GST for all

People from all over India out cried on the announcement of Goods and Services Tax (GST) in India. Is it really going to be a burdening tax to consumers, in the history of India? Or is it the best thing that has happened to the people of India? The most debated hot topic of India over the past few months has been implemented by the Government of India on July 1st, 2017, with the taxes ranging from 0% to 28%. More money is flowing out of customer’s wallet as all manufacturers and service providers started billing in accordance to GST. But the real question, unanswered so far, is whether the populace understands how GST works and avoid being exploited. Let us see.

History of Tax in India

In the pre-GST era, there were n number of terminologies associated with tax in India. Income tax, Wealth Tax, Property Tax, Import and Export duty, Excise duty, Value Added tax, Service tax, Central sales tax, Customs duty and the list goes on… These taxes were levied by both Central and State governments, broadly classified as Direct Tax and Indirect Tax.

Direct tax is what the taxpayer pays to the government, directly out of his pocket. Income tax, Wealth Tax, Property Tax comes under this category. The government collects tax from the manufacturer, retailer for selling a good or service, which is added to the selling price for the consumer. It is called an Indirect tax, as though the amount is collected from manufacturers and retailers, ultimately the consumer ends up paying it.

Application of Indirect tax started as early as the goods move out of manufacturer’s warehouse. The Central government levied excise duty for all manufactured goods. In a case of imported goods, four types of excise duty were applied.  Specific duty is applied for each individual item of imported goods. In other terms, specific duty was levied based on quantity. Ad-valorem duty was charged on the total value of imported goods. Anti-dumping and Countervailing duties were added to them to protect the sales of Indian goods against the sales of imported goods. Excise duties were applied on exports as well, but the exporter can avail rebate once the goods were shipped.

When the manufacturing and consumption of the product or service are within the state, only the taxes of state government were applied. State government tax rates varied from state to state. The Central government received a share of tax in the name of Central Sales Tax only on the sales involving two or more states.

Too many terms used in Indirect tax caused havoc in the minds of people. An ordinary person could not come in terms with the types of tax. A person with less understanding would find it difficult to cope with the types of taxes applicable or not applicable on each item. To avoid any loss, people simply added the tax on top of the entire amount on each step, resulting in cascading of tax. i.e., adding tax for tax amount calculated previously.

The longer the supply chain, a customer had to pay more irrespective of no value addition. In short, the taxes paid by the customer is multiplied by the number of links in the supply chain. To curb the cascading of taxes, VAT and cenVAT were introduced. VAT was applied by state governments and cenVAT by the central government. Though they reduced cascading to some extent, they were not totally effective.

With the implementation of GST, all different types of indirect tax were combined under one roof. Now, there is just one term that needs to be understood.

India

GST

Goods and Service Tax, commonly known as GST, is a consumption based tax. The goods or service is deemed taxable only when it is consumed by others. Through GST, the central government will get half of tax money. The state in which the goods or service is consumed will get the remaining half. State in which they are manufactured, will not get any share of tax.

GST comprises of three components: CGST, SGST, and IGST. In the intra-state sales of the goods and service, where they are manufactured and consumed within the same state, CGST and SGST are applicable. In inter-state sales, where the goods are manufactured in one state and sold to a person from another state, IGST is applicable.

CGST is Central GST, a term used to denote the share that goes to central government and SGST is state GST, the share to state government. IGST is Integrated GST, combined value of CGST and SGST, collected entirely by the central government, half of which is added as input credit to the government of the state, where the goods are consumed.

Government has fixed 5 different tax slabs as Nil GST, 5%, 12%, 18%, 28%. Goods and services that are essential for survival fall under 5% and 12% slabs, while the luxury goods and services are placed in 18% and 28% slabs.

How it works

The goal of GST is to ensure that every person pays their tax properly and to avoid cascading of tax.

The gist of GST is as follows, when the manufacturer sells his product to a wholesaler, will be charging as per GST slab. The wholesaler, while selling the same product to a retailer, should be adding tax only for the difference in the selling price, i.e., the profit margin. The retailer, who in turn sold to the customer, should add tax only for the profit margin. So, the end customer will be paying the tax for the amount that is added at the last stage. In long run, the prices of each good and service will come down.

