Goods and Service Tax is a comprehensive destination based indirect tax that will be levied at all the stages right from manufacture up to final consumption of goods and services with credit of taxes paid at previous stages available as setoff. As such only value additions will be taxed and paid by the ultimate consumer.
Value addition means the amount by which the value of a product or service increases with every level of production and selling. It is the difference between the value of all the inputs (Raw materials, outsourcing charges, etc.) and the price at which the product is sold for. For example, a farmer grows wheat which is bought by a miller to be converted into flour. This is the first value addition. Further, a confectioner buys the floor from the miller and bakes it into cakes and cookies. This is the next stage of value addition. Cakes and cookies are further bought by a retailer. He incurs the cost of warehousing and packaging the products and finally sells it to the final consumer in attractive packaging. This is the final stage of value addition. GST will be levied on these value additions at each of these stages, unlike our present taxation system.
In the present system, for a new entrepreneur it's actually very difficult to understand the calculation of taxes and estimation of costs. He needs to pay around a dozen of taxes to the Central Government as well as to the State Government. Some of these taxes may even be overlapping and the possibility of paying tax on a tax is also very much there. Due to these complications, final price for the ultimate consumer increases as this burden of this indirect tax is passed over by the seller to the buyer.
Now how this new tax reform of introducing GST will ease out the situation? For this first of all we need to understand how GST works. The best feature of GST is that it has a system of Input Tax Credit in which the seller may claim the tax he had already paid to the manufacturer or wholesaler at the time of purchase. Due to this, the final liability of the ultimate consumer also reduces.
GST will comprise of CGST (Central GST) levied by the Centre, SGST (State GST) levied by the State and IGST (Integrated GST) levied by the Center again.For Intra State transactions, the seller will collect both CGST and SGST from the buyer and pay CGST to the Centre and SGST to the State. For Inter-State transactions, IGST will be charged. In this case, tax paid on sale within the state can be claimed against the tax paid on inter state sale, which is missing in the present system. In the new system, the credit of CGST cannot be taken against SGST and vice versa but both the credits can be taken against IGST.
This new taxation system will be essentially based on a robust IT system which will ease out compliance and ensure transparency. There will be increased certainty also as there will be uniformity in tax rates and structures throughout the nation. Due to its structure, ‘cascading of taxes’ will be evaded which will boost up the commercial sector in the country and encourage competitiveness. Finally, because of increased efficiencies, the total tax burden will reduce which will decrease prices of most of the commodities and provide relief to the ultimate consumers.
This is no doubt the biggest game changer for the business. It is a significant change communicating to the world at large that India is adamant to pave its path of progress. Once implemented, this system no doubts, holds great promise in terms of sustaining growth for the Indian Economy.