What is GST or Goods and Services Tax: A Simple Explanation.

What is GST?

^{goods and service Tax or GST is a comprehensive, multi-level, destination-based tax that will be levied on every addition to the value. To understand this, we have to understand the terms under this definition. Let us start with the term 'multi-level'. Any commodity passes through  stages from manufacturing to final consumption.|} 

^{The first step is to purchase the raw material. The second stage is production or manufacture. Then, there are arrangements for storing the materials or putting them in the warehouse. Thereafter, the product comes to the retailer or retailer. And in the final stage, the retailer sells the final goods to you or the end consumer. If we look at an illustrated description of the different steps, it will look like this:}

^{GST will be levied in these phases, and it will be a multi-stage tax. how? We will see shortly, but before that, let us talk about 'Value Addition'. Let's say the manufacturer wants to make a shirt. For this he has to buy thread. This thread will become a shirt after manufacturing.}

^S

^{In this way monetary value is added at each stage which is basically value addition. GST will be levied on this value addition. There is one more term in the definition that we need to talk about – destination-based. GST will be levied on all transactions occurring throughout the manufacturing chain.}

^{Earlier, when a product was manufactured, the center levied excise duty or excise duty on the manufacturing. In the next step, the state adds VAT when the item is sold. Then there will be a VAT at the next level of sales. So, earlier the nature of the tax levy was as follows:}

^{But when the product moves out of Rajasthan and reaches the final consumer in Karnataka, Rajasthan will not get the revenue. This means that Karnataka will earn revenue on the final sale, as it is a destination-based tax. This means that Karnataka will earn revenue on the final sale, as it is a destination-based tax and this revenue will be collected at the final destination of the sale which is Karnataka.}

^{Why is the Goods and Services Tax so important?}

^{Now that we have understood GST, let us see why it will play such an important role in transforming the current tax structure and the economy. Currently, the Indian tax structure is divided into two taxes – direct and indirect taxes. Direct Taxes or Direct Taxes are those in which the liability cannot be passed on to anyone else.}

^{An example of this is income tax, where you earn income and only you are liable to pay tax on it. In the case of indirect taxes, the burden of tax can be passed on to another person. Keeping in mind the erstwhile tax system, this means that when the shopkeeper pays VAT on his sales, he can transfer the tax burden to his customer.}

^{This is because the shopkeeper had to pay tax when he bought the item from the wholesaler. In order to recover that amount as well as to compensate the VAT paid to the government, he passes on the tax burden to his customer due to which the customer has to pay an additional amount. Whoever pays out of pocket, there is no other way to claim the refund and hence, he has no option but to pay the tax burden to the customer.}

How will GST work?

A nationwide tax reform cannot work without strict instructions and provisions. The GST Council has prepared a rule to implement this new tax regime by dividing it into three categories.

How will GST help India and common man?

GST Input Tax Credit is based on a smooth flow of value combination chain. At every stage of the manufacturing process, businesses will have the option to claim the tax already paid in the previous transaction. It is important for businesses to understand this process. Here is a detailed description.

To understand this, let's first understand what is Input Tax Credit. It is the credit that the manufacturer receives for the tax paid on the inputs used in the manufacture of the product. After that the balance amount has to be deposited to the government. Let us understand this with a hypothetical numerical example. A shirt manufacturer pays Rs 100 to buy raw materials.

If the rate of taxes is fixed at 10%, and there is no profit or loss, he will have to pay Rs.10 as tax. So, the final cost of the shirt now becomes (100 + 10 =) Rs 100. In the next step, the wholesaler buys the shirt from the manufacturer for Rs 110, and adds the label on it. When he's adding labels, he's adding value. Hence, his cost increases by Rs.40 (estimated).

For this to happen, the tax liability was passed on to every sale and the final liability passed to the customer. This is called cascading effect of taxes where the tax is paid on top of the tax and the value of the item keeps on increasing every time.

Under GST, input tax credit is a way of claiming credit for the tax paid. In this, the person who has paid the tax can claim the credit of the tax paid at the time of depositing his taxes. In our example, when the wholesaler buys from the producer, he pays 10% tax on his cost price because he has an amount due.

Rs.40 added to the cost price of Rs.100 and that made their item cost Rs.140. Now he will have to pay 10% of this price as tax to the government. But he has already paid a tax to the producer. So, what he does this time is, instead of paying the government as tax (10% = 14 of 140%), he deducts the amount already paid. So he deducts Rs 10 from his new due amount of Rs 14 and pays only Rs 4 to the government.

So Rs 10 gets his input credit. When he pays Rs.4 to the government, he transfers the due amount of Rs.14 to the retailer. In the next step, the retailer adds Rs.30 to his cost price and pays 10% tax on it to the government. did. When he adds the value, his price becomes Rs 170. Now, if he has to pay 10% tax on it, he passes on the tax burden to his customer.

But the retailer has input credit as he has paid Rs 14 as tax to the wholesaler. So, now he reduces his tax payable amount from (170% = 170) = Rs.17 to Rs.14 and he has to pay only Rs.3 to the government. And so, he now gives this shirt (140) to the customer. + 30 + 17 =) 187 can be sold for Rs.