The full form of GST is “Goods and Service Tax“. The journey of GST in India began in 2000 when the government set up a panel for drafting the law. It took 17 years for the law to evolve, and was finally implemented on 1st July 2017. Now let’s see what is the meaning of GST.
What is the meaning of GST?
First and foremost, it is essential to know the meaning of GST. It is a multi-stage indirect taxation system where tax is levied at every value addition that goods and service go through. In other words, tax is applicable at every point of sales, such as raw material purchase, manufacture or production, warehousing finished goods, sale of the product to a wholesaler, sale to retailer, and final sale to the consumer.
Who introduced Goods and Service Tax in India?
Prime Minister Narendra Modi launched Goods and Service Tax into operation on the midnight of 1st July 2017. But it was almost two decades in the making since the concept was first proposed under the Atal Bihari Vajpayee government.
How does the Goods and Service Tax System work?
Let us understand how Goods and Service Tax works.
Stage 1: The Manufacturer
Let us consider a shirt manufacturer that buys raw material worth 1000 INR and 60 INR tax. He added the value of 300 INR to manufacture the shirt. Now the total value of the shirt became 1300 (1000+300). Assuming the GST rate on the shirt be 5%, that will be 65 INR. This applicable GST amount (65 INR) can be set off by the manufacturer against the tax paid by him on the raw material i.e., 60 INR. Hence the effective Goods and Service Tax rate applicable will be only 5 INR (65-60). This makes GST a value-added tax.
Stage 2: Distributor or Service Provider
The next stage is where the goods are given to the distributor. The distributor buys the same shirt for 1300 INR and adds on the value to that shirt of around 200 INR. Now the value of the shirt will be 1,500, that is (1300+200). Under the Goods and Service Tax, he will need to pay the tax around 75 INR (5%), which again can be set off against the tax on the purchased shirt from the manufacturer that is 65 INR. Now the actual tax incidence under GST on the distributor will be 75-65= 10 INR.
Stage 3: Retailer
At this stage, the retailer gets the goods from the wholesaler or service provider. Now the retailer adds a margin of 100 INR on the purchase of a shirt. The total cost of the product will become 1600 INR (1500 + 100). Under GST, he will now need to pay tax (assuming a 5% rate of GST) that will become 80 INR that can be set off by him against 75 INR tax paid by wholesaler. Now the tax incidence under GST on the retailer will be 5 INR (80-75).
Stage 4: End Consumer
This amount of 1600 INR is paid by the end consumer purchasing this shirt.
Through the above examples given, We can conclude that Goods and Service Tax is a value-added tax that provides benefits of an input tax credit on every stage, excluding the end consumer stage. Hence, we can say that GST is one nation one tax providing economic freedom to the traders.
Advantages Of GST
GST has mainly removed the cascading effect on the sale of goods and service. Thus removal of the cascading effect has impacted the cost of goods. Since the GST regime eliminates the tax on tax, the cost of goods decreases.
Below are few advantages of Goods and Service Tax
- Removes the cascading effect of tax.
- Higher threshold for GST registration.
- Composition scheme for small businesses.
- Simpler online facility for GST compliance.
- Relatively lesser compliances under GST.
- Defined treatment for e-Commerce activities.
- Increased efficiency in logistics.
- Regulating and unorganized sectors.
Component of the Goods and Service Tax
There are three taxes applicable under the Goods and Service Tax system: CGST, SGST, and IGST.
- CGST: It is the tax collected by the Central Government on an intra-state sale, i.e. sale happening within a state.
- SGST: It is the tax collected by the state government on an intra-state sale, i.e. sale happening within a state.
- IGST: If goods or service are provided within two states, i.e., from one state to another, then IGST or Integrated Goods and Service Tax is applicable on the transaction.