Tag Archives: indirect tax

Jul 20 2015

GST Unravelled

vd-GST-take-2 (1)With too much of waiting (already implemented in 150 countries) and more than too much of debate (both between our own intellectual ministers and among highly intellectual news readers), GST Bill is finally around the corner waiting for its approval and its time we get our hold on what it means for us. As the name suggests it’s a tax on both goods and services and is expected to cut short on the confusion among Indians as to when and how much they should pay for what kind of consumables. GST plans to bring unification in Indian market and replacing most (of-course nothing can be fool proof) indirect taxes with one tax-GST.

Let me explain with an illustration as to how it will effect pockets at every level of a supply and distribution channel.

Level in supply chain Cost of procurement (A) Premium Charged (B) Selling Price (C=A+B) GST Rate (D) GST on output (E) Input Tax Credit (F) Net GST (G=E-F)
Producer 100 40 140 10% 14 10 4
Whole Seller 140 20 160 10% 16 14 2
Retailer 160 10 170 10% 17 16 1

gst_3636_356

Now the above was explained for a small channel, but same would hold for large industries too where the number of players are more. GST is required because although we had a Central VAT (CENVAT) and a State Level VAT, they are not covering all the aspects like capturing the chain of value addition in a supply chain below the stage of production as explained above and it also didn’t incorporate many taxes like excise duty, customs duty, surcharges, etc. which is the key difference between GST and already implemented VAT. After its implementation traders can gain credit on the taxes they paid on both goods purchased and services availed and deduct it from the tax they will gain in passing on the product to next level in chain.

The real problem in its coming to action is that so called tax unification scheme namely GST is itself divided into 2 components- Central GST and State GST and each of them are fighting for the percentage they get to keep of the taxes they procure from the approximately 3% Indian tax payers. The Central GST and the State GST would be applicable to all transactions of goods and services except the exempted goods and services, goods which are outside the coverage of GST and the transactions which are below the approved limits and they will be paid to the account of Central and State separately. Now this does not really decrease confusion in our complex tax system, for e.g.

“Suppose, the rate of CGST and SGST is 10% and 5% respectively. When an advertising company located in Mumbai supplies advertising services to a company within the State of Maharashtra for, let us say Rs. 100, the ad company would charge CGST of Rs. 10 as well as SGST of Rs. 5 to the basic value of the service. He would be required to deposit the CGST component into a Central Government account while the SGST portion into the account of the concerned State Government. Of course, he need not again actually pay Rs. 15 (Rs. 10+Rs. 5) in cash as it would be entitled to set-off this liability against the CGST or SGST paid on his purchase (say, of inputs such as stationery, office equipment, services of an artist etc.). But (here comes the funny thing) for paying CGST he would be allowed to use only the credit of CGST paid (Rs. 10) on its purchase while for SGST he can utilise the credit of SGST (Rs. 5) alone. In other words, CGST credit cannot, in general, be used for payment of SGST. Nor can SGST credit be used for payment of CGST.” – So much for a unified system.

The respective rates (SGST for each individual state) are not yet decided as for that to happen finance ministry has to individually sit with every state’s CM and come up with individual package for everyone so that GST is launched country wise, because for the bill to be passed by a two-third majority in all 29 states’ Legislative Assembly in not at all an easy task. Still, with so much criticism and valuations it would bring a lot of added benefits like more coverage, less confusion, price reductions which will lead to more consumption that require more production which in turn will increase the ‘C- Consumption by consumer’ component of GDP equation and help in GDP growth.

I would now my so far the most boring blog by listing out the bottlenecks in the GST implementation-

  • Understanding the preparation needed for implementation at the Central and State level
  • If the government machinery is efficient enough for the enormous change
  • Whether the tax payers are ready for the change ?
  • What impact will it have on Government revenue ?
  • Effect on small and large manufacturers, traders and end consumers
  • Will it really unify the tax system?

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