Few days back GST (Goods and Services Tax) bill was passed in the parliament without any resistance.
Almost every member in the parliament voted in the favor of the bill.
We are writing this article to tell you about GST, its importance and how GST is going to affect not only manufacturers and retailers but also end consumers like you and me.
Finally we will tell its advantages and disadvantages.
Importance of GST
Before I tell you about the GST, you need to know why GST is important for the country. GST is perhaps the biggest tax reform in India since the liberalization of economy 25 years ago.
The importance of GST is that it will spur the growth in the country and expand the economy.
Right now Indian economy is just $2 Trillion and if it has to expand then it needs stimulus and the best way to do is by reforming the tax structure.
GST will certainly increase the consumption helping economy to grow substantially.
Now India as a whole nation is under one unified common market helping small and medium size businesses to grow.
What is GST?
According to government of India, GST is a one monolith tax regime on supply of goods and services right from manufacturer to the end consumers.
In other words credits of input taxes which are paid at each level will be available in the following level of value addition.
This will make GST a tax only on value addition at each level.
In simple words the end consumers like you and me will have to pay the GST charged by the last entity (which is retailer) in the supply chain.
Earlier you were paying taxes added by manufacturer to wholesaler to retailer. Now you only pay for the retailer in the supply chain.
We shall discuss this in great details with an example in next paragraph.
How GST Will Affect Manufacturers, Wholesalers, Retailers & End Consumers
Now let us see through an example how GST is going to impact everyone in the chain, from manufacturer to consumers.
Take an example of a commodity say shirt.
- Stage 1: Manufacturer
- Stage 2: Wholesaler
- Stage 3: Retailer
- Stage 4: End Consumer
|Non GST Regime||GST Regime|
|1||MRP of a shirt is Rs 208.23. Let us see how we reached the final price.||MRP for GST is just Rs 166 (Rs 42.23 off)|
|2||First Manufacturer buys the shirt for Rs 100 (Including Rs 10 Tax)||Now let us see same cost of the shirt under GST Regime. Manufacturer buys for Rs 100 (Including Rs 10 Tax)|
|3||Then the Manufacturer adds value of Rs 30, Making the shirt cost Rs 130, Assuming the tax rate of 10% = Rs 13||Manufacturer adds value of Rs 30, Making it Rs 130|Rs 13 can be offset against the tax on raw materials, so effective tax is Rs 13-Rs10=Rs 3|
|4||So the shirt sold to the Wholesaler by the manufacturer would be Rs 143 (Rs 130+13)||So the shirt sold to Wholesaler is Rs 130 with no tax.|
|5||Now Wholesaler adds a margin Rs 20, Price = Rs 163 (143+20), again adding 10% tax=16.3, Shirt Cost = 179.3 (163+16.3)||Wholesaler adds a margin Rs 20, Price = Rs 150 (130+20), adding 10% tax=15, Rs 15 offset against Rs 13 tax paid earlier. GST on wholesaler will be Rs 15 –Rs 13 = Rs 2|
|6||Next is Retailer buys for 179.3 and adds margin of Rs 10, Making the shirt cost 179.3+10 = Rs 189.3, Add tax of 10% = 18.93, Shirt Cost =189.3+18.93= Rs 208.23||Retailers buys for Rs 150 and adds margin of Rs 10, Making shirt Cost Rs 150 + 10 = Rs 160, Add tax of 10% = Rs 16, Rs 16 offset against Rs 15 tax paid earlier. GST will be Rs 16 – Rs 15 = Re 1, Final Dress = Rs 166|
|7||So the final cost of the shirt that a retailer is going to sell you would be Rs 208.23.|
This is how we finally came to NON GST price of a shirt = Rs 208.23 (You pay Tax of Rs. 58.23 = 10 + 13 + 16.3 + 18.93) Total tax paid.
|So the final cost of the shirt under GST will be Rs 166 and you pay only Rs 16 tax (Tax is Rs 16 = 10 +3+2+1) as compared to NON GST where you pay Rs 58.23|
Manufacturer bought for 100 (10 tax inc.)
