What Is The Goods and Services Tax (GST) ?: Indirect Federal Sales Tax
What Is The Goods and Services Tax (GST) ?: Indirect Federal Sales Tax
What Is The Goods and Services Tax (GST) ?: Indirect Federal Sales Tax
The goods and services tax (GST) is a value-added tax levied on most goods
and services sold for domestic consumption. The GST is paid by consumers, but
it is remitted to the government by the businesses selling the goods and services.
In effect, GST provides revenue for the government.
More recently, the GST and PST have been combined in some provinces into a
single tax known as the Harmonized Sales Tax (HST). Prince Edward Island was
the first to adopt the HST in 2013, combining its federal and provincial sales
taxes to a single tax at 14%, which was raised to 15% in 2016. Since then,
several other provinces have followed suit, including New Brunswick,
Newfoundland and Labrador, Nova Scotia and Ontario.
The wholesaler purchases the notebook for Rs. 15 and sells it to the retailer at
a Rs. 2.50 markup value for Rs. 17.50. The 10% tax on the gross value of the
good will be Rs. 1.75, which he can apply against the tax on the original cost
price from the manufacturer i.e. Rs. 15. The wholesaler’s effective tax rate will,
thus, be Rs. 1.75 - Rs. 1.50 = Rs. 0.25.
If the retailer’s margin is Rs. 1.50, his effective tax rate will be (10% x Rs. 19) -
Rs. 1.75 = Rs. 0.15. Total tax that cascades from manufacturer to retailer will
be Rs. 1 + Rs. 0.50 + Rs. 0.25 + Rs. 0.15 = Rs. 1.90.
India has, since launching the GST on July 1, 2017, implemented five different
tax rates.
Under the GST regime, the tax is levied at every point of sale. In the case of intra-state
sales, Central GST and State GST are charged. Inter-state sales are chargeable to
Integrated GST.
Now let us try to understand the definition of Goods and Service Tax – “GST is
a comprehensive, multi-stage, destination-based tax that is levied on every value
addition.”
Multi-stage
There are multiple change-of-hands an item goes through along its supply chain: from
manufacture to final sale to the consumer.
Let us consider the following case:
Goods and Services Tax is levied on each of these stages which makes it a multi-stage tax.
Value Addition
The manufacturer who makes biscuits buys flour, sugar and other material. The value of the
inputs increases when the sugar and flour are mixed and baked into biscuits.
The manufacturer then sells the biscuits to the warehousing agent who packs large
quantities of biscuits and labels it. That is another addition of value after which the
warehouse sells it to the retailer.
The retailer packages the biscuits in smaller quantities and invests in the marketing of
the biscuits thus increasing its value.
GST is levied on these value additions i.e. the monetary value added at each stage to
achieve the final sale to the end customer.
Destination-Based
Consider goods manufactured in Maharashtra and are sold to the final consumer in
Karnataka. Since Goods & Service Tax is levied at the point of consumption. So, the
entire tax revenue will go to Karnataka and not Maharashtra.
Sale within CGST + VAT + Central Revenue will be shared equally between the
the State SGST Excise/Service tax Centre and the State
Sale to IGST Central Sales Tax + There will only be one type of tax (central) in case
another State Excise/Service Tax of inter-state sales. The Centre will then share the
IGST revenue based on the destination of goods.
Illustration:
Let us assume that a dealer in Gujarat had sold the goods to a dealer in Punjab worth
Rs. 50,000. The tax rate is 18% comprising of only IGST.
In such case, the dealer has to charge Rs. 9,000 as IGST. This revenue will go to the Central
Government.
The same dealer sells goods to a consumer in Gujarat worth Rs. 50,000. The GST rate
on the good is 12%. This rate comprises of CGST at 6% and SGST at 6%.
The dealer has to collect Rs. 6,000 as Goods and Service Tax. Rs. 3,000 will go to the
Central Government and Rs. 3,000 will go to the Gujarat government as the sale is
within the state.
CGST, SGST, and IGST has replaced all the above taxes. However, the chargeability of CST
for Inter-state purchase at a concessional rate of 2%, by issue and utilisation of c-Form is still
prevalent for certain Non-GST goods such as: (i) Petroleum crude; (ii) High-speed diesel; (iii)
Motor spirit (commonly known as petrol); (iv) Natural gas; (v) Aviation turbine fuel; and (vi)
Alcoholic liquor for human consumption. in respect of following transactions only:
Resale
Use in manufacturing or processing
Use in the telecommunication network or in mining or in the generation or distribution of
electricity or any other power