GST also known as Goods and Services Tax has been one of the many recent changes to India’s Taxation system.
What is GST?
According to the technical definition, it is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition. But this, obviously, is a little complex and confusing to understand.
In more simple terms, it is a type of indirect tax which is charged on the supply of goods and services. This law has replaced many indirect taxations laws that previously existed in India.
It will be imposed at every point of a sale; from manufacturing to wholesale selling to retail to a consumer. This makes it a multi-stage tax as there are many steps involved in the buying and selling process.
Entire multi stage process
It is easier to understand the entire multi stage process with the help of a simple example.
Take into consideration a manufacturer who makes t-shirts. He obviously needs to buy a material, supposing cotton. The value of cotton gets increased when said material is stitched into a t-shirt. This manufacturer then sells these t-shirts to a warehouse agent or company who attaches the tags and labels to these t-shirts. That is another totaling of cost after which the warehouse sells it to the buyer who packages each t-shirt independently and invests in the promotion of the t-shirt, therefore, increasing its value.
GST will be charged on these value additions i.e. the monetary worth added at each stage to achieve the final sale to the end customer.
Why is GST so important?
- Regulating the unorganized sector
- Higher threshold for registration
- Reval of the cascading tax effect
- Lesser compliances
- Defined treatment for e-commerce
- Increased efficiency of logistics
How does this system help the common man?
To understand the answer, we first need to understand what Input Tax Credit means. It is the credit a person receives for the tax paid on the inputs used in developing the product.
So, if there is a 10% tax that the person must pay to the government, he can take away the sum he has paid in taxes at the time of purchase and pay only the balance amount to the government.
So what are the pros of this taxation system?
- More cutthroat trade environment: It will alter the load of taxes from the manufacturers in India where the tax system is unjustly skewed towards the customers. Manufacturers will pay a lesser significance of taxes and there will be an atmosphere of greater competitiveness and more autonomy in commerce and trade.
- Better inter-state trade: At the moment, there is no tax credit offered for inter-state trade and for this reason, consistent rates across all the states would enhance the trade in the country between different states.
- Widening tax base: More citizens will pay taxes. The tax rates are reduced but the increasing number of participants will make up for the loss.
Disadvantage of GST
Of course, to every law, there is a good side and a bad side. Here are some of the disadvantages:
- States will lose a share of revenue: A few of the states may even experience a loss on the account of tax sharing and the center itself may make a decision on the one-time reimbursement. The government may augment the state taxes by 1-2% to reimburse them. However, this is the stumbling block in the way of this bill as the settlement will be a difficult process to undergo.
- Trouble on taxpayers: The amount that was not taken from the manufacturer under the system of the tax credit in GST will be recovered from the customers, which definitely is a negative for the “consumer community”.