- Manufacturer >>100+30 (Margin) =130,
- Wholesaler buys at 143 (130+13(10% of 130))
- Wholesaler>>143>143+20 (margin) =163,
- Wholesaler>>179.3 (163+16.3(a tax @10% of 163))
- Retailer buys it for Rs 179.3+10 (Margin) =189.3,
- Retailer >> Rs 208.23 (189.3+18.93 (tax @ of 10% of 189.93))
End Consumer buys for Rs 208.23
Manufacturer bought for 100 (including Rs.10 tax)
- Manufacturer >>100 + 30 (Margin) = 130,
OFFSET: Rs 13 (10% tax of Rs 130) – Rs 10 (Earlier Paid) = Rs 3
So effective tax is Rs 3
- Wholesaler>> Rs 130 with no tax
- Wholesaler>> Rs 130 + Rs 20 (Margin) = Rs 150/-
OFFSET: Rs 15 (10% tax of Rs 150) – Rs 13 (Earlier Paid) = Rs 2
So effective tax is Rs 2
- Retailer>> Rs 150
- Retailer>> Rs 150 + Rs 10 (Margin) = Rs 160
OFFSET: Rs 16 (10% tax of Rs 160) – Rs 15 (Earlier Paid) = Re 1
So effective tax is Re 1
Total Effective tax = Rs 3 + Rs 2 + Re 1 = Rs 6
- End Consumer buys Shirt = Rs 166 (Rs 160 + Rs 6)
Different Taxes GST Will End
Here is the list of taxes that will be gone after the implementation of GST.
You can divide these taxes in two categories Central taxes and states taxes.
Central Taxes to Go
- Central Excise Duty
- Service Tax
- Duties of Excise
- Additional Duties of Excise
- Additional Duties of Custom
- Special Additional Duty of Customs
States Taxes to Go
- State VAT
- Central Sales Tax
- Purchase Tax
- Luxury Tax
- Entry Tax
- Entertainment Tax
- Taxes on Advertisements and lotteries
So these were taxes that will go.
Advantages of GST
There is no doubt that GST has a number of benefits whether you are a manufacturer, wholesaler, retailer or an end consumer. Everyone in the chain benefits from GST.
However in short we complied some of the major advantages of GST that you need to know.
What does it mean?
You can’t define manufacturing because it is very complex and controversial issue.
Therefore the term manufacture is defined by Supreme Court or high court and not by businesses and academics.
After the GST the concept of manufacturing would not exist because it will be replaced by value added which is calculated numerically.
Now the country will have one tax and not 16 different taxes.
GST will allow the amalgamation of various central taxes and the state taxes enabling one tax regime.
So there will be common base for charging GST therefore getting rid of many unwanted taxes.
One Common Marketplace
Earlier many quality goods and products manufactured in one state weren’t sold in other because of entry tax and CST.
However with GST there will be one common market which means it will be easier for companies to sell goods across India without worrying about CST and entry tax.
No Entry Tax
As I mentioned in earlier paragraph there will be no entry tax as well as CST.
Entry tax was the main hindrance for the movement of goods by the road transport. Because of this long distance trucker’s are parked most of their time.
With GST it will be boom in the fast movement of goods.
GST will make invoicing quite simpler. Right now an invoice includes taxes on goods and services separately for each transaction.
Right now taxes were stacked up and you end up paying more because the taxes are passed on by manufacturer to wholesaler to retailer to an end consumer.
However, after GST there will be only one tax rate written.
Common Tax Exemption Between Center and State
After the implementation of GST the tax exemptions will be common between the center and the states.
It means the duty rates will be same all across India.
Currently exemptions given by Center and states are quite different so the final price is different in different states.
No Distinction Between Goods and Services
Usually goods and services are two different categories. There is a difference when they are sold as a package.
However after GST there won’t be any difference.
No Big Central Excise Tariff
The big central excise tariff was one of the many impediments in business growth. It will be gone after GST.
They have different rates at different times. After the implementation of GST they will be replaced with one tax regimen.
This will be great.
So these were few well known advantages of GST that you need to know.
Disadvantage of GST
Until reading now GST looks very good. But can there be problems with GST because you got to also look at the other side of the story.
Some are saying Central tax will not go and it will be added in GST.
Moreover GST will impact housing and real estate sector thus making homes more expensive.
Some are also saying GST will be higher than some of the current taxes because we will be using double GST and not single GST.
So these were few disadvantages pointed by experts in the industry.
In coming days we have to see how GST will be implemented.
After reading this article you will get an idea how GST is going to change entire tax structure prevailing in the country helping businesses to grow and economy to expand.