Goods and Services Tax (GST)

Ques. 1) What is GST?

Ans. GST refers to Goods and Services Tax which is an indirect tax that will be levy across all states of India (except to the state of Jammu and Kashmir) with a single tax rate as compared to previous taxation methods being adopted by each state separately. In other words, a single tax rate for all states of India instead of different rates for different states of India.

GST is a comprehensive, multi stage; destination based indirect tax that will be levy on every value addition of a product.

Let us learn each component of GST in detail:

a. What is indirect tax?

The Indian economy has two types of taxes; i.e. Direct Tax and Indirect Tax.

Direct Tax : Direct Tax means the burden of payment of tax that cannot be transferred to another person, for eg, Income Tax, Wealth Tax, i.e., what you earn or any type of wealth you have you pay tax for that.

Indirect Tax : As far as indirect tax is considered, the burden of payment can be transferred. For eg: We visit a restaurant, the owner who was charged with VAT and Service Tax for the portion of goods on which he paid vat and services he used paid service tax will recover the same from us, therefore, he has transferred his tax burden on us, this is called indirect tax, i.e., the burden of which can be transferred. From the above we can draw the conclusion that the ultimate burden of tax is on the end consumer as the owner was also not available with the remedy of reduction in his tax liability. But with the implementation of GST, the buyer of a product has the facility of claiming input tax credit on the taxes that were previously paid by him and this will result in decrease in tax liability of the end consumer.

b. What is multi-stage?

There are multiple steps which are being followed in production of every product which is being made available for final consumption. Every product has its own life cycle before arriving at its final destination of ultimate consumption. For eg: first a raw material will be purchased for production of a particular product. At second stage production or manufacture process is being conducted. Then comes the stage of storage of finished goods before being made available for the final consumer. Now comes the stage of selecting retailers for the supply of finished goods to the final consumer.
The other component of GST is value addition:

c. What is value addition?

The monetary worth added to a product at each stage of manufacture to achieve the final sale to the end consumer is called value addition. Under GST each and every stage of value addition will be covered. For eg: Let’s consider a saree; as per mentioned above, first a raw material will be purchased, say yarn, now manufacturing procedure will be conducted to convert yarn to textile, this will change the character of yarn and add value to the raw material. At next stage, the textile so produced will be altered as per required length and designing or colors will be given to the textile, which will add further value to the saree. At warehouse brand tags will be added to them which will increase its worth. After this the brand owners will do marketing expenses for the purpose of attracting more and more consumers and at the last stage final packing will be done so as to make it available for the final consumption. Each stage is doing a value addition to the product and hence will be covered under GST.

d. What is destination based?

GST will be levied on all transactions taking place during a manufacturing process.

In the old taxation process VAT is leviable at each and every stage of sale being imposed by the particular state in addition to the other indirect taxes, such as excise duty on production along with VAT on purchase of raw material. But under goods and Services Tax a single rate will be imposed at each stage. For eg; raw material is purchased in a particular state and production also takes place in that stage and other processes as well, then GST which is being leviable at each stage will be collected by that particular state and if the final product is sold in some other state, then, the GST levied on such final sale -will be collected by that state. But not by the state in which all other processes were conducted.