Goods and Services Tax (GST) is an indirect tax which has been implemented in India on 1 July 2017. The main objective behind the implementation of this tax is to make a uniform tax system in the country. Due to the implementation of the GST, incidence of tax evasion will come down in the country. So GST will increase the total tax collection of the government.

Some commonly known pointers with regards to GST are as under:

  1. The Goods and Services Tax (GST) was first implemented in France, and it is based on a Canadian Model.
  2. GST in India was made on the recommendation of Vijay Kelkar Committee, and it was implemented as on 1st July 2017. It has been implemented under Article 279 of the Indian constitution, and GST council was formed by the President of India on September 2016.
  3. The first state which implemented the GST was Assam.
  4. Amitabh Bachchan has been made the brand ambassador of GST.
  5. During passing of GST bill in parliament; 336 votes casted in the favour of GST bill and 11 votes were against it.
  6. There is a provision of 5 years imprisonment for those who do not pay GST.
  7. There are 5 rates of taxes in GST i.e. 0%, 5%, 12%, 18% and 28%.

GST is a single tax on the supply of goods and services. That means the end consumer will only bear the GST charged by the last dealer in the supply chain. Several economists and experts see this as the most ambitious tax reform since independence. GST will eventually replace all indirect taxes levied on goods and services by the central and state governments, and is expected to liberate India of its complex indirect taxation structure.

Let's try and understand how GST will function throughout the value chain:

How did indirect taxes functioned earlier?

India’s constitution has divided the current taxation power fairly between the centre and states. Both enjoy their own share and exclusivity on respective taxes. Most goods attract a wide range of taxes including:

  1. Central Taxes:
  2. Central Excise duty
  3. Duties of Excise (Medicinal and Toilet Preparations)
  4. Additional Duties of Excise (Goods of Special Importance)
  5. Additional Duties of Excise (Textiles and Textile Products)
  6. Additional Duties of Customs (commonly known as CVD)
  7. Special Additional Duty of Customs (SAD)
  8. Service Tax
  9. Central Surcharges and Cess
  10. State Taxes:
  11. State VAT
  12. Central Sales Tax
  13. Luxury Tax
  14. Entry Tax
  15. Entertainment and Amusement Tax
  16. Taxes on advertisements
  17. Purchase Tax
  18. Taxes on lotteries, betting and gambling
  19. State Surcharges and Cess

To add to that, one has to pay a "tax on tax" throughout the value chain as well. However, in the current tax structure, businesses are not allowed to take tax credits, which leads to a high probability of double taxation at every step of the supply chain. This not only increases the taxes to as high as 24-27%, but also raises the end cost of the goods or services significantly.

How will GST transform the present indirect structure?

GST is an attempt to remove the geographical barriers and create a single market that is open to all, to buy, sell, import, and export within the country.

However, the impact of GST will not be uniform and will vary from one sector to another. The common man will benefit in two ways: first, all the taxes will directly be collected at the point of consumption, and second, consumers won’t have to pay a 'tax on tax'.

This way multiple tax points would be removed, cascading tax system would be eliminated and the eventual tax paid would be reduced in most cases. This in turn would lead to reduction in the cost of production, and by extension an increase in profits for the businessmen. A part of these benefits will eventually be passed on to the end-consumer as well.

How will GST work?

A product has to go through different stages before it reaches the end consumer, and there are several taxes applicable throughout this process. However, this situation will change in the GST regime. Here’s an illustration to understand how:

Stage 1: Manufacturing

Take apparel manufacturing as an example and 10% as the GST applicable.

The manufacturer buys raw material worth INR 5000 that is inclusive of the GST of INR 500 (10% of 5000).

He then adds his own value of INR 500 to the materials during the manufacturing process. This brings the gross value of the product to INR 5500.

Now, the total tax amount on the output of the apparel comes to INR 550 (10% of 5500) In the current tax system, the manufacturer would be required to pay a tax of INR 550; however, under GST he can set some of his tax off as he has already paid it while purchasing the raw materials. Therefore, the final GST that the manufacturer will incur will be of INR 50 (total tax amount till now minus the tax he has already paid) i.e. INR 5 (550-500)

Stage 2: Wholesale

Here, the apparel is passed from the manufacturer to the wholesaler at a gross value of INR 5500 that is inclusive of the GST of INR 550 (10% of 5500). The wholesaler then adds his value (his margin) of INR 500 making the total INR 6000 (5500 + 500). This brings the total tax amount on the final to INR 600 (10% of 6000). Like the manufacturer, the wholesaler too can set off this tax amount with the tax that he has already paid for while purchasing the goods from the manufacturer. Thus, the final GST for the wholesaler would be INR 50 (600 – 550)

Stage 3: Retailer

In this final step, the retailer buys the apparel from the wholesaler at a gross value of INR 6000 that is inclusive of the GST of INR 600 (10% of 6000). He then adds his value or margin of INR 500 making the total cost of the goods INR 6500. The GST applicable here is INR 650 (10% of 6500), but since the retailer has already paid a tax while purchasing the goods, he can set it off. Thus, the final GST incidence for the retailer would be INR 50 (650 – 600).

At the end, since the retailer will sell the product at INR 6500, the GST paid by the customer would be INR 650(10% of 6500) only. This number would have been much higher in our current tax structure.

Thus GST can be a win-win scenario that will benefit the entire value chain and make it easier for both businesses and consumers.