Goods & Services Tax

What is GST? How does it work?

GST is one indirect tax for the whole nation, which will make India one unified common market.

GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer.
Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which
makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only
the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

GST is being introduced in the country after a 13 year long journey since it was first discussed in the report
of the Kelkar Task Force on indirect taxes. A brief chronology outlining the major milestones on the
proposal for introduction of GST in India is as follows:

In 2003, the Kelkar Task Force on indirect tax had suggested a comprehensive Goods and Services
Tax (GST) based on VAT principle.
A proposal to introduce a National level Goods and Services Tax (GST) by April 1, 2010 was first
mooted in the Budget Speech for the financial year 2006-07.
Since the proposal involved reform/ restructuring of not only indirect taxes levied by the Centre
but also the States, the responsibility of preparing a Design and Road Map for the implementation
of GST was assigned to the Empowered Committee of State Finance Ministers (EC).

What are the benefits of GST?

For business and industry
1. Easy compliance: A robust and comprehensive IT system would be the foundation of the GST
regime in India. Therefore, all tax payer services such as registrations, returns, payments, etc.
would be available to the taxpayers online, which would make compliance easy and transparent.
2. Uniformity of tax rates and structures: GST will ensure that indirect tax rates and structures are
common across the country, thereby increasing certainty and ease of doing business. In other
words, GST would make doing business in the country tax neutral, irrespective of the choice of
place of doing business.
3. Removal of cascading: A system of seamless tax-credits throughout the value-chain, and across
boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce
hidden costs of doing business.
4. Improved competitiveness: Reduction in transaction costs of doing business would eventually
lead to an improved competitiveness for the trade and industry.
5. Gain to manufacturers and exporters: The subsuming of major Central and State taxes in GST,
complete and comprehensive set-off of input goods and services and phasing out of Central Sales
Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the
competitiveness of Indian goods and services in the international market and give boost to Indian
exports. The uniformity in tax rates and procedures across the country will also go a long way in
reducing the compliance cost.

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For Central and State Governments
1. Simple and easy to administer: Multiple indirect taxes at the Central and State levels are being
replaced by GST. Backed with a robust end-to-end IT system, GST would be simpler and easier to
administer than all other indirect taxes of the Centre and State levied so far.
2. Better controls on leakage: GST will result in better tax compliance due to a robust IT
infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the
chain of value addition, there is an in-built mechanism in the design of GST that would incentivize
tax compliance by traders.
3. Higher revenue efficiency: GST is expected to decrease the cost of collection of tax revenues of
the Government, and will therefore, lead to higher revenue efficiency.

For the consumer

1. Single and transparent tax proportionate to the value of goods and services: Due to multiple
indirect taxes being levied by the Centre and State, with incomplete or no input tax credits
available at progressive stages of value addition, the cost of most goods and services in the
country today are laden with many hidden taxes. Under GST, there would be only one tax from
the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.
2. Relief in overall tax burden: Because of efficiency gains and prevention of leakages, the overall
tax burden on most commodities will come down, which will benefit consumers.

Which taxes at the Centre and State level are being subsumed into GST?
At the Central level, the following taxes are being subsumed:

I. Central Excise Duty,

II. Additional Excise Duty,
III. Service Tax,
IV. Additional Customs Duty commonly known as Countervailing Duty, and
V. Special Additional Duty of Customs.

At the State level, the following taxes are being subsumed:

I. Subsuming of State Value Added Tax/Sales Tax,

II. Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the
Centre and collected by the States),
III. Octroi and Entry tax,
IV. Purchase Tax,
V. Luxury tax, and
VI. Taxes on lottery, betting and gambling.

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How will GST work?
The implementation of GST involves three steps, from manufacturing to wholesale and finally retail. To
help you get a better understanding of GST, we take a look at the tax incidence that will come into play
once the indirect tax reform is implemented. Lets assume that a manufacturer of trousers buys raw
materials like cloth, zips, thread, buttons and other equipment that is required to stitch the pants. This
raw material costs the manufacturer Rs 200. This Rs 200 includes a 10% tax of Rs 20. Once the shirt is
made, the manufacturer has added his own value to the input material. As a part of this example, if one
were to assume that the value added is Rs 60, then the total cost of the trouser is now Rs 260 (Rs 200 +
Rs 60). With a 10% tax rate, the tax on this trouser would be Rs 26. However, since the manufacturer has
already paid Rs 20 as tax while purchasing raw material, under GST the tax incidence will now be only Rs
6 (Rs 26 Rs 20).

Now, lets see how GST works at the second stage, that is for the wholesaler. Now, the wholesaler would
buy the trousers at Rs 260 and would keep a margin on it to make profit. Assuming that the margin is kept
at Rs 40, the cost of the clothing item now becomes Rs 300. Applying the same 10% principle, the tax
would amount to Rs 30. But, out of this Rs 30, Rs 26 are already accounted for from stage one. So the
effective tax incidence for the wholesaler would be Rs 4 (Rs 30 Rs 26).

The final stage is that of the retailer. Now that the retailer has bought the trousers at Rs 300, he would
also keep a profit margin. Say the margin that the retailer decides on is Rs 20. The total cost now becomes
Rs 320. Using the 10% rule, the tax would be Rs 32. However, with Rs 30 already accounted for in the
earlier two stages, the tax incidence would be Rs 2 (Rs 32 Rs 30). To sum up, the total GST for the entire
chain, from manufacturer to retailer is Rs (20 + 6 + 4 + 2 = 32). The suppliers of inputs would be able to
claim no tax credit, given the fact that they have themselves not purchased any item.

Copyright PIB & Financial Express

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