what is GST? explain with the help of an example
Answers
GST is a consumption based tax levied on sale, manufacture and consumption on goods & services at a national level. This tax will be substitute for all indirect tax levied by state and central government. Exports and direct tax like income tax, corporate tax and capital gain tax will not be affected by GST. GST would apply to all goods other than crude petroleum, motor spirit, diesel, aviation turbine fuel and natural gas. It would apply to all services barring a few to be specified. With the increase of international trade in services, GST has become a global standard. The proposed tax system will take the form of “dual GST” which is concurrently levied by central and state government. This will comprise of:
Central GST (CGST) which will be levied by Centre
State GST (SGST) Which will be levied by State
Integrated GST (IGST) – which will be levied by Central Government on inter-State supply of goods and services
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:
a. Central Excise duty
b. Duties of Excise (Medicinal and Toilet Preparations)
c. Additional Duties of Excise (Goods of Special Importance)
d. Additional Duties of Excise (Textiles and Textile Products)
e. Additional Duties of Customs (commonly known as CVD)
f. Special Additional Duty of Customs (SAD)
g. Service Tax
h. Central Surcharges and Cess
2. State Taxes:
a. State VAT
b. Central Sales Tax
c. Luxury Tax
d. Entry Tax
e. Entertainment and Amusement Tax
f. Taxes on advertisements
g. Purchase Tax
h. Taxes on lotteries, betting and gambling
i. 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.