A Detailed Analysis Of The GST: Will Modi’s ‘One Nation One Tax’ Idea Work?

Prime Minister Narendra Modi referred to this tax as the Geeta: it took 18 sessions to finalize the bill for this tax and there were 18 adhyays (chapters) in the Geeta — instructions for the way of life and responsibilities.

The main idea behind the GST is One Nation One Tax; it scraps all the other taxes: VAT, service tax, central excise duties, customs, octroi, luxury tax, and more.

Another basic fundamental of this tax is that it will be levied upon consumption: sale or supply of service or product.

GST has two components: Central and State. The constitution of India has been changed to accommodate this tax as earlier the Center could not levy any tax on the supply or consumption of any product. It was only at the manufacturing level.

GST slabs are placed at 0%, 5%, 12%, 18% and 28%.

Understanding GST:

1. Intrastate: In an intrastate sale of product or service, the GST will have two equal components: State (SGST) and Central (CGST).

Scenario 1:

Geetika runs a cloth boutique in Bengaluru. She sells two suits at her boutique for ₹1000. Let us say GST is 12% on this sale. Then she will pay an SGST of 6% — ₹60 and a CGST of 6% — ₹60. The state shall deposit the CGST at the Center.

2. Interstate – In an interstate sale of a commodity or a service, Integrated GST (IGST) would be applicable which will go to the Center. The state does not get anything in the interstate sales. IGST will also be levied on imports.


Scenario 2:

Geetika sells 15 suits to another boutique in Maharashtra for ₹10,000. Let us say GST is 12% on this sale. Then, she will pay an IGST of 12% — ₹1200 to the state of Karnataka. But the state of Karnataka will pay this money to the Center.

From this point on, only GST will be visible on bills. It makes me feel better as earlier when I used to see three or four different kinds of taxes in addition to the cost price and it seemed like we were paying a huge amount of tax. But don’t get me wrong, I am not claiming anything about the tax rates yet.

Tax on Tax

GST claims to remove the cascading effect of tax—tax on tax. This is possible as we can claim Input Tax Credit now.

What is Input Tax Credit? The amount you can claim by showing the taxes you have already paid on a purchase.

Output Tax is the total tax payable during the sale of the product or service or the tax received from the customer.

Final Tax Payable = Output Tax – Input Tax Credit.

Let us consider a Non-GST scenario.

Suppose Geetika buys silk cloth for ₹ 100. She pays a tax of 10%. Cost price is ₹110.

She adds ₹20 for the raw material and decides to sell it at ₹130.

The wholesale dealer who buys the suit would pay ₹130 + 13 (10% tax) = ₹143.

So, total tax paid to the government is ₹ 10 + 13 = ₹23.

We can see that ₹13 has been applied to the total cost price which already included tax (₹10), hence consumer is paying tax on tax. We all are.

The first day of GST roll out. Image source: Getty Images
The first day of GST roll-out. Image Source: Getty Images

GST Scenario (let us consider GST is 10%)

Geetika buys raw material for ₹100 and pays ₹ 10 as tax. Now, Geetika manufactures the product and adds a value of ₹20. This makes the cost price ₹ 120 and not ₹ 130 as ₹ 10 was the tax. The next 10% tax would be levied on the cost price of 120 and would be ₹12. Now, Geetika had already paid ₹ 10 as tax so she does not need to pay ₹ 12 but only ₹ 12-10 = 2.

Here we saw that she avails the already paid tax or the tax input credit. Geetika received a tax of ₹ 12 and paid a tax of ₹ 12 ( 10 + 2 ). She sells this finished product for (₹ 120 + ₹ 12 tax) ₹ 132 to Gupta aunty. Tax paid to the government, in this case, is ₹ 10 + ₹ 2 = ₹ 12 which was paid by Gupta aunty, the final consumer.

Do you see the difference in prices which attributes to the non-cascading effect of tax? But this example has assumed that the GST rate and the earlier tax rate are same, 10%.

Hence, we cannot comment whether the prices will go down or up but considering the current slabs on everyday commodities, the prices should go down, given, this benefit of a decrease in price is passed onto the customer.

Under the State and Central GST Act, a five-member National Anti-Profiteering Authority (NAPA) will be set up to ensure that any benefits from the reduction in tax rates are passed on to the consumer in the form of lower prices. It will ensure that companies reduce the costs or at least don’t increase them. The penalties are as stiff as losing the GST registration. NAPA’s life expectancy is two years after which there are no regulations.

No-one is sure if the price of the commodity would decrease or increase as many factors are changing with respect to tax. Not only is the percentage of tax changing, the way it is calculated is changing, and when is it applicable is also changing.

States opposing the GST
States opposing the GST

Many states protested for long against GST. One of the reasons is that they think their revenues will go down. There is another provision for the next five years which takes care of the revenue of the states: an additional cess on certain goods and services will be levied under GST. At the end of the five-year period, the unutilised funds received by levying the cess will be shared equally between the Center and States.

India is not a unique country to adopt the GST. It has been in existence in many countries for many years. They all faced a few years of inflation after the introduction of GST but everything settled down eventually. The experts and the advisors to the Finance Ministry of India say that they don’t know if we will also face a similar situation.

