What is GST?
Indirect Goods and Services Tax (GST) was introduced in India on 1 July 2017 replacing old VAT & CST system. In GST, goods and services are taxed at the rates, 0%, 5%, 12%, 18% and 28% respectively. GST is the biggest reform in India and its numerous benefits will be a game changer in the future. GST will bring more tax payer in tax limit, making revenue and thus it contributes to the development of our nation.
GST Practical Example
Let’s start with the simple example of GST, in the below chart; you can see that in GST & VAT system, the tax was taken at every stage. There was Tax on buying raw material, then value addition done by 90 Rs. In the first stage during buying material, manufacture XYZ private limited already paid tax for raw material, but again in the next stage after adding value to it, manufacture XYZ private limited will again pay tax on (100 + 90). But why when tax was already paid for raw material? In order to solve this problem GST was being introduced. In fact, GST will make the products cheaper for the end consumer.
This is not the case in GST and manufacture XYZ private limited will pay tax only on value addition in the next stage after purchase. So, he will pay tax on 190rs amounting to 19rs @10% but whatever he paid for the purchase of raw material will be routed back to his account as input tax credit.
Old System GST
What are the Taxes in GST?
It is a destination based tax system which merges various taxes like Central Excise Law, Service Tax Law, VAT, Entry Tax, Octroi, etc. Old system was complexes due to different rules and regulation by different state. GST can solve all these complexities by making it uniform at the national level. It will replace all indirect taxes levied on goods and services by states and Central. Under this law, taxes will be shared by state as follows
SGST – This will be collected by the state government.
CGST – This will be collected by the central government.
IGST – This will be collected by the central government when the supplies move from one state to another.
How GST Work?
In old system, there was a tax on (tax + value addition) which was creating a cascading effect. GST can solve this problem effectively by taking tax only on value added. Credits of input taxes paid during purchases at each stage for value addition will be available in the next stage, which in fact makes GST essentially a tax only on the value added at each stage. In the supply chain, the final consumer will only have to pay the GST charged by the last dealer or service provider.
GST will make products cheaper for end consumer, but there will be complexity in return filing. As per Confederation of All India Traders there are about 100 million small traders and most of them do not have basic knowledge of computer and accounting principle. After realizing the complexity of return, many companies started developing cloud based GST software and launched it hurriedly without much of the testing. We are very much aware as how bad the internet services are in India and also it is well known fact that many Indian cities still haven't got much exposure to the internet. So, It will be very interesting to see how it works in such a scenario. In personal opinion, only windows based applications are capable to solve such problem.