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Everything You Wanted To Know About The GST Research Team | Posted On Monday, December 12,2016, 11:03 AM

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Everything You Wanted To Know About The GST



In this world nothing can be said to be certain, but death and taxes.” Yes…Just as you dedicate your life to earning good income to feed yourself and family, you must also pay attention to taxes. Let’s talk about a very interesting tax….The Indirect Tax….

Indirect taxes are levied (charged) on the manufacture of goods, provision of services and items of consumption. Well you buy biscuits…chocolates…the bread you eat everyday…soaps…toothpaste …the mobile services….why even the haircut you have, you need to pay indirect taxes on almost everything. Now there are plenty of indirect taxes…sales tax…value added tax, popularly called VAT…Excise tax….to name a few.

Indirect taxes which are charged on the manufacture of goods and the provision of services, are managed exclusively by the Central Government. Taxes on consumption are managed, exclusively by the State Government.

Confused…too many indirect taxes…Well, GST aims to solve this problem.

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What is GST?

Goods and services tax, popularly known as GST, is one indirect tax, for the whole of India. GST is considered to be the biggest reform, since India got her independence.

See Also: GST Tax Rates In India

Let’s understand how GST works through a simple example.

Stage 1:   Manufacturing

You have a manufacturer of shirts. This manufacturer buys raw materials like cloth, thread, buttons and so on worth INR 200, for manufacturing shirts. This amount also includes a tax of INR 20. The manufacturer makes a shirt, using all these raw materials.

As the manufacturer makes the shirt, he adds value to the materials he has purchased. Let us consider the value added by the manufacturer as INR 60.

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The gross value of the shirt manufactured

INR 200 + INR 60 = INR 260

The tax rate is 10%.

The tax on the output of the shirt = 10% @ INR 260 = INR 26.

Under GST the manufacturer of the shirt can set off this tax (INR 26) against tax paid on raw material inputs. (INR 20)

Now the shirt manufacturer has to pay just (INR 26 - INR 20) = INR 6.

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Stage 2: Wholesale

In this stage the shirt passes from the manufacturer to the wholesaler. This shirt is purchased by the wholesaler from the manufacturer for INR 260.

The wholesaler adds value (This is his margin or profit) to the shirt he has purchased. Let’s say the wholesaler adds INR 40, which is a total of INR 300 (INR 260 + INR 40).

Now, a 10% tax on this amount = 10% @ INR 300 = INR 30.

Under GST the wholesaler of the shirt, can set off this tax (INR 30), against tax paid on the shirt purchased from the manufacturer (INR 26).

Now, after the GST, the wholesaler has to pay

= INR 30 – INR 26 = INR 4.

Stage 3: Retail

The retailer has bought the shirt from the wholesaler. He has purchased this shirt for INR 300. The retailer then adds value (margin) to the shirt of say, INR 20. The gross value of the shirt is now INR 320.

Now, a 10% tax on this amount = 10% @ INR 320 = INR 32.

Under GST the retailer of the shirt, can set off this tax (INR 32), against tax paid on the shirt purchased from the wholesaler (INR 30).

The retailer has brought the tax charged on him under GST = INR 32 – INR 30 = INR 2.

Why GST?

Let’s understand why GST is so important, through a simple example. You love sports shoes. These sports shoes have to be manufactured in a factory. Now, the Central Government charges an indirect tax called central excise at the factory gate (where the shoe is manufactured). When your sports shoe reaches the retail outlet, the State Government charges a tax called value added tax, popularly known as VAT. You have two taxes…a tax at the factory gate and a tax on the final price. You are paying tax twice…a tax on a tax…This is unfair. GST aims to help you solve this problem.

India is one country…but when it comes to indirect taxes, it’s a collection of States. Let’s understand this through a simple example. Each state in India, imposes consumption taxes, on goods within its borders. The goods which come from other states, are treated as imports. Let’s say a shoe manufacturer in Madhya Pradesh, buys color (dye) from Uttar Pradesh. The shoe manufacturer has to pay central excise (tax charged by the central Government) and state tax charged by the Uttar Pradesh Government. Now the shoe manufacturer sells the shoes in Madhya Pradesh and this Government charges a state tax. GST could help eliminate all these additional taxes.

What are the GST Rates?

  • The Government wants to keep inflation under check. The Government will tax essential items like food at 0%.
  • The four GST slabs have been set at 5%, 12%, 18% and 28%.
  • The GST could be 5% on items of mass consumption like spices and mustard oil.
  • The GST could be 12% on items like processed foods.
  • The GST could be 18% on items of daily use like soaps, oil, toothpaste and maybe smartphones and refrigerators.
  • The GST could be 28% on cars and white goods.

What about GST on luxury cars, tobacco and aerated drinks? Expect a GST of 28% + cess.

Remember: It is not yet decided which item will fall under which GST slab. Expect items which are used by the middle class to fall in the 18% GST slab. Be Wise, Get Rich.

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