India’s indirect tax system got a makeover on 1st July 2017 and it’s popularly known as – The G.S.T. aka The Goods and Service Tax, an indirect, destination based, multi stage tax system.
Here is a sneak peek into India’s Tax System:
Before the G.S.T: You might be familiar with the words VAT, Service Tax, Octroi, Krishi Kalyan Cess, Swachh Bharat Cess, etc. on your bills. These taxes are sources of revenue for the Central and State Government.
The Central Government would impose and collect taxes from all states and the State Government would impose and collect taxes from their respective States. And since each state has a different State Government the taxes in each state are different.
Lets say a lipstick in Punjab costs you Rs. 1350, the same lipstick in Maharashtra would cost you Rs. 1300 because Value Added Tax (VAT) in Punjab and Maharashtra on cosmetics was 13.5% and 13% respectively.
This discrepancy in tax rates between states was one of the reasons India needed G.S.T.
After The G.S.T: On comparing a restaurant bill before and after G.S.T you’ll notice that post G.S.T your bill looks lot more organized and neat. Here’s why:
Instead of the list of taxes imposed earlier, you will see one tax called the G.S.T on your bill. This tax will further be broken down into two parts: C.G.S.T and S.G.S.T. (These terms are easily explained below).
To understand it better you can compare this to the online store Nyka. Instead of buying individual products from Maybeline, Lakme, MAC etc. Nyka lets you shop these brands under one roof at lesser rates.
Example: Rhea, a bag seller from Maharashtra sells bags worth Rs. 20,000 to Tina in Maharashtra The G.S.T rate she charges is 18% (comprising of C.G.S.T rate of 9% and S.G.S.T rate of 9%). Thus, Rhea collects Rs. 1800 from Tina and from that Rs. 900 goes to the Central Government and Rs. 900 goes to the Maharashtra Government.
But if Rhea in Maharashtra sells bags worth Rs 20,000 to Tina in Punjab, the G.S.T. rate of 18% (comprising of C.G.S.T rate at 9% and S.G.S.T. rate at 9%) will be charged as I.G.S.T and the entire Rs.1800 will go to the Central government.
G.S.T. also provides a method to claim credit on tax paid. Look at this example to understand this:
Before the G.S.T.: Rhea sells satin to Tina at Rs. 1180 (inclusive of VAT at 18% on Rs.1000). Tina produces a dress out of it and sells it for Rs. 3540 which includes her profit and VAT at 18% (on Rs. 3000=Rs.540).
After the G.S.T: Rhea sells silk to Tina at 1180 (inclusive of G.S.T at 18% on Rs.1000). Tina produces a dress out of it and sells it for Rs. 3540 (Inclusive of profit and tax at 18% on Rs. 3000).
Now Tina can take credit from the government for tax she has already paid to Rhea. So she will get Rs. 180 back and now she can price her product at Rs. 3360 (3540-180). The balance amount i.e Rs. 360 will be paid to the government as G.S.T.
The G.S.T affects:
The Government: Helps them collect taxes in an efficient and smooth manner. It prevents people from tax evasion because without registration people cannot claim input credit. And lastly with G.S.T. in place the cost of tax collection will be reduced and this means more revenue for the government.
Businesses & Industry: For businesses G.S.T. will bring more clarity in the tax system and tax rates will be uniform all over the country. Due to input tax credit businesses will no longer have to pay double tax. Transporting goods between states will also become much more easier. This is similar to the European Union, goods can be freely imported and exported between states.
You and Me: Under G.S.T. 4 tax rates have been decided depending on the nature of the item. These rates are 5%, 12%, 18% and 28%. 1,211 items have been listed under G.S.T. Most of the day to day items are exempt from G.S.T. and will be taxed at 0%. Which means cheaper goods for us. However, the government could not make everything cheaper. So Luxury and sin goods such as aerated beverages are taxed at the highest rate of 28% and the others are between 12% and 18%, keeping the items almost close to their previous rates.
That was the G.S.T. simplified. If you still have any questions or would like us to cover any topic under the G.S.T. comment and let us know.