While filing the tax returns, the retailer must ensure that the wholesaler has filed his returns and wholesaler must ensure that manufacturer has filed his returns, to avoid loss. Thus, the transparency in sales will be confirmed in future.

All these ideas behind GST tax structure will work only when the tax is included in the selling price. If the tax is calculated in addition to the selling price, it results in cascading of tax and yield no benefits to the consumer.

Let us consider below scenario and compare what happens when the tax is included/ not included in selling price:

The manufacturing cost of a product is ₹750, GST slab is 18%. Manufacturer from Tamil Nadu sells to a wholesaler in Tamil Nadu for ₹1003. The wholesaler sells the product to a retailer in Kerala for ₹1150. The retailer sells to a customer in Kerala for ₹1300.

1.Tax is included in Selling price (Idea behind GST):

Manufacturer in Tamil Nadu sells to Wholesaler in Tamil Nadu for ₹1003 inclusive of tax.

The manufacturing cost of the product is ₹750. The manufacturer adds ₹100 as his profit.

Base price of product (cost+ profit) = ₹850

18% tax on ₹850 = ₹153

Total selling price = ₹850 + ₹153 = ₹1003

Tax split up (Intra state sales):

Central Government CGST – 9%: ₹153/2 = ₹76.5

Tamil Nadu Government SGST – 9%: ₹153/2 = ₹76.5

Wholesaler in Tamil Nadu sells to Retailer in Kerala for ₹1150.50 inclusive of tax.

Base price from Manufacturer is ₹850. Wholesaler adds ₹125 as his profit.

New Base price of product = ₹850 + ₹125= ₹975

18% tax on ₹975 = ₹175.5

Total selling price = ₹975 + ₹175.5 = ₹1150.5

Tax amount to be paid by Wholesaler:

If manufacturer filed his tax = ₹175.5 – ₹153 = ₹22.5

If manufacturer did not file his tax = ₹175.5

Tax split up (Inter-state sales):

Central Government (IGST – 18%): ₹22.5

Kerala Government gets ₹11.25 as input credit (half of tax amount)

Total profit for Wholesaler:

If manufacturer pays his tax = ₹125 + ₹153 = ₹278

If manufacturer did not pay his tax = ₹975 – ₹1003 = -₹28

The retailer in Kerala sells to Customer in Kerala for ₹1298 inclusive of tax.

Base price from Wholesaler is ₹975. Retailer adds ₹125 as his profit.

New Base price of product = ₹975 + ₹125 = ₹1100

18% tax on ₹1100 = ₹198

Total selling price = ₹1100 + ₹198 = ₹1298

Tax amount to be paid by Retailer:

If manufacturer and wholesaler filed their taxes = ₹198 – ₹175.5 = ₹22.5

If manufacturer did not pay, wholesaler paid tax = ₹198 – ₹175.5 = ₹22.5

If manufacturer paid tax, wholesaler did not pay = ₹198 – ₹153 = ₹45

If both manufacturer and wholesaler did not pay = ₹198

Tax split up (Intra state sales):

Central Government CGST – 9%: ₹22.5/2 = ₹11.25

Kerala Government SGST – 9%: ₹22.5/2 = ₹11.25

Total profit for Retailer:

If manufacturer and wholesaler paid their tax = ₹125 + ₹175.5 = ₹300.5

If manufacturer did not pay his tax, wholesaler paid = ₹125 + ₹175.5 = ₹300.5

If manufacturer paid and wholesaler did not pay his tax = ₹125 + ₹153 = ₹278

If both manufacturer and wholesaler did not pay their tax = ₹1100 – ₹1150 = -₹50

Since GST is consumption based Tax and the product is only manufactured in Tamil Nadu, but consumed in Kerala, SGST collected in Tamil Nadu will be handed over to Kerala Government by the central government.

Final Tax split up:

Tamil Nadu Government (Manufacturing state) = ₹0

Central Government = ₹76.5 + ₹11.25 + ₹11.25 (after deducting input credit in IGST) = ₹99

Kerala Government = ₹11.25 + ₹76.5 + ₹11.25 (Input credit from IGST) = ₹99

To Sum up,

Manufacturing cost = ₹750

Profit to Manufacturer = ₹100

Profit to Wholesaler = -₹25 to ₹278

Profit to Retailer = -₹50 to ₹300

Tax to Government = ₹198 (State and Central Government)

Cost to consumer = ₹1298

2. Tax not included in Selling price:

Manufacturer in Tamil Nadu sells to Wholesaler in Tamil Nadu for ₹1000 exclusive of tax.

