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After a decade of discussion, the GST bill has finally been
passed. This bill will be implemented on July 1st, 2017. The bill
will relieve the consumers from the system of double taxation and
After a decade of discussion, the GST bill has finally been passed. This bill will be implemented on July 1st, 2017. The bill will relieve the consumers from the system of double taxation and will ultimately bring the price of the final product down.
What is GST?
GST or goods and services tax is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
The raw product goes through a lot of processes in order to be converted into the final product. GST will be paid at each stage of production making it a multi-stage tax.
2. Value Addition
At each stage of production, a value is added to the product. For example, a manufacturer buys cotton from the farmer for Rs50 and converts it into a yarn. He sells the yarn to another manufacturer for Rs60. Here he has added a value of Rs10 to the cotton by making it into a yarn. The final consumer pays the price for all the value added.
3. Destination Based
When a product is a manufactured, a tax is to be paid to both the central and state government. Excise duty is levied by the central government and VAT is applied by the state government. After the implementation of GST, it will be levied on each and every sale. For example, is a product is manufactured in Mumbai but sold in Karnataka, the Maharashtra government will receive tax at the manufacturing stage but the Karnataka government will earn revenue at the final point of consumption. Hence tax is levied based on the destination of the product.
Why is GST important?
GST will play a very important role in the taxation policy of India. As of now, India follows a double taxation policy i.e. direct tax and indirect tax. A direct tax is levied where the liabilities cannot be transferred like income tax. Indirect tax is levied where the liability can be passed to others. This is also known as VAT.
Due to this system, the consumer not only pays for the final product but also for the tax that has to be paid to the government. As a result of this the price of the commodity increases. GST will deal with this problem after its implementation. It has a system of input tax credit through which the sellers need not pay for the taxes already paid by the others and the liability of the consumer decreases.
How does GST work?
After the implementation of GST, there will be three kinds of taxes
1. CGST: revenue collected by the central government
2. SGST: revenue collected by the state on intra-state sale
3. IGST: revenue collected by the central government on inter-state sale
In a case of sale within the state, CGST and SGST will be applicable and the revenue will be collected by the center and the state.
In a case of an intra-state sale, only IGST will be levied and the revenue will be collected by the central government.
Benefit to the common man
Input tax credit is the credit a person receives for the tax paid on the inputs used during the manufacturing stage. So if a 10 percent tax has to be paid, an individual can minus the amount he paid as taxes at the time of purchase and give the rest to the government.
According to the earlier taxation method, the final value of the product is decided by adding the value added and taxes paid by the others. This is the Cascading Effect of taxes where a tax is paid on top of the previous tax and the value of the good keeps increasing.
ACTION Cost 10% tax Total
Buys raw material 100 10 110
Manufactures @40 150 15 165
Adds value @30 195 19.5 214.5
Total 170 44.5 214.5
In the case of GST, one can claim credit for tax paid for acquiring input. So no tax has to be paid on the previous taxes levied. The individual who has already paid the tax can claim credit for this tax. At the end, every time a person claims the input tax credit, the sale price reduces and ultimately the final cost price also reduces.
Action Cost 10% tax Actual liability Total
Buys raw material 100 10 10 110
Manufactures @40 140 14 4 154
Adds value @30 170 17 3 187
Total 170 17 187
In the end, GST hopes to level the playing field for Indian businesses and put them India at par with the foreign nations. It also hopes to reduce prices of the goods.