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Discussions - G
Tuesday, 15 September 2015 9:22 pm

WHAT IS GST? While the VAT, which replaced sales tax and has already been
adopted by all the states, was imposed only on goods; the GST
will be like a VAT on goods and services both.

So current scenario ===> STATES TAX GOODS, CENTRE TAXES


SERVICES

GST = Indirect tax.

How does GST This is how GST will work:


work? + Its
advantages I bought milk for Rs.100, and sugar for Rs.100 from a
wholesaler.

There is 10% tax --> So, I paid Rs.10 tax for milk + Rs.10 tax for
sugar = a total of Rs.20 GST to the wholesaler

Now, using the milk and sugar I bought, say I make ice cream. I
set its SP = Rs.250 with a view of a profit margin of Rs.50

So, just to be clear, my CP = Rs.200, my SP = Rs.250

What about the Rs.20 tax I paid when buying milk + sugar? =
We'll actually recover them later below.

Now, for my ice cream, customer has to pay a total of Rs.250 +


Rs.25 (10% tax) = Rs.275

So, when customer buys my ice cream, I can note in my diary


that I received Rs.25 as GST from customer.

Now, what do I do with this received GST of Rs.25? Pay it to the


Govt.? = NO. Since I've already paid Rs.20 GST to the
wholesaler (who'll pass it on to the Govt.) when I bought the
raw materials milk and sugar, all I need to pay to the Govt. at
this stage = Rs.25 - Rs.20 = Rs.5
Now, what do I do with this received GST of Rs.25? Pay it to the
Govt.? = NO. Since I've already paid Rs.20 GST to the
wholesaler (who'll pass it on to the Govt.) when I bought the
raw materials milk and sugar, all I need to pay to the Govt. at
this stage = Rs.25 - Rs.20 = Rs.5

Therefore, in all, the taxes being paid by ultimate customer =


Rs.20 + Rs.5 = Rs.25

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Now, how does the current system work?:

I bought milk for Rs.100, and sugar for Rs.100 from a


wholesaler.

There is 10% tax in my state --> So, I paid Rs.10 tax for milk +
Rs.10 tax for sugar = a total of Rs.20 TAX to the wholesaler.

Now, using the milk and sugar I bought, say I make ice cream. I
set its SP = Rs.270 with a view of a profit margin of Rs.50

So, just to be clear, my CP = Rs.200 + Rs.20 = Rs.220, and my SP


= Rs.270. Here I'm counting the Rs.20 in CP since tax will be
computed on this (i.e. tax on tax).

Now, for my ice cream, customer has to pay a total of Rs.270 +


Rs.27 (10% tax) = Rs.297

I'll need to pay this Rs.27 entirely to the Government.

Therefore, in all, the taxes being paid by the ultimate customer


= Rs.27

1. Note the difference?:

In current scenario, the customer was paying a tax of


Rs.27.
In GST regime, the customer was paying a tax of Rs.25.
So, ice cream was cheaper in GST regime. BUT WHY?

Because, in GST regime, TAX ON TAX i.e. CASCADING


TAX is avoided.
Rs.27.
In GST regime, the customer was paying a tax of Rs.25.
So, ice cream was cheaper in GST regime. BUT WHY?

Because, in GST regime, TAX ON TAX i.e. CASCADING


TAX is avoided.

Because the shopkeeper already paid a tax when buying


the raw materials, he DOESN'T need to pay the tax again
later. BUT, in current scenario, shopkeeper needs to pay
tax at both times i.e. when he was buying the raw
materials and when he's selling the finished product to
the customer.

2. Now, in GST regime, for the shopkeeper to pay lesser tax


later on, he WILL need to show that he already paid the
tax when buying the raw materials. --> Therefore, this is
an incentive for maintaining proper paper trail and thus
will promote TRANSPARENCY IN ACCOUNTS leading to
LESS TAX EVASION.

2 separate There will be 2 GSTs for each good/service:


GSTs?? 1. A STATE GST
2. A CENTRAL GST

If a product goes from one state to another, then they'll charge


IGST = Integrated GST = Cental Govt. will collect it.

Ok, so why all Because a CONSTITUTIONAL AMENDMENT is needed. Why?


the noise?
Cause currently ONLY CENTRE has powers to collect TAX on
SERVICES.

To allow states to collect tax on goods + SERVICES via GST,


constitution will have to be amended.

And given the current nature of politics, that is easier said than
done.

Points in 1. GST will replace a plethora of taxes thereby simplifying tax


FAVOUR of GST regime --> will simplify tax collection also.

2. Currently, different states have different tax rates == it's like


Points in 1. GST will replace a plethora of taxes thereby simplifying tax
FAVOUR of GST regime --> will simplify tax collection also.

2. Currently, different states have different tax rates == it's like


so many different Indias within a single India = bad for
attracting investment

3. Avoids CASCADING OF TAXES ---> production costs will


decline ---> exports will increase.

4. It's a DESTINATION based tax --> tax is levied on sale points

Points AGAINST 1. Some states say this is impinging on their freedoms of


GST setting their own tax rates -- they say they have their own
visions of development and thus need freedom to set their
own tax regime

2. The ideal way to bring down GST without incurring revenue


losses is to widen the base by including as many goods and
services under its purview as possible. But this could mean
that some essential goods currently taxed at a lower rate
could end up being taxed higher under GST.

Bonus Finally, what should be the taxation rate?

A 12% GST (7% SGST and 5% CGST) rate will = substantial


revenue losses for states as the general VAT rate for many
states is 13-14%.

A 27% GST (mooted as a Revenue Neutral Rate or RNR or the


rate at which tax revenues for states and centre will remain the
same as before GST) = enormous tax burden on wage earning
classes and political suicide for the Govt. of the day.

SIN TAX FOR Sin tax = globally prevalent practice under which "sinful"
ALCOHOL AND products like tobacco and alcohol which are considered as
TOBACCO "bad" for society attract higher rates of tax
INDUSTRIES IN
GST REGIME The main aim of this sin tax is to discourage people from using
these products/services.
INDUSTRIES IN
GST REGIME The main aim of this sin tax is to discourage people from using
these products/services.

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