The GST story: Present and future

Deepak Kumar

Hailed by many political stalwarts, industry analysts and economists alike as ‘One Nation, One Tax’, the Goods and Service Tax (GST) is undoubtedly the government’s visionary policy pronouncement so far. The GST Bill was cleared on Wednesday after many confrontations amidst political deadlock by the opposition parties (irrespective of who represented the opposition parties) for years. The government has set a new deadline for the implementation of the GST on April 1, 2017. The incorporation of the GST, as analysts say, will add 1.5% -2% to the country’s current GDP growth rate.

Once fully incorporated, here’s how the tax equations will be different from the current regime.

In a non-GST tax regime, there is tax-on-tax in some cases, and tax on value addition in other cases. Furthermore, there is no provision of setting off the taxes paid on previous purchases. Let's say a producer A produces raw material of a certain product of Rs.1000 and pays Rs.180 at 18% tax rate on this amount.

In its second stage, the product is sold to producer B, who adds Rs. 500 as margin on his purchase amount. The gross value of the product then becomes Rs.1500 (1000+500). Thereafter, a non-GST tax rate of 18% is levied on the value-added amount, which then comes to Rs. 90 (18% of 500).

Similarly, producer C adds his margin, let's say, Rs.500 on the product, thereby making the gross value of the product Rs. 2000. Again, with no GST equation in provision, an 18% tax on the value-added amount results in Rs.90 (18% of 500). Therefore, under the current regime the final selling price, including tax rate, becomes Rs.2090 (2000+90).

As a result, the total tax burden in its final stage reaches Rs.360 (180+90+90).

Under the GST regime, let’s take the previous example; the total cost of raw material is Rs.1000; an 18% tax rate on this would result in Rs.180. The producer A adds Rs. 500 on value addition of the product, thereby making the total investment Rs. 1500 so far. An 18% GST tax on this gross value then becomes Rs.270. Therefore, the net GST amount would then be Rs.90 (270-180).

At the second stage, the producer B adds Rs.500 on the purchase value. The total value at this stage then becomes Rs.2000 (1500+500). An 18% GST on this would then results in Rs.360. The effective GST on the total amount then becomes Rs.90 (360-270).

Now, the original purchase value for the producer C is Rs.2000. He, like his predecessors, adds another Rs.500 on the product as margin value. Overall value of the product at this stage then becomes Rs. 2500. An 18% tax on this would then result in tax output of Rs.450 (18% of Rs.2500). Therefore, the effective GST at its final stage then becomes Rs. 90 (450-360).

If GST were fully-operational, the effective GST value on the aforementioned amount would be Rs.270 (90+90+90). Consumers, therefore, can save Rs. 90 (360-270).

Broader picture

Once fully incorporated, the GST will replace central excise duty, duties for excise (medicinal and toilet preparations), additional duties of excise (goods of special importance and textile and textile products), additional duties of customs, special additional duties of customs (SAD), service tax, and cesses and surcharges pertaining to the supply of goods and services.

GST Bill will subsume state VAT, Central Sales Tax, purchase tax, entertainment tax, state cesses and surcharges, and taxes on advertisements, lotteries gambling and betting.

A few items such as alcoholic liquor for human consumption, high-speed diesel, petroleum crude, petrol, aviation turbine fuel and natural gas have been excluded from the GST bracket.

Under the current regime, more taxes have been imposed on fewer products; but under GST, there will be lesser taxes on more products.

GST in other countries as against the proposed rate in India