TAX – it is the most frequently heard word in any business/financial market. Tax is charge that must be paid to the government. Any thing that reduces the tax is a boon. GST is one such gift, introduced to reduce the tax. But does it really reduce the tax and is it more reliable than the previous version of tax system. So, to answer such questions we need to have some understanding of what GST is and its benefits. So, let us start with the question “what GST is?”.
Goods and Service Tax(GST) was introduced to transform the entire nation into one single common market place. It aims at simplifying the tax structure and to subsume the multiple indirect taxes imposed on both the producers and the consumers. GST simplified a slew of indirect taxes with a unified tax and is therefore expected to dramatically reshape the country’s 2.4 trillion-dollar economy. The goods and services are divided into five tax slabs for collection of tax- 0%,5%,12%,18% and 28%. GST replaced multiple cascading taxes and reduced tax-on-tax scenario.
Before GST was introduced there were tax-on-tax scenarios. We try to explain it with a simple example by the flow chart below.
This is how VAT, exercise duties, so on .. levied at several stages contribute to raise in the final price of the commodity. In the traditional tax structure (pre-GST structure) both the central government and state government levied taxes such as income tax, custom duties, service tax, central exercise by central government and VAT( value added tax), stamp duties and land revenue, state excise by state government. The indirect taxes were in vast numbers as there were several of taxes to be incurred on manufacture, import and sale and even on purchase in some cases.
THREE KINDS OF GOODS AND SERVICE TAXES:
Under GST we have three kinds of taxes CGST, SGST, IGST. In CGST the revenue will be collected by the central government, in SGST the revenue will be collected by the state government for intra-state sales, IGST where the revenue will be collected by the central government for inter-state sales.
BENEFITS OF GST
The notion of having one tax (merged indirect tax) in place of several indirect taxes have several benefits:
- Benefits people as price decreases
- It helps to build transparency and to build corruption free tax administration
- Regulating unorganized sectors
- The tax will be levied at place of consumption
- The poorer states will have to pay equal amount of tax which will help them to develop
- Doing business will be much easier with the simple rules
- It will boost up the country’s economic growth
- It reduces the logistic cost and time taken across states
- It makes survival of start-ups easier
- It simplified tax structure and promoted ‘ Do it Yourself ‘ notion
- All the invoices will be captured online by GSTN
With all these benefits, it can be stated that GST is going to play an important role in boosting the country’s Gross Domestic Product. GST is a reform that boosts economy and ensures reduced costs.
Now we have some idea as to what GST is and how it boosts economy and its benefits. But to know whether GST is better than the previous version of tax structure, we need to compare both the GST and pre-GST structures to have a clear understanding. Till now we have just discussed the advantages of GST, but we even have some disadvantages.
DISADVANTAGES OF GST
- There is a need to update existing accounting software or to buy a new one which increases the operational cost
- Industries and small-scale enterprises who haven’t registered, need to register GST in a short period
- Smaller business face problem because even small-scale industries are subjected to pay GST if their turnover is greater than 20 lakhs. But previously only if their turnover exceeds 1.5 crores they were subjected to tax.
Now let us try to compare both the version of taxes i.e. pre-GST and GST.
- STRUCTURE: In old tax system we had several taxes by central government and state government such as custom duty, central excise duty, service tax, VAT, state excise, etc. But under GST all such taxes are merged to a single tax levied on all commodities.
- STRATEGY: In old tax system tax will be levied at the place of manufacturing or at the place where it is sold. But in GST it is destination-based tax i.e. levied at the place of consumption.
- TAX-ON-TAX: In the older tax system there were scenarios of tax-on-tax which substantially increased the final price of commodities. But in GST since we have only one tax such situations is less prevalent.
- EXEMPTION: In the older version of tax, some regions(states) were exempted from tax. But with GST there are no such exemptions to any states.
- TURNOVER LIMIT: Under previous tax structure an organization is subjected to central excise if its turnover exceeds 1.5 crores. But under GST, an organization whose turnover exceeds 20 lakhs must pay GST.
- CORRELATION: Previously there was no correlation between state government and central government. But under GST, there is a mutual correlation between the central government and state government.
- EASE OF DOING: In previous tax structure there were several tax hurdles. Multiplicity in meeting compliances at different state levels by following separate laws. Under GST, the tax complexity is less. There is a similar state level and central level compliance and hence there is a unified return filing formats on a pan India basis.
- TAX RATES: In pre-GST tax structure we had different tax rates for different taxes which vary from state to state. But with GST there will be one CGST rate and a uniform SGST rate across all states.
Now let us have a look at an example after which we will be able to conclude.
UNDER PRE-GST SYSTEM:
The product sold from Hyderabad to Bangalore. If the price is 2000 rupees. The VAT at 10% results to rupees 200.
Now product sold from Bangalore to Chennai, the cost = 2200 rupees. Let the profit amount be 1000 then the selling price would be 3200 rupees.
Now CST at 10% results 320 rupees. So, the total cost would be 3520 rupees.
UNDER GST SYSTEM:
The product sold from Hyderabad to Bangalore. If the price is 2000 rupees. The CGST at 5% results to rupees 100.
The SGST at 5% results to rupees 100.
Now product sold from Bangalore to Chennai, the cost = 2200 rupees. Let the profit amount be 1000 then the selling price would be 3200 rupees
Now IGST at 10% results 320. With deduction of CGST and SGST i.e. 320-CGST-SGST=120 rupees.
Now total cost of product would be 3320 rupees.
So, we clearly spot the difference of 200 in between Pre-GST and GST system. The GST system have reduced the final amount by 200 in the above example.
Finally, it’s time to tell why and how GST is better than the previous tax structure. GST, with its unique features stands out as a best tax structure. It has merged all taxes to a single tax that is uniform over the regions. With it’s ‘one nation on tax’ agenda and subsumed taxes, it helps and contributes for the economic development.
It has made the working of small organizations easy with simplified tax structures. It plays an important role in GDP. So, we finally say, by going through all the benefits GST and the comparison between the previous tax structure and GST, we conclude that GST is better than the earlier tax system.