What Falls Under The GST?

All the businesses and individuals having a turnover of more than ₹ 20 lacs have to register with the GST. This threshold is ₹ 10 lacs for the Northeast states.

GST claims to be a boon for the farmers — the kisan of India. An agriculturist shall not be considered taxable and shall not be liable to get registered.

Daily use items make up for about 80% of goods used. Let us analyze the tax rates on some of these.

Products such as unbranded flours and cereals, fresh milk, unbranded eggs, fresh vegetables and fruits, puffed rice, salt, jaggery, fresh meat, unbranded natural honey, contraceptives, newspapers, animal feed, and firewood are free from GST.

Health and education services are exempt from GST.

Raw silk, wool, jute, hand operated agricultural equipment, and organic manure are all exempt from GST.

Life-saving drugs, domestic LPG, footwear up to ₹ 500, apparels up to ₹ 1,000 and kerosene are under five percent.

Coal is also under the five percent GST as opposed to the current tax rate of 11.69%.

Apparels above ₹ 1,000, regular medicines, Ayurvedic or homoeopathy medicines, electric vehicles, butter, ghee, almonds, fruit juice, frozen meat, and mobiles have been placed in 12% bracket.

Footwear above ₹500, food items such as — biscuits (all categories), flavored refined sugar, cornflakes, jams, sauces, mineral water, pastries and cakes, pasta, ice cream and soups, instant food mixes, betel nut, vinegar, sharbat, and other commodities — aluminum foil, tissues, envelopes, tampons, notebooks, camera, printers, speakers and monitors, software, capital goods, and iron/steel come under 18% tax bracket.

The highest tax of 28 percent will be levied on cement, perfume, chewing gum, chocolates, shampoo, make-up, fireworks, ACs and refrigerators, aerated drinks, motorbikes, and cars.

Right now, the products such as electricity, petroleum, liquor are out of GST. Petroleum is temporarily out and will be added to the GST norms soon.

Tea, mineral water, milk powder, curd, buttermilk, dairy spreads, spices, sugar, jaggery, pasta, wheat, rice, flour, edible oils, cement, domestic LPG and LPG stove, LED, sewing machine, copper and steel utensils, ready-made garments, soaps, toothpaste, hair oil, kerosene — are all items that have lower GST rate as compared to the present combined tax rates.

Ghee, cheese, dry fruits, frozen meat, branded cereals, instant coffee, medicines — are all items that have higher GST rate as compared to the present combined tax rates.

According to Revenue Secretary Hasmukh Adhia — 7% of the items are under 0% GST, 14% are under 5%, 17% items are in 12% tax bracket, 43% in 18% tax slab and the rest 19% fall in the top tax bracket of 28%.

Overall, 81% of the items will attract 18% or less GST.

Hopefully, making it easier for common man aka aam-aadmi.

Will GST prevent tax evasion?

The government claims it will. There are multiple scenarios to consider. An unregistered business deals with a registered and an unregistered one. Or a GST registered business deals with a registered and an unregistered one. And many more.

Let us consider this scenario.

Manjunath and Guptaji are GST registered, and Mr Patel is not.

Mr Patel wants to buy raw material from Manjunath. This deal is billed under GST. Guptaji wants to buy the finished product from Mr Patel and this is a billed deal without GST as Mr Patel is not GST registered so he cannot collect GST. Now to collect output tax from Guptaji, Mr Patel has to register under GST. Else he will only end up paying to Manjunath while not receiving the tax. If Manjunath and Mr Patel decided to do this deal without bills, then we cannot do anything.

Here, if Guptaji was also not registered but the transaction was billed between Manjunath and Mr Patel, due to cascading effect, Guptaji might also have to register under GST to claim input tax credit.

There is a possibility of small businesses registering for GST bringing in larger chains of financial transactions under tax cover.

If a transaction happens through a chain of GST registered businesses but none of them wants to pay any tax then the whole chain of the transaction can still go without bills. But even if one of these registered businesses wants a billed transaction, all would like to go for billed transactions as they can claim the input tax credit.

The middle man involved knows that the tax he has to pay can be cancelled by collecting the tax at a later stage which reduces his temptation to evade tax. This also broadens the tax base. The combination of improved compliance and a larger tax base should improve revenues but it also depends on the inflation, sales, and prices.

Another push towards digital India?

There is a greater amount of online processes involved now to pay the tax. The process involved might make it difficult to hide the taxes but it also gives the incentive to run away from tax paying. Narendra Modi said that even a 12th standard student can sit and do your online work as it is simple but apart from a 12th standard student we also need time, a computer, an internet connection, and a detailed understanding of the tax and related processes.

Maybe, the government can come up with online and offline training programs where people can learn how to manage GST on their own (along with their 12th standard kids).

It is still not clear how much benefit GST will bring and for which sections of the society. Will the state and central governments benefit? Will inflation hit India even worse? Will the revenues increase? Will the life of common man become even more difficult?

Will GST — One Nation One Tax — be able to truly unite India?

But all we can do is hope for a better future and do more research, with time, about the impacts of GST on the economy of 1.2 billion people.

Till then, happy GST!

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