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What you should know about GST

CA Sagar Khubchandani 
on 03 December 2014

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If there is most discussed and delayed tax reform in India,it is GST (Goods and Service Tax).

Although many are aware of what GST is all about and advantages associated with it, there are still latent facts which you may not be aware of.We will discuss it after its general introduction so as to maintain a logical connectivity of facts.

What is Goods and Service Tax?

Goods and Service Tax (GST) is a comprehensive tax levy on manufacture,sale and consumption of goods and service at national level.

GST is a tax on goods and services with value addition at each stage having comprehensive and continuous chain of set-off benefits from the producer's / service provider's point up to the retailer's level where only the final consumer has to bear the tax.

GST regime aims at making tax procedures more fair,transparent and efficient.

How does the GST mechanism work?

Let's understand this with the help of an example.

Suppose a manufacturer purchases raw material to be used in the manufacture of a product for Rs 100 and pays tax @ 10% thereon i.e., Rs 10.

Manufacturer further incurs processing cost of Rs 10 and keeps profit at Rs 20.

Thus, Selling price being Rs 140 (110+10+20).

If we calculate the total tax manufacturer has to pay in this case,it would be Rs 24 (Rs 10 on procurement + Rs 14 on sales).

Now, under GST regime, tax payable by the manufacturer shall be Rs 14 i.e., on selling price.

Since manufacturer had paid Rs 10 as input tax, tax payable by him in final transaction shall be Rs 4.

Thus,GST works on VAT principle thereby giving full credit for input tax paid on procurement.As an add on,while VAT gives credit on goods only,integration of various taxes into a GST system would make it possible to avail credit on goods and services both.The GST hence,reduces tax burden on producers and thereby helps to reduce overall production cost and increase the output of the economy in the long run.

Visible advantages of GST

Apparently, GST provides following common benefits :

1. Unified market : The GST will cut down the large number of taxes imposed by the Central Government (eg Central VAT,Excise duty,Service Tax,Central Sales Tax on inter-state sale,etc) and State (VAT on sales,entertainment tax,luxury tax,octroi and entry tax levied by municipalities).This would lead to creation of a unified market,which would facilitate seamless movement of goods across states and reduce transaction cost of businesses.

2. Reduce tax evasion : Since the companies in a chain will have to pay tax on value addition instead of underlying value of goods or service,actual tax paid will likely be small and reduce evasion. Also,since credit can be availed against output tax only when input tax has been paid,companies at different stages would be encouraged to pay taxes on inputs.

3. Widen tax base : GST will give credits for all taxes paid earlier in the goods/service chain incentivising tax paying firms to source inputs from registered dealers only.This will bring in additional revenues to the government as unorganised sector, which is not part of value chain,would be drawn into tax net.Besides,states would be allowed to tax services,as opposed to Central Government only,under GST. 

Latent advantages of GST

Now comes the real part you all need to know which everyone is not aware of.

It's an astounding fact that Indian truck drivers clock an average of 280 Km per day,much below the world average of 400 Km and far below 700 Km the average truck driver in US does everyday.Is this underperformance related to bad roads or less fancy trucks? Well maybe to an extent but not whole.

The major cause of the underperformance is prevailing archaic laws.

Truck drivers spend 60% of their time off roads negotiating check posts and toll plazas and there are about 650 odd check posts in the country and 11 different types of taxes on the road transport sector.

Since road traffic accounts for 60% of freight traffic in India,slow movement of trucks across states lead to productivity loss. According to a study, If the distance covered goes up by 20% per day, Indian truck productivity would improve by 12%.We can estimate the loss government incurs everyday because of existing laws which is ultimately borne by general public.

Higher productivity would 

- cut the need for buffer stocks,

- reduce the loss of perishable goods,

- cut down the need for warehouses, and 

- would save so much time and efforts that can be used productively.

Implementation of GST would provide the productivity boost as illustrated above by doing away with different types of taxes and bringing uniformity in tax laws.

With long delay in its implementation,it is expected to be brought into force with enormous planning and can henceforth, boost the economy as a whole.Fingers are crossed and it's effects will be seen after its implementation only.

Sagar Khubchandani

(khubchandani_sagar@yahoo.com)


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