One subject where you could become lost if unguided is, taxation. GST went into effect in 2017. Regarding its use and effects, there was a sense of confusion among the general people. If we go into great detail about it in just one piece, it will be overwhelming because it is such a large subject. Hence This article aims to provide you with a straightforward explanation of GST, including its goals and methods of implementation.
What is GST
GST stands for goods and service tax. In India we have two categories of taxes, they are direct and indirect. Direct taxes refers to the tax you pay directly to the government based on the income you accumulate in a financial year. Indirect taxes are the one pain on purchasing certain kinds of products or using certain services. As you must have guessed by now GST is an indirect tax.
Previous to GST some of the indirect taxes were sales, entertainment, service, custom, and excise duty. It’s a lot for a person to remember. One can easily get confused while dealing with all of these at once. To solve the exact same problem GST was introduced to replace all of these under one single category.
Objective of GST
There are two main objectives
To promote one nation one tax principle
Before GST, VAT [value-added tax] was implemented. Each state would determine its VAT value. Hence the amount of tax you would pay for your goods will be determined by your state. But GST is controlled by the central government and hence its value is the same for the entire country. This unified system helps the government and the consumer with an easy and common method of filing their taxes.
Improve ease of doing business
As mentioned above, previously multiple different taxes were to be paid. This means that business owners need to deal with different authorities. This simply adds up to the delays and also results in a waste of human resources. By implementing one tax for all business owners no need to understand different taxes or need to deal with different authorities, they can simply pay their GST online.
Understanding how GST works
A final product that a consumer uses goes through various stages. Let’s say an example of a packet of chips. First, the manufacturer needs to buy raw materials to produce chips. Then it is sent to the packaging factory. From there it is sent to wholesalers where they stock the product. The wholesaler will sell them to retailers and finally, the consumers buy the packet from the retailers. At each step that we mentioned, tax is lived.
Previously the VAT which was implemented applied to the entire amount at each stage whereas in the case of GST, it applies to the additional value added to the product. I know this is probably not making any sense to you. Let’s understand with an example.
Old tax system
First, let’s calculate the TAX paid based on the old system.
A manufacturer buys raw material at ₹50 and he adds up his manufacturing and profit cost of another ₹50. Hence the total value of the product is ₹100. Let’s assume Tax is 10% So He will sell this product to the wholesaler at ₹110. The additional ₹10 is the tax that was implemented. Now this wholesaler will add his profit of say ₹10. So the new value is now ₹120. He will sell this to a retailer at ₹132 after implementing a 10% tax on ₹120. Now the retailer will add his profit of another ₹10 increasing the value to ₹142. So when a customer goes to buy a product he will purchase it at ₹156.2 After 10% of tax is implemented.
GST implementation
Now let’s see the same example in the case of GST by keeping all the conditions the same.
A manufacturer buys raw material at ₹50 and he adds up his manufacturing and profit cost of another ₹50. Here he will be taxed on the value which he added which is ₹50. Let’s assume Tax is 10% So He will sell this product to the wholesaler at ₹105. The additional ₹5 is the tax that was implemented. Now this wholesaler will add his profit of say ₹10. So the new value is now ₹115. He will sell this to a retailer at ₹116 after implementing a 10% tax on ₹10. Now the retailer will add his profit of another ₹10 increasing the value to ₹126. So when a customer goes to buy a product he will purchase it at ₹127 After 10% of tax is implemented.
As you can see in the case of GST the customer pays less as compared to the previous system. This is the basis of how GST is implemented and how it is helpful for people.
In this article, we simply went over the fundamentals of GST. Taxation usually is something people fear because it sounds very complex. But truly just by understating the basic working, you can easily hold a grip on this topic.