect tax body, has gone the extra mile to correct prevailing high tax rates on items as basic as school bags.

However, many believe there is some hype around the anticipated benefits since the current version of GST is a diluted form of what was originally considered ideal—a low, single tax rate with few exemptions. The current form has four rates for goods and services—5%, 12%, 18% and 28%—and excludes five hydrocarbons—crude oil, petrol, diesel, jet fuel and natural gas—as well as liquor, real estate and electricity from the purview of GST. Oil and liquor are among the biggest tax revenue sources for the federal and state governments. The authorities insist most items are placed in either the 12% or 18% slab and only a few are in the highest 28% slab.

Despite the imperfections, indications are that GST is going to benefit the system which can be proved by calculations of Tax liability paid before and after GST tax regime.

The road to GST wasn’t an easy one. Rolling this out on 1 July is the result of more than a decade of discussions, tussles among states, and between states and the Union government, instances of give and take, lobbying and compromise. The highlight of the reform is the creation of the federal tax institution, the GST Council, which has state ministers as members and the Union finance minister as chairman and gives every state a say in the country’s indirect tax policy. The GST that is being rolled out is far from ideal. The guiding principle for the government while trying to secure consensus amid competing interests of various stakeholders was that it is better to have a good GST instead of waiting endlessly for the best one, which is the best way forward.

  2.            history and timeline of events leading to gst

GST is not a new phenomenon. It was first implemented in France in 1954, and since then many countries have implemented this unified taxation system to become part of a global whole. Now that India is adopting this new tax regime, let us look back at the how and when of the Goods and Services Tax and its history in the nation.

France was the world’s first country to implement GST Law in the year 1954. Since then, 159 other countries have adopted the GST Law in some form or other. In many countries, VAT is the substitute for GST, but unlike the Indian VAT system, these countries have a single VAT tax which fulfils the same purpose as GST.

In India, the discussion on GST Law was flagged off in the year 2000, when the then Prime Minister Atal Bihari Vajpayee brought the issue to the table. 

3.           Tax system before GST

Previously, Indian consumers had to pay indirect tax on goods and services such as Value Added Tax, Service Tax, Excise Duty, Customs Duty, etc. and each State has a right to levy their own tax on the goods coming into their dominion for sale and consumption, while the Centre levies taxes on manufacture of the goods. All these direct taxes levied on the traders are passed down to the consumer.

The taxes levied by the State and Central Governments is given in the table below:

Central Government	State Government	Local Administration
Income Tax	Sales Tax	Property Tax
Excise Duty or Central VAT	Value Added Tax
Service Tax	Entertainment Tax
Customs Duty	Road Toll
Central Sales Tax	Professional Tax
	Stamp Duty
	Luxury Tax
	Octroi Duty
	Capital Gains Tax
	Entry tax

GST will prevent the multiple taxation occurring on certain goods, and ensure transparency with regards to the rate of taxation and the total amount that goes to the government as taxes on a product. Currently, a consumer is not aware of the total amount of taxes s/he pays for a product, apart from VAT which is mentioned on the bill.

Here’s a list of taxes that the GST will likely replace:

·         Service Tax

·         Cesses and surcharges related to supply of goods or services

·         Central Excise Duty

·         Excise Duties on medicinal and toilet preparations

·         Additional Excise Duties on textiles and textile products

·         Additional Excise Duties on goods of special importance

·         Additional Customs Duties (CVD)

·         Special Additional Duty of Customs (SAD)

These are the taxes that could be absorbed into the GST regime:

·         Central Sales Tax

·         State VAT

·         Entry Tax

·         Purchase Tax

·         Entertainment Tax (not levied by local bodies)

·         Luxury Tax

·         Taxes on advertisements

·         State cesses and surcharges

·         Taxes on lotteries, betting and gambling

The exact rates of GST have not been decided yet. This will be done only after repeated consultations on the reports made by the GST Council. The rates being discussed as of now hover around 18%, which may be higher than the current system for certain goods and services, and lower for the others.

