GST is a consumption-based tax levied on the sale, manufacture and consumption of goods & services at a national level. This tax will be a substitute for all indirect taxes levied by the state and central governments. Exports and direct taxes like income tax, corporate tax and capital gain tax will not be affected by GST. The New Taxation System of GST Works in India 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 that are 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.
Central Taxes subsumed under GST
- Central Excise Duty (including additional excise duties)
- Service tax
- Additional customs duty (CVD)
- Special Additional Duty of Customs (SAD)
- Central surcharges and cesses
State Government Taxes subsumed under GST
- Value Added Tax
- Central Sales Tax
- Octroi and Entry Tax
- Purchase Tax
- Luxury Tax
- Taxes on lottery, betting & gambling
- State cesses and surcharges
- Entertainment tax
New Tax System Under GST :
The main reason for implementing GST is to abolish the cascading effect on tax.
Stage 1:
- Imagine a manufacturer of, say, shirts. He buys raw material or inputs — cloth, thread, buttons, tailoring equipment — worth Rs 100, a sum that includes a tax of Rs 10. With these raw materials, he manufactures a shirt.
In the process of creating the shirt, the manufacturer adds value to the materials he started out with. Let us take this value he added to be Rs 30. The gross value of his goods would, then, be Rs 100 + 30, or Rs 130.
At a tax rate of 10%, the tax on output (this shirt) will then be Rs 13. However, under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw materials/inputs (Rs 10). Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10).
Stage 2:
- The next stage is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs 130, and adds on value (which is basically his ‘margin’) of, say, Rs 20. The gross value of the good he sells would then be Rs 130 + 20 — or a total of Rs 150.
A 10% tax on this amount will be Rs 15. But again, under GST, he can set off the tax on his output (Rs 15) against the tax on his purchased goods from the manufacturer (Rs 13). Thus, the effective GST incidence on the wholesaler is only Rs 2.
Stage 3:
- In the final stage, a retailer buys the shirt from the wholesaler. To his purchase price of Rs 150, he adds value, or margin, of, say, Rs 10. The gross value of what he sells, therefore, goes up to Rs 150 + 10, or Rs 160. The tax on this, at 10%, will be Rs 16. But by setting off this tax (Rs 16) against the tax on his purchase from the wholesaler (Rs 15), the retailer brings down the effective GST incidence on himself to Re 1 (16 –15).
Thus, the total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs 10 + 3 +2 + 1, or Rs 16.
