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GST, short for Goods and Services tax, is a new tax that will be imposed on the sale and purchase of goods and services in India. GST is meant to replace all taxes in India with a single unified tax applied to value addition instead of the total value of the product at each stage in the supply chain.
This method provides credit for the input tax paid on the purchase of goods and services, which can be offset with the tax to be paid on the supply of goods and services. As a result, this reduces the overall manufacturing cost, with the end customer paying less.
To understand all about GST, let’s take an example:
A farmer sells milk to an ice cream manufacturer, who then processes the milk to make ice cream and sells it to several retail stores.
The farmer sells the milk at Rs.10. If the GST rate is 10%, then the added tax will be Rs.1, so the ice cream manufacturer will purchase milk for Rs.11 (10 + GST 10%).
After making the Ice Cream, he adds Rs. 10 as his margin, so his total sale price will be Rs.20 i.e. (Cost of Goods sold Rs.10 + his margin Rs.10). Here Cost of Goods Sold is taken as Rs.10 (Purchase price Rs.11 – Rs.1 of GST because the manufacturer will take input credit).
So, the manufacturer sells his ice cream to a retailer for Rs. 22 i.e. Rs.20 + 10% GST (Rs.2).
The retailer then adds a value of Rs. 10 to his Cost of Goods sold Rs.20, by following the same pattern as from Farmer to Ice cream manufacturer (Purchase price Rs. 22 – Rs. 2 of GST because the retailer will take input credit).
With certain current taxes remaining, the following goods and services will be fully or partially exempted from the GST:
- Alcohol for human consumption (State Excise plus VAT will continue to be applied)
- Electricity (Electricity Duty)
- Real Estate (Stamp Duty plus Property taxes)
- Tobacco products (GST plus Central Excise will be applied)
Free movement of goods: Business owners will be able to sell more in other states without having to worry about interstate transaction costs. With GST, the entry tax will be eliminated, which will save time and money spent.
Reduced tax cost: Businesses will benefit from reducing the tax burden and operational costs. The GST will work with Input Tax Credits thus eliminating the need for tax cascading. Business owners will be able to offset the tax paid on purchase with the tax on the supply of goods and services.
Easier to comply: Currently there are around 15 different legislatures with different definitions, tax rules and regulations. GST will simplify part of these taxes, making it easier for businesses to comply with the law.
Cheaper products for your customers: Under the current system, from the production to the consumption of a product, there are multiple taxes that are applied without the provision of tax credits. As a result, the price of the final product is increased, causing the customer to pay more. The GST will absorb many of the current taxes into a single tax, while also providing tax credits. This will reduce the price of final products for end consumers.