 4.           one nation, one market, one tax: implementation of GST

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

There are multiple steps an item goes through from manufacture or production to the final sale. Buying of raw materials is the first stage. The second stage is production or manufacture. Then, there is the warehousing of materials. Next, comes the sale of the product to the retailer. And in the final stage, the retailer sells you – the end consumer – the product, completing its life cycle.

So, if we had to look at a pictorial description of the various stages, it would look like:

Let us assume that a manufacturer wants to make a shirt. For this he must buy yarn. This gets turned into a shirt after manufacture. So, the value of the yarn is increased when it gets woven into a shirt. Then, the manufacturer sells it to the warehousing agent who attaches labels and tags to each shirt. That is another addition of value after which the warehouse sells it to the retailer who packages each shirt separately and invests in marketing of the shirt thus increasing its value. Thus with every new process value addition is being performed on raw cotton yarn.

GST will be levied on these value additions – the monetary worth added at each stage to achieve the final sale to the end customer.

Also, GST is a Destination-Based tax. Goods and Services Tax will be levied on all transactions happening during the entire manufacturing chain. Earlier, when a product was manufactured, the centre would levy an Excise Duty on the manufacture, and then the state will add a VAT tax when the item is sold to the next stage in the cycle. Then there would be a VAT at the next point of sale.

Now, Goods and Services Tax will be levied at every point of sale. Assume that the entire manufacture process is happening in Rajasthan and the final point of sale is in Karnataka. Since Goods & Services Tax is 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 point of sale/destination which is Karnataka.

How does GST work?

There will be 3 kinds of applicable Goods and Services Taxes:

CGST: where the revenue will be collected by the central government

SGST: where the revenue will be collected by the state governments for intra-state sales

IGST: where the revenue will be collected by the central government for inter-state sales

In most cases, the tax structure under the new regime will be as follows:

Transaction	New Regime	Old Regime	Comments
Sale within the state	CGST + SGST	VAT + Central Excise/Service tax	Revenue will now be shared between the Centre and the State
Sale to another State	IGST	Central Sales Tax + Excise/Service Tax	There will only be one type of tax (central) now in case of inter-state sales.

 5.           Gst EXPLAINED: the technicalities

For example a shirt manufacturer pays Rs. 100 to buy raw materials. If the rate of taxes is set at 10%, and there is no profit or loss involved, then he has to pay Rs. 10 as tax. So, the final cost of the shirt now becomes Rs (100+10=) 110.

At the next stage, the wholesaler buys the shirt from the manufacturer at Rs. 110, and adds labels to it. When he is adding labels, he is adding value. Therefore, his cost increases by say Rs. 40. On top of this, he has to pay a 10% tax, and the final cost therefore becomes Rs. (110+40=) 150 + 10% tax = Rs. 165.

Now, the retailer pays Rs. 165 to buy the shirt from the wholesaler because the tax liability had passed on to him. He has to package the shirt, and when he does that, he is adding value again. This time, let’s say his value add is Rs. 30. Now when he sells the shirt, he adds this value (plus the VAT he has to pay the government) to the final cost. So, the cost of the shirt becomes Rs. 214.5 Let us see a breakup for this:

Cost = Rs. 165 + Value add = Rs. 30 + 10% tax = Rs. 195 + Rs. 19.5 = Rs. 214.5

So, the customer pays Rs. 214.5 for a shirt the cost price of which was basically only Rs. 170 (Rs 110 + Rs. 40 + Rs. 30). Along the way the tax liability was passed on at every stage of transaction and the final liability comes to rest with the customer. This is called the Cascading Effect of Taxes where a tax is paid on tax and the value of the item keeps increasing every time this happens.

Action	Cost	10% Tax	Total
Buys Raw Material @ 100	100	10	110
Manufactures @ 40	150	15	165
Adds value @ 30	195	19.5	214.5
Total	170	44.5	214.5

In the case of Goods and Services Tax, there is a way to claim credit for tax paid in acquiring input. What happens in this case is, the individual who has paid a tax already can claim credit for this tax when he submits his taxes.

