GST stands for Goods and Service Tax which is going to be implemented from 1st July 2017 in INDIA . If you are up to date with the news in INDIA , you might have heard about the issue of implementing the GST in our country . You might be wondering what is GST . Aren’t you? Let me try to explain about it .
Firstly, what is a tax?
Tax is the money which is paid to the government . It is imposed on your income , business profit , cost of goods and services and the transactions. The government generally uses this money in public interest and also to pay the national debts .
Types of taxes :
- Direct tax
- Indirect tax
Direct tax : Corporate tax , income tax , wealth tax etc comes under the direct tax
Indirect tax : Indirect tax is the one whose liabilities can be shifted to someone else. Sales tax , service tax etc comes under the indirect tax.
So , what does GST do now? GST will replace all the indirect taxes .
The following taxes will be bound together by the GST:
- Central Excise Duty
- Commercial Tax
- Value Added Tax (VAT)
- Food Tax
- Central Sales Tax (CST)
- Entertainment Tax
- Entry Tax
- Purchase Tax
- Luxury Tax
- Advertisement tax
How is GST different from the current taxation ? Let me explain it with an example .
Let us consider a simplified tax rate of 10% at each level . There are generally four levels
current taxation :
Consider the current taxation . Let the simplified tax rate be 10%. If the manufacturer buys the raw materials of RS.50/- and manufacture the product which adds RS.50/- of value to it . So the product becomes RS.100/- .
Manufacturer : 50+50 = 100 . Since the tax is 10% . He needs to pay RS.10/- . So now the cost of the product becomes RS.110/-
The distributor then adds the value of RS.20/- which is nothing but his profit . The price now is Rs.130/- . He adds the 10% tax to it .
Distributor :110+20=130 . After adding the tax , 130+13 = RS.143/- .
The wholesaler follows the same pattern of profit and tax .
Wholesaler : 143+20=163 . After adding the tax, 163+16.3 = RS.179.3/-
Retailer then buys the product for RS.179.3/- and adds a profit of 20 and the tax to it .
Retailer : 179.3+20 =199.3 . After adding the tax , 199.3+19.93 =Rs. 219.23
The consumer buys the final product for Rs. 219.93 .
Goods and Services Tax ( GST ) :
In GST , except the initial manufacturer , the rest three levels only pay the tax for the value added by them .
When the manufacturer buys the raw material for Rs.50/- and adds Rs.50/- as the manufacturing value . Let the simplified tax rate be 10%.
Manufacturer : 50+50 = 100 .
As in the current taxation , manufacturer pays 10% tax to the government . So he adds up that tax to the total price at which her= sells the product to the distributor
Manufacturer : 100+10 = Rs.110/-
The distributor buys the product for Rs.110/- and adds Rs.20 as his profit . Now, the distributor has to pay the tax only for the value added by him to the product .The tax on the value added by him is Rs.2/-.
Distributor : 100+20+2 = Rs.122/-
The wholesaler buys the product for Rs.122/- . He adds a profit of Rs.20 to it .The tax on the value added by him is Rs.2/- .
wholesaler : 122+20+2 = Rs.144/-
The retailer buys the product for Rs.144 and adds the profit of Rs.20/- to it. So, the retailer has to pay a tax of Rs.2 /-.
Retailer : 144+20+2= Rs.166/-
So, the consumer buys the product only for Rs.166/-.
The consumer buys a product for Rs.219.93 /- by following the current method of taxation .
The same product can be bought for just Rs.166/- if GST is implemented .
However , the decline in the price is only for few products like air conditioners , washing machines , small cars etc . If GST is implemented , the prices of products like jewellery , manufactured clothes , mobile services etc might increase as well .
ps. There are different pros and cons of Goods and Services tax .