What is GST ?

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)
  • Octroi
  • 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

  1. Manufacturer
  2. Distributor
  3. Wholesaler
  4. retailer

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 .

 

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