In our example, when the wholesaler buys from the manufacturer, he pays a 10% 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. Now he has to pay 10% of this price to the government as tax. But he has already paid one tax to the manufacturer. So, this time what he does is, 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 he paid on his purchase from his new liability of Rs. 14, and pays only Rs. 4 to the government. So, the Rs. 10 becomes his input credit.

When he pays Rs. 4 to the government, he can pass on its liability to the retailer. So, the retailer pays Rs. (140+14=) 154 to him to buy the shirt. At the next stage, the retailer adds value of Rs. 30 to his cost price and has to pay a 10% tax on it to the government. When he adds value, his price becomes Rs. 170. Now, if he had to pay 10% tax on it, he would pass on the liability to the customer. But he already has input credit because he has paid Rs.14 to the wholesaler as the latter’s tax. 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. And therefore, he can now sell the shirt for Rs. (140+30+17) 187 to the customer.

Action	Cost	10% Tax	Actual Liability	Total
Buys Raw Material	100	10	10	110
Manufactures @ 40	140	14	4	154
Adds Value @ 30	170	17	3	187
Total	170		17	187

In the end, every time an individual was able to claim input tax credit, the sale price for him reduced and the cost price for the person buying his product reduced because of a lower tax liability. The final value of the shirt also therefore reduced from Rs. 214.5 to Rs. 187, thus reducing the tax burden on the final customer.

So essentially, Goods & Services Tax is going to have a two-pronged benefit. One, it will reduce the cascading effect of taxes, and second, by allowing input tax credit, it will reduce the burden of taxes and, hopefully, prices. 

 

 6.           the road ahead and impact of gst

 For the successful implementation of GST in the country, the Central and State Governments have jointly registered Goods and Services Tax Network (GSTN) as a not-for-profit, non-Government Company to provide shared IT infrastructure and services to Central and State Governments, tax payers and other stakeholders. The key objectives of GSTN are to provide a standard and uniform interface to the taxpayers, and shared infrastructure and services to Central and State/UT governments.

 GSTN is working on developing a state-of-the-art comprehensive IT infrastructure including the common GST portal providing frontend services of registration, returns and payments to all taxpayers, as well as the backend IT modules for certain States that include processing of returns, registrations, audits, assessments, appeals, etc. All States, accounting authorities, RBI and banks, are also preparing their IT infrastructure for the administration of GST.

There would no manual filing of returns. All taxes can also be paid online. All mis-matched returns would be auto-generated, and there would be no need for manual interventions. Most returns would be self-assessed.

The major features of the proposed registration procedures under GST are as follows:

1.     Existing dealers: Existing VAT/Central excise/Service Tax payers will not have to apply afresh for registration under GST.

2.     New dealers: Single application to be filed online for registration under GST.

3.     The registration number will be PAN based and will serve the purpose for Centre and State.

4.     Unified application to both tax authorities.

5.     Each dealer to be given unique ID GSTIN.

6.     Deemed approval within three days.

 What will be expensive?

Eating Out

Dining out will be expensive. Here’s an example explaining how -

In a restaurant, say a consumer spends Rs.100. Currently you pay an average of 18.5% as service tax and VAT. So apart from the service charge, you usually shell out Rs 118.5.Now, according to GST, it’s expected that the rates can be fixed at 18 to 20%.Accordingly at 20% approximate tax rate, your bill will be 120 rupees.

Phone Bills

Suppose on a bill of Rs 100 on which consumer pays service tax of 15 % and finally pays Rs 115 as total amount to his service provider.After GST, if the tax rate is fixed at 18 % then he will have to bear the brunt of Rs 118.After implementation of GST, internet packs and call rates are likely to get higher.

Jewellery

The yellow metal too is all set to become expensive. At this point of time, only 2% tax is paid by the buyers, but sadly though, according to GST at least 6 % is expected to be paid by buyers. This will impact jewellery sales.

Online Shopping

For every purchase from its sellers, the e commerce companies will pay a fixed TDS.Consequently, the cost for example commerce will increase. This will affect sales as customers will be expected to shell out more money for the same goods.

