GST is a single tax on the supply of goods and services. This means that end-users will only bear the GST imposed by the last trader in the supply chain. Some experts see it as the most difficult tax reform since independence. Finally, the GST replaces all indirect taxes levied on goods and services by the federal and state governments, and now India is free from the complex indirect tax structure. Let’s try to understand how GST works across the value chain:
How has indirect taxation worked before?
The Indian Constitution has evenly divided the current taxation power between the central and state. Both enjoy their own and exclusive share of their taxes. Most items attract different types of taxes including:
1. Central Taxation:
Central Tax Duty
Excise Tasks (Drug and Toilet Supplies)
Additional Customs (Special Interest)
Additional Customs duty
Central Surcharges and Cess
2. State Tax:
Central Sales Tax
Entertainment and Entertainment Taxes
Tax on ads
Tax on lottery, betting, and gambling
State surcharge and Cess
To add, one has to pay “tax on taxes” during the value chain as well. However, in the current tax structure, manufacturers are not allowed to take the tax credit, which leads to high chances of double taxation at all levels of the supply chain. This not only raises taxes by as much as 24-27% but also raises the final cost of goods or services.
How does GST change the current indirect structure?
GST is a check-up to relegate geographical boundaries and make a single market that is open to all, to buy, sell, import, and export provincially.
However, the impact of GST will not be consistent and changes from one sector to another. Ordinary people will benefit in two ways: first, all taxes will continue to be collected at the point of use, and second, consumers will not have to pay ‘tax on taxes’.
This way, some tax points will be abolished, the auctioned tax system will be abolished and taxes eventually paid will be reduced in most cases. This, in turn, will lead to a reduction in production costs, and further an increase in profit for business people. Some of these benefits will ultimately be passed on to end-users as well.
How does GST work?
The product must go through different stages before reaching the end-user, and there are some taxes that are imposed during this process. However, this will change in the GST regime. Here is an illustration to understand how:
Stage 1: Creation
Take manufacturing clothes for example and 10% as GST applies.
Manufacturers purchased raw materials worth INR 500 which included GST INR 50 (10% of 500).
He then adds his own INR 50 value to the substance during the production process. This brings the whole value of the product to INR 550.
Currently, the total tax rate on garment output comes to INR 55 (10% of 550) In the current tax system, manufacturers are required to pay INR 55 tax; However, under GST he can set some of his taxes because he paid for it when buying raw materials. Therefore, the final GST generated by the manufacturer will be subject to INR 5 (total tax amount to date less the tax he has paid) which is INR 5 (55-50)
Stage 2: Wholesalers
Here, the clothing is passed from manufacturer to wholesaler at a gross value of INR 550 which includes GST INR 55 (10% of 550). Wholesalers then add the value (margin) of INR 50 to the amount of INR 600 (550 + 50). This brings the total tax amount at the end to INR 60 (10% of 600). Just like manufacturers, wholesalers can also set this tax amount with the taxes they paid when purchasing goods from manufacturers. Therefore, the final GST for wholesalers is INR 5 (60 – 55)
Stage 3: Retailers
In this last step, the retailer buys clothing from wholesalers at a gross value of INR 600 which includes GST INR 60 (10% of 600). He then calculated the value or margin of INR 50, conducting the total cost of goods to RS 650. The GST used here is RS 65 (10% of 650), but since the retailer has paid taxes when purchasing the product, he can set it. Therefore, the final GST measure for retailers is RS 5 (65-60).