Understanding GST in simpler terms
RISHI JARYAL || India is home to nearly 1.3 billion people that makes it the second most populous nation in the world. With this huge population comes great responsibility. Of course handling this much population is quite a difficult task… isn’t it?
India also is the fastest growing economy in the world. It’s growth rate has come out to be nearly 7.2% in 2016 and it is expected to grow further. In this race we already have surpassed the super-powers of the world. You can yourself name them in your mind. India, an economy of 2 trillion USD, is growing on the account of its huge population., Thanks to industrialization and globalization that have provided employment to Indian youth. To feed such a huge population, government also needs some fund and that is assisted by the population itself. The people provide money to government through the so called TAX SYSTEM and that money is utilized by the government to feed her people.
What is TAX?
Tax is a Mandatory monetary levy imposed on an individual or any product by an authority. This levied money is then used to fund various public expenditures eg. Health, Education, Infrastructure, Military, Public transport, Pensions and many more.
Yes we all are aware of the term tax because it is already amongst the Trending topics. We all know that the Government of India has recently launched GOODS AND SERVICES TAX system. But majority of us are actually unaware of what GST or Goods and Services Tax is all about?
Let us help you in Understanding GST in simpler terms:
GST is a tax (indirect as it would be collected by an intermediary and not directly by the government) which is persistent throughout the country in order to replace the slew of so many indirect taxes with a unified tax, thus reshaping country’s huge economy. GST has been introduced as The Constitution Act 2017 (101st amendment). It is governed by a GST Council, Finance Minister being its chairman. Although a few members of opposition just chose to boycott this launch claiming that it was just the exact copy of the then existing taxation systems. I don’t want to insert politics here, so let’s continue the topic.
Before GST, there were multiple taxes levied by central and state government. These were, for example, Central Excise, Service Tax, Custom Duty, CST and VAT etc. Now let’s see what was the system of tax levitation (previous one) on a product that reaches from a manufacturer to a consumer.
Say, a material X is to be manufactured and then sold to a consumer via wholesaler and retailer.
Let’s assume the cost of production for manufacturer = Rs. 1,00,000.
He adds profit margin @ 10% = Rs. 10,000.
Now. Excise duty on this product @ 12%= Rs. 13,200.
Now total cost comes out to be= Rs. 1,00,000 + Rs. 10,000 + Rs. 13,200 = Rs. 1,23,200
VAT @ 2.5% = Rs. 15,400
Total price that the wholesaler would pay = Rs. 1,23,200 + Rs. 15,400 = Rs. 1,38,600
Now, wholesaler would add more profit margin @ 10% i.e. Rs. 13,860
Total value = Rs. 1,52,460
VAT @ 12.5% would be applied again = Rs. 19,058
Total price that the retailer would pay to wholesaler = Rs. 1,52,460 + Rs. 19,058 = Rs. 1,71,518
Retailer’s profit margin @ 10% = Rs. 17,152
Total value = Rs. 1,88,670
Now, Again VAT @ 12.5% = Rs. 23,584
Now the exact amount of money that a consumer would pay = Rs. 1,88,670 + Rs. 23,584 = Rs. 2,12,254
Now, let us understand how GST would impact the taxation system and the product cost. Under this system, tax would be levied at:
INTRA-STATE LEVEL: This means when goods are sold with in a state where they were produced. Both Centre and State governments shall levy tax at equal rate through CGST and SGST respectively. CGST stands from Central GST and SGST stands for State GST.
INTER STATE LEVEL: This means when the goods are sold across the boundaries of a state and then an INTEGRATED GST would be levied.
CGST and SGST both shall be levied at equal rates based on the particular product. Lets us suppose for this product X, GST rate is 6%.
So, for state and centre @6% each, thus making the total of 12% GST.
Now let’s take the previous example to understand the present system of tax levitation.
Manufacturer manufactures the product with a production cost of RS. 1,00,000 and adds profit margin @10%= Rs. 10,000.
Now applying SGST @6% = Rs. 6,600
and CGST @6% = RS. 6,600
Thus, the price that a wholesaler has to pay = Rs. 1,00,000 + Rs. 10,000 + Rs. 6,600 + Rs. 6,600 = Rs. 1,23,200
Now, wholesaler adds margin @10% = Rs. 12,320
Total value = Rs. 1,23,200 + Rs. 12,320 = Rs. 1,35,520
CGST @6%= Rs. 8,131
SGST @6%= Rs. 8,131
Thus, the price that the retailer has to pay = Rs. 1,35,520 + Rs. 8,131 + Rs. 8,131 = Rs. 1,51,782
Now he adds his margin @10% = Rs. 15,178
Total value = Rs. 1,66,960
CGST @6% = Rs. 10,018
SGST @6% = Rs. 10,018
Total GST = Rs. 10,018 + Rs. 10,018 = Rs. 20, 036
Hence, the exact amount of money that a consumer would have pay = Rs. 1,66,960 + Rs. 20,036 = Rs. 1,86,996
We hope you got the clear insight into GST. The example well explains how GST would have a positive impact on the lives of the consumers.
We request all are readers to be Honest in Paying taxes as:
A Nation is Made, When taxes are Paid