Banking & Insurance

Services offered by banks are taxed at 14.5% currently which under GST regime are likely to become costlier at standard rate of 17-18%.Several services by bank to a customer are centralized or localized. These complexities add to compliance costs, making it expensive for consumers.

Travelling

Air tickets to will become expensive. Service tax on airline fares ranges between 6%-9%. GST will pump the taxes up further to 15%-17%

 What will be cheaper?

Buying a car

The luxury of a car will now seem reachable for the common man.Buying a car will be hassle free in different states with same prices everywhere.So a Rs.5 lakh car with excise duty of 12.5 % and with VAT roughly totals to Rs 6.25 lakh. Now under the GST, it is expected to get lower up till Rs 35,000. If the rate is fixed at 18%, the price will now be Rs 5.9 lakhs. Automobile industry looks upwards.

Televisions

Currently a buyer shells out Rs 20,000 for a basic LED TV plus 24.5 % tax making the total cost rise to Rs 24,900. As GST will be around 18 to 20 %, the buyer will now approximately pay Rs 23,600.

Movie Tickets

Entertainment Taxes are likely to reduce by 2-4%.Multiplex chains will increase revenues as current high rate of entertainment tax will be uniform in all parts of the country. Lower the ticket price, higher the ticket sales. Even film producers will benefit from this advancement.

Processed Foods

Companies manufacturing processed food pay various taxes summing up to 24%-25%. With GST, it’ll sum up to 17%-19%. Such great savings from the taxes may issue a decrease in prices of products, making it cheaper for end consumers.

Cement

Tax for cement is 25%. With GST it will become 18%-20%. With logistics cost also decreasing, cement depots will also decrease. Overall cost will also decrease.

7. Conclusion

 GST is being referred as a single taxation system but in reality it is a dual tax in which state and centre both collects separate tax on a single transaction of sale and service. Earlier, majority of dealers were not covered with the central excise but were only paying VAT in the state. Now all the Vat dealers will be required to pay “Central Goods and service tax”.

 However, the political battles as well as the technical debates have so dominated public discourse that the original economic rationale for GST has receded from the spotlight. There are 2 important political economy issues that need a fresh airing. First, there is the fundamental idea from Adam Smith that the division of labour is limited by the extent of the market. In other words, the integration of the domestic market through the GST will improve economic efficiency. 

The needless fragmentation of Indian supply chains will be minimized. India will truly become a common market, nearly seven decades after its political integration Second, two classic papers in the modern theory of taxation by Peter Diamond and James Mirrlees—both Nobel laureates—presented the theory of optimal taxation. One of the lessons learnt is that optimal tax systems should not tax the production of intermediate goods. The idea underlying this insight is that taxation on intermediate goods leads to the diversion of resources away from the production of final goods. The burden of taxation should fall on income and consumption in order to maximize efficiency. The GST is actually a tax on final consumption rather than a tax paid across the value chain, and is hence close to the Diamond-Mirrlees norm.

Everything has their good and bad points. In my view, the balance tips in favor of GST .The main reason to implement GST is to abolish the cascading effect on tax. The GST is being introduced to create a common market across states, not only to avoid enfeebled effect of indirect tax but also to improve tax compliance. It will lead a more transparent and neutral manner to raise revenue. GST is structured to simplify the current indirect system. It is a long term strategy leading to a higher output, more employment opportunities, and economic boom. GST is beneficial for both economy and corporations. The reduced tax burden on companies will reduce production cost making exporters more competitive. GST is also beneficial for agriculture as now more and more transactions which were originally cash based are coming under organised channels of trade and can transfer benefits directly to farmers. GST will improve the ease of doing business in India that would definitely be the biggest economic achievement till date.

In the End , i'd like to credit the websites and links i've used for reference
http://www.gstindia.com/about/
https://cleartax.in/s/gst-law-goods-and-services-tax
http://www.livemint.com/Opinion/XEghSAGTVEhXMkqzyoITrN/The-economics-of-GST.html
http://taxguru.in/goods-and-service-tax/igst-model-gst-replacement-cst-practical-examples.html

you can read them as well for more information :-)