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GST in India

B
Bindu Rekha Babu
21 Sep, 2020 - Updated 6 months ago

Introduction

Goods and Service Tax or GST is a consumption based tax on the supply of goods and services, at each stage of sale or purchase, right from the manufacturer to the consumer. It is the replacement of all indirect taxes such as service tax, central excise and customs duty, and value added tax (VAT), levied on goods and services by the Indian Central and state governments.

What is the difference between the Current Taxation system and upcoming GST system?

The GST is an indirect tax where the tax is passed on till the last stage of the purchase cycle, wherein it is the customer of the goods and services who bears the tax. This is same as today’s tax system but the difference is GST streamlines the current tax system and subsumes all the indirect taxes, thus eliminates the system of tax on tax.

To know the benefits of GST, let’s first understand the process of current tax system.

Consider a Surat based fabric manufacturing unit selling their fabric products to a wholesaler in same state. Let’s imagine that the cost of 1 shirt is Rs.1000

Note! In this example, we are assuming that all taxes associated with the manufacturing process have been paid and the selling price in the first stage is the final price set by the manufacture (excluding VAT). To simplify the number let’s assume the VAT and CST= 10% each

Now, when the manufacturing unit sells 1 shirt with value = 1000 and VAT = 10%, the Selling Price of 1 shirt total’s up to Rs. 1100. The Wholesaler buys the shirt for Rs. 1100 and adds profit value of Rs. 200, where the cost of the shirt summing up to Rs. 1300.

Next, consider that the wholesaler sells the shirt to a retailer located in another state say Bhopal.
Since states have their exclusive domain on consumption tax within their borders, they treat goods coming from other states as “imports.”
As a result, a CST of 10% (on the entire amount) is applied, and so the retailer actually owes Rs.1430 instead of just Rs.1300.

Retailer purchases the shirt for Rs.1430 adds profit value of Rs. 250 and VAT = 10% summing up the Selling price to Rs. 1848. So, the customer purchases the shirt at the cost of Rs. 1848.

Current Tax System

Location Buyer Product Value Profit Value Tax Selling Price
Surat Manufacturing Unit Rs. 1000 - VAT = 14.5% Rs. 1145
Surat Wholesaler Rs. 1145 Rs. 500 CST = 12% (on 1645) Rs. 1842
Bhopal Retailer Rs. 1842 Rs. 500 VAT = 14.5% (on 2342) Rs. 2682
Bhopal End Customer Rs. 2682 - - -

As the example suggests, India is politically one country, but economically it is fragmented. There are multiple taxes when there is commerce across state borders. Consequently, it increases costs for everyone and makes economic activity within India for Indians complicated.

Now, let’s consider the above example with GST System.

The manufacturer would start the cycle by selling the shirt to the wholesaler for a selling price of Rs.1000 + GST of 10% making the total Rs.1100.

The wholesaler located at Surat would then add profit value of Rs. 200 to the product and sell it to the retailer located at Bhopal. Here, an IGST of 10% (on the value added which is = Rs.200 i.e., Rs.20 ) is applied, and so the retailer actually owes Rs.1320.

Then, the retailer adds a profit value of Rs. 250 over the purchase value of the shirt, and sells it to a local customer. Here, a GST of 10% (on the value added which is = 250 i.e., Rs. 25) is applied, costing the customer a total of Rs.1595/shirt.

GST

Location Buyer Product Value Profit Value Tax Selling Price
Surat Manufacturing Unit Rs. 1000 - CGST + SGST = 12% Rs. 1120
Surat Wholesaler Rs. 1120 Rs. 500 IGST = 12% (on 500) Rs. 1680
Bhopal Retailer Rs. 1680 Rs. 500 CGST + SGST = 12% (on 500) Rs. 2240
Bhopal End Customer Rs. 2240 - - -
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