If you are from India or if you are working out of India, you might be well aware that
from 1st of July 2017, there will be GST levied on all types of indirect taxes that we have
today.
While you might have seen some people opposing it, some people are in the favour of GST.
People are getting really confused as some products might get cheaper while others will
be even more costly.
But the fact is, it is quite easy to understand GST if someone explains it you in a simple
way, and that is what I am here for.
Regardless of you being a manufacturer or a consumer, you need to know these simple
concepts in order to track what you will be paying to government from 1st of July.
In case you are not from India, well, having a little insight about tax systems is certainly
not going to hurt you.
Now all of you might be knowing what exactly a tax is?
For those of who doesn�t know, a tax is a financial charge or some other type of levy
imposed upon a taxpayer by a state or the functional equivalent of a state in order
to fund various public expenditures or to pay off the national debts.
Taxes can be of two types, Direct and Indirect.
Direct Tax basically is something whose liability can�t be shifted to someone else.
Or to put it simply, direct tax is a tax imposed upon a person or a property.
Example for it can be Corporate Tax, Income Tax, Wealth Tax etc.
On the other hand, Indirect tax is a kind of tax whose liability can be shifted to someone
else.
An indirect tax is a tax collected by an intermediary (such as a retail store) from the person who
bears the ultimate economic burden of the tax (such as the consumer).
Examples for it can be Central Excise Tax, Sales Tax, Services Tax etc.
We are going to talk about indirect taxes here.
The present structure of Indirect Taxes is very complex in India.
There are so many types of taxes that are levied by the Central and State Governments
on Goods & Services.
We have to pay �Entertainment Tax� for watching a movie.
We have to pay Value Added Tax (VAT) on purchasing goods & services.
And there are Excise duties, Import Duties, Luxury Tax, Central Sales Tax, Service Tax
and much more.
As of today some of these taxes are levied by the Central Government and some are by
the State governments.
So, how will it be if there is only one unified tax rate instead of all these taxes?
That is when GST, which is also known as Goods and Service Tax comes into play.
So let�s try to understand it in respect to the current tax system.
For this explanation, consider a simplified tax rate of 10% at each level.
There are generally 4 levels.
Manufacturer, Distributor, Whole Seller and Retailer.
Let�s say manufacturer buys raw materials of the product for Rs50 and creates the product.
Creating adds Rs50 more to value and product is now of Rs100.
For selling this product, he needs to pay a tax of 10% which converts to 10 rupees here
and the cost of product for distributor is 110.
Distributor adds a value of Rs20 to the product which is nothing but profit and the product
is now of 130 rupees.
Now again 10% tax is levied and 10% of 130 is 13 rupees, so the product cost for the
whole seller is now 143 rupees.
Now the whole seller does the same and price gets to 163 rupees.
Upon this, further 10% tax is added which bring the price of product for retailer to
179.3 rupees.
Retailer again adds 20 rupees for profit, bringing the price to 199.3, let�s say 200
for simplicity and then the retailer adds 10% tax on the product.
So the final price of the product that boils down to the consumer is around 220 rupees.
This is how the current tax system works.
Now in India, we are following dual tax system of GST where State and Government collects
separate tax on a single transaction of sale or service.
In this GST system, we have CGST that is Central GST levied by Central Government.
We then have SGST that is State GST levied by State Government and then finally, we have
IGST that is Integrated GST which will be levied by Central Government on inter-State
supply of goods and services.
Now let�s try to look into the same example using GST system.
So the manufacturer spends Rs50 for raw material and makes a product which adds 50 rupees value
to it, taking the worth to 100 rupees.
Now the State and Central will collect 5% tax each on the price which bumps the price
for distributor to 110 rupees.
Now the distributor adds it profit of 20 rupees and the product is now worth Rs130.
Again 5% tax will be levied by the State and Central government each, but this time on
the cost price of product for distributor.
So, 5% of 110 is 5.5 rupees.
It will make the cost of product for whole seller at 141 rupees.
Now whole seller will add 20 rupees profit to it which brings the price to 161.
Again 5% tax levied by central and state government on the cost price of whole seller.
5% of 141 is 7.05 rupees.
So total cost will for retailer will be 175.1 rupees.
