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GST: What are the benefits of GST? How it will work?

Jun 27, 2017

GST (Goods & Services Tax) – These are indirect and uniform tax across India. We will pay only single tax on goods and services. Since last couple of months, we’ve been hearing GST all over the news. Have you been wondering what actually is GST?  India has many indirect taxes such as:

  • Central Excise duty
  • Service tax
  • Surcharges & Cesses
  • Central sales tax
  • Sales tax
  • Purchase Tax
  • Entertainment tax
  • Luxury Tax
  • Entry tax etc.

Indirect taxes: Indirect tax is the tax whose liability can be shifted to someone else. All taxes on goods and services. They are not taxes on income or profits. Therefore, these multiplicity of taxes on goods & services had driven up. The prices of goods & services make taxation complicated. Further, the taxation is different for each state and businesses paying taxes on the paid taxes. GST attempts to unified most of the indirect taxes makes it destination base taxation and make India a unified market.

Let’s take an example to understand how it will different from current taxation system:

Consider a simplified tax rate of 10%. There’re generally 4 levels: Manufacturer, Distributor, Wholesaler and Retailer.

Current Taxation:

Manufacturer buys raw materials of Rs.50 & manufactured the product in which he adds Rs.50  value to it. So the product is of Rs.100. & for selling this product he needs to pay tax of 10% 50+50 = 100 pays tax of 10%
Cost of the product for Distributor= Rs.110
Distributor add value of RS. 20 as a profit. So the price will be come 130.  Adding 10% tax so the product is of 143 110 + 20 = 130 pays tax of 10 %
Cost of the product for Wholesaler = Rs.143
Wholesaler follows the same pattern so, the price will become 143+20 = 163 and 10% tax which is of 16.3 and sells it for 179.3 to retailers. 143+20 = 163 pays tax of 10%
Cost of the product for Retailer = Rs.179.3
Retailer add Rs.20 profit and the price will become 199.3 the consumer buys this product from retailer by paying 10% tax on 199.3 179.3 + 20 = 199.3 pays the tax of 10%
Cost of the product for Consumer = Rs.219.23
So, the final consumer price is 219.23. This is how the current taxation system works. Rs.219.23

Now, we will take the same example with GST:

Raw material is of Rs.50 & the manufacturing value of Rs.50 makes the value 100rs. At this time manufacturer has to pay taxes on the value added by him which is Rs.50 so he pays 10 % of 50 which is 5 as tax from his profit. But the selling price will not increase and the cost of the product for distributor is Rs.100 only. 50 + 50 = 100
10% of Rs.50 = Rs.5
Cost of the product for Distributor will remains the same i.e. Rs.100
Distributor adds Rs.20 profit and the cost will be 100+ 20 = 120 and pays the tax of Rs.2 on his profit of Rs.20. 100 + 20 = 120
10% of Rs.20 = Rs.2
Cost of the product for Wholesaler = Rs.120
The wholesaler buys the product of Rs.120 and add Rs.20 profit and the cost of the product would be Rs.140 and he also pays Rs.2 tax on his Rs.20 profit. 120 + 20 = 140
10% of Rs.20 = Rs.2
Cost of the product for Retailers = Rs.140
Retailers buys the product Rs.140, add profit of Rs.20 and pays the tax of 2 rs on his profit of 20 rs.
And final consumer price is Rs.160. So, if the prices are compared the product is Rs.59. 23 cheaper in GST system than the current system.
140 + 20 = 160
10% of Rs.20 = Rs.2

Benefits of GST:

Here’re some benefits of GST in India:

  • Better tax collection
  • The goods manufactured within India will become more competitive
  • Ease of business
  • Faster movement of goods across state
  • It will decrease production cost
  • Increase in GDP
  • Improved Taxation system
  • Reduces tax on manufacturers

Similarly, there are many other benefits:

GST will replace Central excise duty, duties of excise, special additional duty of customs, service tax, cesses & charges, state vat, central sales tax, state level sales tax, purchase tax, luxury tax, entry tax, entertainment tax which are not levied by local bodies, taxes on advertisement, lotteries & gambling.

GST may not replace: Basic custom duty, export duty, road & passenger tax, toll tax, property tax , stamp duty & few others.

So, Will GST make things cheaper? No not immediately in fact applying the uniform rate of GST will increase the prices in the short term in some areas where they are currently tax less than the uniform rate. However, in the long term GST will reduce the prices of goods and services due to no tax on tax and improvement in productivity.

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