How will GST work in India

Let us begin with the understanding of how taxes are applied before VAT came into picture.

Consider this flow of a product: Manufacturer -> Retailer -> Consumer
Say the initial price is 100 and sales tax is 10%. Then

  • Manufacturer sets the price at 100 +10% =110. (Tax is 10)
  • Say Retailer adds 390 as his costs and profit making the product value 500. He then sets the price at 500+10%=550 (Tax is 50)
    The consumer buys at 550 where in he payed 50 as tax.

GSTVAT

From the year 2005, the above sales taxes are replaced with Value added Tax (VAT). With VAT, the consumer actually pays 40 as tax instead of 50. VAT=output tax-input tax i.e. 40. (50-10).
VAT is imposed by state governments and vary from state to state.

Service Tax

In addition to VAT most of us are aware that a service tax is applicable in many service industries like restaurants, travel, insurance, phone bills payments etc. This is imposed by central government.

GST (Goods and Services Tax)

GST is uniform tax imposed on any sales, manufacturing or goods & services at national level. This tax will substitute all other taxs imposed by state and central government. (Exports and direct tax like income tax, corporate tax and capital gain tax will not come under GST).

Why GST is better than VAT

  • VAT is imposed on only goods whereas GST on both goods & services
  • GST is a uniform rate in all the states and is imposed by center where as VAT varies from state to state.
  • In case of VAT, input tax credit (i.e. calculation of output tax – input tax , 40 in the above example) is applicable on only goods sold within the state whereas incase the of GST this is applicable across country and also applicable on the services too apart from goods.

GST will overcome the above three limitations of VAT.
GST will create a common market across states. It eliminates complexity of different taxes. It is beneficial to consumer. It will ensure a transparent and neutral way to raise revenue.

Why is GST opposed in Parliament?

However, GST has it own negative aspects. As GST imposed by center eliminates all the other taxes imposed by states, It is like parent asking a child to stop earning and instead giving him pocket money. Child looses his financial independence here.

Hence to have some financial independence, the current GST bill proposed by BJP excludes Petroleum and Alcohol – revenue generating sources for states. Also a 1% inter state tax (for manufacturing states like Maharastra, TN, Gujarat that fear loosing more if GST is imposed)

Currently, the GST is been opposed by Congress on three grounds.

  • A 18% cap should be made a part of constitution, ensuring consumers does not end up paying based on mood of central government. But, BJP feels that this could flaw the syatem as goods like Luxury products are supposed to attract higher taxes.
  • 1% additional inter state tax to be removed to provide an equal advantage to all states
  • Formation of a GST council that will decide on any GST issues based on majority. Congress says to have 1/4th vote weightage to Center and remaining 3/4th to State. However, BJP wants it to be 1/3rd and 2/3rd

Conclusion

In summary, GST bill is designed to replace more than dozen state taxes to a single uniform central tax proving a single market. Removing complexities, to raise revenue in a nuetral way

 

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