The manufacturing cost of the product is ₹750. Manufacturer’s profit is ₹250.

Base price of product (cost+ profit) = ₹1000

18% tax on ₹1000 = ₹180

Total selling price = ₹1000 + ₹180 = ₹1180

Tax split up (Intra state sales):

Central Government CGST – 9%: ₹180/2 = ₹90

Tamil Nadu Government SGST – 9%: ₹180/2 = ₹90

Since wholesaler paid ₹1180 for the product, he tends to sell at a higher cost to avoid loss. Wholesaler in Tamil Nadu sells to Retailer in Kerala for ₹1300 exclusive of tax.

Base price from Manufacturer is ₹1000. Wholesaler’s profit is ₹120. Tax amount paid by wholesaler = ₹180.

New Base price of product = ₹1000 + ₹120 + ₹180= ₹1300

18% tax on ₹1300 = ₹234

Total selling price = ₹1300 + ₹234 = ₹1534

Tax amount to be paid by Wholesaler:

If manufacturer filed his tax = ₹234 – ₹180 = ₹54

If manufacturer did not file his tax = ₹234

Tax split up (Inter-state sales):

Central Government IGST – 18%: ₹54

Kerala Government: ₹27 as input credit (half of tax amount)

Total profit for Wholesaler:

If manufacturer pays his tax = ₹120 + ₹180 = ₹300

If manufacturer did not pay his tax = ₹1300 – ₹1180 = ₹120

Since retailer paid ₹1534 for the product, Retailer in Kerala sells to Customer in Kerala for ₹1700 exclusive of tax.

Base price from Wholesaler is ₹1300. Retailer’s Profit = ₹166. Tax amount paid by retailer = ₹234

New Base price of product = ₹1300 + ₹166 + ₹234 = ₹1700

18% tax on ₹1700 = ₹306

Total selling price = ₹1700 + ₹306 = ₹2006

Tax amount to be paid by Retailer:

If manufacturer and wholesaler filed their taxes = ₹306 – ₹234 = ₹72

If manufacturer did not pay, wholesaler paid tax = ₹306 – ₹234 = ₹72

If manufacturer paid tax, wholesaler did not pay = ₹306 – ₹180 = ₹126

If both manufacturer and wholesaler did not pay = ₹306

Tax split up (Intra state sales):

Central Government CGST – 9%: ₹72/2 = ₹36

Kerala Government SGST – 9%: ₹72/2 = ₹36

Total profit for Retailer:

If manufacturer and wholesaler paid their tax = ₹166 + ₹234 = ₹400

If manufacturer did not pay, wholesaler paid his tax = ₹166 + ₹234 = ₹400

If manufacturer paid, wholesaler did not pay his tax = ₹166 + ₹180 = ₹346

If both manufacturer and wholesaler did not pay their tax = ₹1700 – ₹1534 = ₹166

Final Tax split up:

Tamil Nadu Government (Manufacturing state) = ₹0

Central Government = ₹90 + ₹36 + ₹27 (after deducting input credit in IGST) = ₹153

Kerala Government = ₹36 + ₹90 + ₹27 (Input credit from IGST) = ₹153

To Sum up,

Manufacturing cost = ₹750

Profit to Manufacturer = ₹250

Profit to Wholesaler = ₹120 to ₹300

Profit to Retailer = ₹166 to ₹400

Tax to Government = ₹306

Cost to consumer = ₹2006

When tax is included in sales price, everyone in the supply chain will get their profit share and consumer would not feel any burden in spending. If the tax is not included, the entire burden falls on the consumer, while all others get more profit. So, the entire responsibility of bringing down the cost lies with the consumer. They need to ensure that maximum retail prices need to be quoted inclusive of taxes.

GST promotes private consumption rate in a state, as state governments will get their share of tax only when the goods or service is consumed in the state. An increase in Private consumption will increase total demand, which in turn will help in the economic growth of India. If properly executed, it will help in tax reduction in future.

Watch out for the part 2 of this post titled “How to make GST work better for Indian exporters” on our website

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