GST is a common topic of discussion in business communities nowadays, and many of us have heard of it but are still clueless about it as a concept. Here’s the first segment from a series of segments elucidating on GST as a whole. I sincerely hope this helps you not only as a seller but as a taxpaying member of the country as well.
WHAT IS GST?
GST or ‘Goods and Service Tax’ is a comprehensive Indirect tax, being implemented from the 1st of July 2017 in India, and is levied on the manufacture, sale, and consumption of goods and services. It is very similar to the Indirect taxation imposed on producers of goods and services now – VAT, Service tax, etc., but all such taxes are unified in a single tax only.
It is the most awaited tax reform in India, which is set to affect all businesses (big or small). The indirect tax routine is going to witness a paradigm shift. As opposed to the current tax regime (which is an origin-based tax), GST is a destination- based tax. It aims to unify taxation throughout the country, and set in motion a One-Country-One-Tax regime.
I know this sounds too technical and confusing to understand, so let me break it down for you.
As per the current scenario, various taxes like Sales Tax, VAT (Value-added Tax), Excise duty, etc., are levied on manufactured goods. Service tax is paid on services; for instance, when you eat at a restaurant, you pay service tax. Depending on the business, be it – manufacturing, providing a service, selling a good/service, import/export, etc., people pay different taxes. These taxes are paid to the State and Central Governments, and more often we end up paying tax on a tax. This is called the ‘Cascading effect of tax’, where we pay more because of the various taxes. With the implementation of GST, we will all just pay a single tax – the Goods and Service Tax.
GST is also called a consumption based tax, that means the tax is collected by the state in which the goods or services is consumed in, as opposed to the state in which such goods are manufactured in. GST will have characteristics of both VAT (only charged on commodities) and Service Tax, among multiple other taxes. It will subsume all the other taxes, and get them under the same label.
Types Of GST – The Breakdown
The GST has been divided into three parts, namely
- Central GST (CGST) – This tax is levied by the Central Government for the Intra-state (between the same state) movement of goods, along with SGST.
- State GST (SGST) – This tax is levied by the State Government for the Intra-state movement of goods, along with CGST.
- Integrated GST (IGST) – As far as inter-state (between different states) movement of goods is concerned, IGST is levied. This is collected by the Central Government only.
So, who exactly will pocket the Goods and Service Tax?
Let me elaborate on what happens in the two scenarios:
- In the case of Intra-state transactions – The seller will collect both Central as well as State GSTs from the buyer, and deposit the CGST to the Central Government, and the SGST to the State Government.
- In the case of Inter-State transactions – Integrated GST will be charged in this case, which is levied as well as administered by the Central Government. The states will claim the credit over all such inter-state transactions.
But why do we need GST? How will it help us in comparison to the current tax regime? How do we enroll for GST? What is TDC?
I know all of us have a lot of questions. I will keep answering them in other articles. For now, let me leave you with an example of why the current regime is not working out for us.
Why Do We Need GST? (An Example)
Keeping in mind how Indirect taxation works out right now, let me explain what happens with one scenario.
It’s the weekend, and you have to buy groceries for your house. You put everything you need in the cart, and head towards the billing counter. Here you pay VAT (Value-added Tax), which is paid on all the commodities you purchase. VAT is paid at different rates, varying from 0 to 20%, depending upon the products you bought. Let’s say you bought products of 10,000, and are to pay VAT of 14%. So you end up paying 1400 rupees just as a value-added tax, which will be collected by your State Government (Delhi, in my case).
Now, let’s say you have to put some petrol in your car. Did you know that the retail price (price to dealers) for Petrol is Rs 27.95 per litre? This is the basic cost of petrol after refining, transportation, freight, etc. On this, Excise Duty is charged (collected by Central Government), at about Rs 21.48 per litre. The petrol pump dealers take a commission of about Rs. 2.58 per litre. Then, an addition VAT is charged (varies from state to state) which is 27% on Petrol for Delhi, and it makes another 14.28 Rupees. Here we are paying tax on the excise duty we have already borne (cascading effect of taxation). So, a litre of petrol comes out to be Rs 66.29/litre, and you pay extra. (Put a table for explanation).
Then, it being a Saturday, you plan a movie and dinner.
I am sure you didn’t know you paid an ‘entertainment tax’ on watching a movie at 20%. So that’s another extra 20% you shed on every movie you watch.
Then comes your dinner. Let’s imagine that the subtotal of your food came out to be 4000. Certain restaurants impose a Service Charge, which is decided by the restaurant itself. In this particular situation, let’s say the Service Charge is 10%. Now, over the food, you pay a Service tax of 5.6% [14% Service tax is charged on 40% of the food only, hence 5.6%]. Apart from that, you pay a VAT on your food & beverages (Excluding the Service tax amount), which is 14.5%. If you end up drinking alcohol, the VAT is 5.5%. Over and above this, you pay Swachh Bharat Cess & Krishi Kalyan Cell of 0.2% each. So, let’s see.
ISN’T THIS CONFUSING?
You won’t even realize when someone charges extra tax because you won’t check as it is so complex. No more worrying about paying so many different taxes with the GST model. It would be a single tax charged for all goods and service. GST will subsume all these taxes under a single label. Nobody can fool you, and you won’t end up paying extra tax. Won’t life be so easy?
Moreover, did you know you pay a luxury tax on a room you booked in a hotel? Or your gym membership? GST will subsume all of these taxes. I would explain this example with the GST rates and categories, but they are yet to be finalized.
Let me be clear – With GST, you won’t pay less tax. In fact, in some situations, you might end up paying more than you did earlier. And GST won’t be levied AT ALL on a lot of things, like – Crude Oil, Healthcare, Education, etc. Filing returns will also be a much easier task at hand since you have to file a single return, that too electronically. Furthermore, you know how while transporting products from one state to another requires Entry Tax or Octroi at each checkpoint. Now, that won’t happen anymore, and logistics would be easier and speedier.
GST is a long-term strategy, and if implemented properly country-wide, it is capable of changing lives for a lot of us.