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GST Explained for Everyone

by Abhimanyu Dhamija

Introduction

Goods and Service Tax or GST made its debut in the middle of 2017. It is a single tax for the whole country. No longer will an item be subject to 3-7 taxes making it impossible to do business profitably. It can be seen conclusively from this essay on GST, how simple it is.

GST replaced the considerable number of taxes that made the tax system unwieldy and cumbersome.

Some of these taxes include:

  • Sales Tax
  • Service Tax
  • Entry Tax
  • Customs Duty
  • Central Excise
  • Entertainment Tax

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Disadvantages of the Old System

The problem with the old tax regime was that it caused the cascading effect of taxes.

Whatever was sold with tax was again re-taxed at the next stage of the sales channel. Naturally, it causes price increase and dissatisfaction.

Also, it was quite easy to conceal the purchase and sale.

Example of GST

Every product travels through a sales channel. This involves at least a manufacturer, wholesaler, and retailer. The consumer at the endpoint is thus three invoices away from the manufacturer.

We have attempted to show in this essay on GST a simplified example of GST in real life and how it is different. That is why there are different calculations for pre and post GST scenarios.

GST calculation for a shirt manufacturer selling goods in the same state where it is manufactured.

  • It is assumed that he is not claiming any GST input tax credit for yarn etc.
  • There is a profit of 12% charged uniformly by all.
  • Excise and VAT rates are approximate historical figures.

Stage 1

Manufacturer Stage Before GST After GST
Manufacturing Cost 8000 8000
Profit @ 12% 960 960
Cost of Production 8960 8960
Add: Excise Duty @ 12.5% 1120
Total Cost 10080 8960
Add: VAT @ 14.5% 1462
Add: CGST @ 6% 538
Add: SGST @ 6% 538
Invoice Amount for Wholesale 11542 10036

Stage 2

Wholesale Stage
Cost of Purchase 11542 10036
Profit @ 12% 1385 1204
Total 12927 11240
Add: VAT @ 14.5% 1874
Add: CGST @ 6% 674
Add: SGST @ 6% 674
Invoice Amount for Retail 14801 12588

Stage 3

Retail Stage
Cost of Purchase 14801 12588
Profit @ 12% 1776 1510
Total 16577 14098
Add: VAT @ 14.5% 2403
Add: CGST @ 6% 846
Add: SGST @ 6% 846
Invoice Amount for Customer 18980 15790

Total tax collected under the old regime was-

  • Excise Duty INR 1120
  • VAT INR 2403
  • Total INR 3523

Total tax levied under the GST regime is-

  • GST INR 1692
  • The manufacturer pays a tax of INR 1076
  • The wholesaler pays a tax of INR 1348
  • The retailer pays a tax of INR 1692

But the wholesaler is able to claim back as refund INR 1076. So his net tax paid is INR 272.

The retailer can claim back as a refund INR 1348. So his net tax paid is INR 344.

Merits of Input Tax Credit

The main advantage of GST as we have shown in this essay on GST lies in the ITC or input tax credit mechanism. A seller can claim back that part of the invoice which he paid as tax.

In the example above the wholesaler can claim INR 1076.

The advantage of this is two-fold.

  1. The system makes it possible to tax at the point of consumption. The retailer or the person selling at the end has to collect the overall amount due from the customer. He deposits it with the government, and the government redistributes it among the wholesaler and manufacturer.
  2. Secondly, it is near impossible to avoid tax. The wholesaler and the retailer need to maintain invoices of purchase and sales very precisely. Otherwise, there will be a mismatch of the amount claimed, and they will not be reimbursed. This ensures compliance.

How is GST Superior?

Since the entire process depends on an IT system known as GSTN and every businessman is identified by a unique GSTIN, the effort made by the government is minimal.

Previous to this sales tax officers had to make regular visits and estimate sales made by a business. Then they had to match it with the actual sales tax returns. There was a possibility not only for errors but also for extortion and bribery.

But under the GSTN system, the inflow of goods to any business can be checked with the click of a mouse. The difference between inflow and closing stock is sales and tax as a percentage of it depending on the slab. Obviously, in real life, there would be some deviation between actual figures and projected figures, but it will be within tolerable limits. A business that has purchased goods worth INR 8 crores and has stock of INR 5 crores in the warehouse cannot claim to have sold goods worth INR 60 lakhs. This level of scrutiny was not found earlier.

Not only can this be verified, but software can help point out patterns. Thus the returns of millions of businesses do not need to be sorted manually. Only if the discrepancy is noticeable will the human element be involved.

Closing Thoughts

We hope that our essay on GST has successfully been able to convey how GST works to the reader. In general, there is a 3-6% reduction in the price of goods and services, as suggested by research during the writing of this essay on GST.

Of course, this may not always be seen in real life when you are buying from a supermarket. Taking advantage of the GST system, manufacturers may have raised the prices slightly. From the MRP of a packet of biscuits, there is no way to know if there has been a rise in the margin of profit.

Also, the price of crude oil in international markets has risen by about 20% since GST was introduced. There has consequently been a price rise that has been absorbed by the efficiency of GST. In the first quarter of the fiscal year 2019-20, the government collected over INR 1 lakh crore as GST every month.

This has been seen by many as a vindication of the pain that GST brought with it. More income for the government would translate to better infrastructure and a raised standard of living down the line.

 

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