Good and Services Tax ( GST) is a destination-based tax also commonly understood as indirect Tax. It has subsumed almost all indirect taxes. It is a multi-level tax where Tax is imposed on every level of the production process. But as this is a destination-based tax, all the taxes imposed on every level of production are meant to be returned, and the Tax is collected from the final consumer.
A short Essay on GST, which is further added below, might be helpful in getting some knowledge of what GST is all about in reality. There are a lot of myths and rumors that have been doing the rounds on social media and among taxpayers.
A good look at the dedicated GST portal from the government might help in getting a better understanding of this Act. If you are a taxpayer, it will help you a great deal to get comfortable with the GST portal.
It is not only useful for different requirements that a taxpayer might have, but it will also be informational. Initially, a taxpayer might check the GST portal to register or to check how to download GST Certificate, but it is much more than that. It is basically a one-stop solution for everything a taxpayer needs. Information about filing taxes, queries on different tax slabs, about the laws, or any legality is available in a downloadable pdf format.
Few basics and examples:
Goods: Anything tangible that is produced, manufactured, bought, or sold and consumed.
Example of Goods: textiles, footwear, furniture, vehicles, etc.
Services: Intangible, Non-physical parts of the economy.
Examples of services: Medical treatment, transportation, marketing, sales, education, etc.
Taxes: A mandatory contribution to revenue of the country, levied by the government on business profits and workers’ income. It can also be cost added to some of the goods, services, and transactions.
There are two types of taxes. Direct Tax and Indirect Tax.
Direct Tax: A direct tax levied on income or profits of the individual who pays it, rather than on goods and services, such as Wealth Tax, Corporation Tax, Income Tax Etc.
Indirect Tax: a Tax levied on goods and services rather than on income or profit. Such as Value Added Tax(VAT), Sales Tax, Entertainment Tax, Service Tax, Excise Etc.
Previously, through Indirect Tax, many taxes of different slabs were levied on single service or product, creating complications and difficulty for the government in the collection of taxes. GST replaced this old tax system. It is an amalgamation of all those indirect taxes into one single Tax. It reduced complications and helped in ease of doing business as well as the collection of taxes. The GST is further divided into 3 parts. S-GST, C-GST, and I-GST.
Example of how GST was a game-changer.
A product goes through many different levels after being manufactured. Like a manufacturer who manufactures the product. It then moves to the wholesaler who sells the product in bulk quantities at lower prices. Then a retailer who sells it directly to the consumer. This has been the standard chain of supplier that a product moves from when it is made to when it reaches a consumer.
Example of the previous tax system.
If a manufacturer buys raw material of Rs. 50 and adds Rs. 50 as production and profit, the total value of the product becomes Rs. 100. With a 10% tax on the product, it becomes Rs.10 paid by the manufacturer as taxes for that product. Manufactures adds this to the cost of the product. “Manufacturers price + 10% tax = final value. 100 + 10 = 110.”
The wholesaler will get that product for Rs.110 from the manufacturer. The wholesaler will add their profit. Let’s say Rs. 10 to the product making the overall value reach Rs. 120. The taxes paid by the wholesaler will be Rs. 12 for the product of 120 as a 10% tax.”Wholesaler price + 10% tax = final value. 120+12 = 132.
Similarly, when it reaches the retailer at the cost of Rs. 132, and with the added profit of Rs. 10 by the retailer, the value of the product will be “Retailers price + 10% tax = final value. 142+14.2 = 156.2”
Here consumer gets the product for the price of Rs.152. This is a direct result of every single entity in the supply chain paying “tax on tax” for the same product making the value of the product increase. It results in consumers bearing the burden. This is called a cascading effect.
Example of GST with the same product value.
The total value of the product, including raw material and profit for the manufacturer, is Rs. 50 + Rs.50, making the product value Rs.100. Now under GST, the manufacturer will need to pay tax only on the “value addition costs,” which is a tax on production cost only ( 10% of Rs. 50 = Rs. 5). The value of the product for the manufacturer will be: “Manufacturers price + 10% GST (only on production) = final value. 100 + 5 = 105.
Now the wholesaler adds their profit of say Rs.10, bringing the total value to Rs.115. The wholesaler will only have to pay tax on the value addition, here the value addition of wholesaler is Rs. 10. GST of 10% on Rs. 10 will be Rs. 1. The value of the product will be “wholesalers price + GST = Final value. 115 + 1 = 116”
Similarly, the retailer will add their profit of say Rs. 10 with the Tax on value addition being Rs.1. The final value of the product will be 126 + 1 = 127.
The consumer will get the product for Rs. 127, whereas the same product would cost Rs. 156.2 with the previous system. The consumer gets the product at a lower price by Rs. 29.2.
The other significant change under the GST regime is the Input tax credit. With the Input tax credit, the Manufacturer, wholesaler, and retailer need to pay Tax once to the government; then, they can claim the tax paid. The catch here, however, is the innovative reform of the GST. Input credit can only be claimed when your supplier deposits the Tax they collected from you. So each and every input credit you claim should be matched and validated with the supplier.
GST Categories: GST is divided into 5 categories. 0%, 5%, 12%, 18% and 28%. However, alcoholic drinks, electricity, and petroleum products are not taxed under GST. These are taxed separately under state governments as per the previous tax system.
Some examples of Goods under each category:
0%: Items that are exempted from tax fall under 0% category. Goods such as books, bread, eggs, fresh vegetables, fresh fruits, etc.
5%: Widely used goods Shoes, Tea, Coffee, Train tickets, Small Restaurants, etc.
12%: Items such as Dates, Nuts, Insulin, Butter and other fats, Cheese, Condensed Milk, etc. fall under 12% category
18%: Beeswax, Sugar confectionery, Cocoa Butter, Chocolates, food containing cocoa, Cornflakes, etc. are some of the goods under 18% category.
28%: Mostly luxury goods fall under this category — items such as branded jeans, digital camera, cigars, 5-star hotels, etc.
- Items are subject to change and can be taken in a different category with each year’s budget.
There have been some changes that were made to GST since its launch, and it has been effective in creating a robust tax system. This Essay on GST might not provide full details of the complex tax system, but it should be good to give you a start in understanding how it works. A deeper understanding can be obtained from the GST portal. If you are someone who wants to get yourself registered under GST, then you should look at How to download the GST certificate. Without a GST certificate, you might not be enrolled under this law. Overall, this new tax system has been path-breaking on many levels, and the more you know, the more you will be able to benefit from this law.