Now the retailer will add 20 rupees profit to the product, getting the price at around
195.1 rupees and again, pays 5% tax on the cost price to both, central and state government.
This brings the final price for consumer as 212.61 rupees.
In case some of you are wondering what�s IGST, it is taxed when goods are moved from
one state to another.
Now as you can see, the price what you get here is cheaper but that�s not always the
case in this system.
In fact, some of the services that you are going to use will be costlier than before.
Those items can be packaged foods, mobile bills, personal care items, Gold, Consumer
durables like TV, Fridge, Washing Machine and of course, Cigarettes.
While mobile bills, DTH and other such services will be taxed at 18% now which earlier was
15%, cigarettes will be taxed at a whopping 28%.
Even personal care items will be in 28% tax slab which right now is 22%, gold will be
taxed at 3% which right now is 2%.
Now what are the things that would come down?
Smartphones will drop down in 12% tax slab which right now is 13.5% whereas Entertainment
sector like movies will remain at 18%, which is beneficial if you remember the example
I just explained.
The cost of luxury cars and two wheelers are also supposed to drop and you might even see
a price drop in Health Care, School Fees, Courier Services etc.
The monthly grocery bill will give you reasons to be happy as food grains have been exempted
from any of the tax slabs and even the transportation tax will drop from 6% to 5%.
Apart from all this, there will be some items which will be exempted from the GST.
They include Alcohol for human consumption, Petroleum Products like Petrol, Diesel, Natural
Gas etc.
Now when I say exemption, it doesn�t mean it won�t be taxed, just that their taxation
system won�t follow the proposed GST.
Now there are some items on which taxes are exempted.
That includes, stamp duty, property tax, toll tax, electricity duty etc.
So now that we know about GST in detail and about the goods or services that might get
costlier or cheaper, let�s talk about the pros and cons of GST.
Now look, we all have different take on the economy of a country and you might disagree
to some of the points that I make, but, this view of mine is completely subjective and
can vary from one person to another.
With that said, let�s first talk about what I think are the pros.
1.
The main reason to implement GST is to abolish the cascading effect on tax.
A product on which excise duty is paid can also be liable for VAT.
Suppose a product A is manufactured in a factory.
As soon as it releases from factory, excise duty has to be paid to central government.
When that product A is sold in same state then VAT has to be paid to state government.
Also no credit on excise duty paid can be taken against output VAT.
This is termed as cascading effect since double tax is levied on same product.
2.
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.
3.
GST will lead a more transparent and neutral manner to raise revenue.
4.
Price reduction as credit of input tax is available against output tax.
5.
GST is structured to simplify the current indirect system.
It is a long term strategy leading to a higher output, more employment opportunities, and
a potential economic boom.
Government claims that it might increase nation�s economy by 2% which I think is huge, but looks
farfetched to me.
6.
GST is beneficial for both economy and corporations.
The reduced tax burden on companies will reduce production cost, making exporters more competitive.
So, now that you guys know about what I think are the pros, let�s talk about the cons
of GST.
1.
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.
2.
Majority of dealers are not covered with the central excise but are only paying VAT in
the state.
Now all the Vat dealers will be required to pay �Central Goods and service tax�.
No wonder why some of the small retailers are quite furious about it.
3.
Basic taxes have been enhanced to 18% and normal rate of overall tax will be 26%.
This rate is very high comparing to the fact that small and medium Industries are at present
not covered by the central excise and most of the Goods such as agricultural products
are out of the preview of the Central Excise.
4.
Improvement in the Manufacturing and distribution of Goods and service, increase in exports,
various reforms, check on corruption, less Government control are some of the factors
which are responsible for the economic growth of the country.
A tax system can make a revolution in the economy of the country is �rarest of the
rare� thing.
So, basically doing all these tantrums might result in no change.
So guys, these are what I think are the cons of this system.
Now, knowledge of finance is something which I think is really important.
If only you know things in detail, you will be able to handle any such change that government
throws at you.
And this is the reason why I covered this topic in the very first place.
So, do check out my other videos on this channel to know about taxation system, finance and
much more.
Hit Like if you found this piece of information helpful.
Do pose your questions and let me know about your thoughts on this in the comments section
below.
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My name is Divyanshu and I will see you all soon, Stay blessed.
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