The buzz going around currently is GST. We have heard of IST, so what exactly is this GST?

And it is this
new tax acronym which we will try to decipher and understand, so that when the paper for amendment of
the constitution to include GST will come up on 15th November and all TV channels will go berserk
flashing this news, at least we will have a fair idea about what exactly this entire hullabaloo is all about.

What is GST?
Known as Goods and Service Tax (GST), it is a reform in the entire indirect taxation process of India. This
Finance Minister has set the deadline of 1st April2010 for implementation of GST. The basic idea of GST
is to simply the indirect taxation process and earn more revenue. Its aim is to re-distribute the burden of
taxation equitably between manufacturing and services.

What will GST include?

It will include central excise, service tax and state VATs. It will also include entertainment tax, luxury tax
and entry tax. GST would be on all products except petroleum and liquor. It is a consumption based tax.
Currently, the despatching state pays the tax but under GST, it is the receiving state which will pay the
tax. There would be a lower rate for necessary items and goods of basic importance and a standard rate
for goods in general. Exports would be zero-rated but imports would attract GST, both from the state as
well from the Centre. Inter-state transactions would attract an integrated GST of state and centre.
Tobacco products, like cigarettes and gutka would face the double wrath and will attract both GST as well
as excise duty.

What is input tax credit?

Input tax credit will allow a manufacture to deduct the tax he has already paid on an input from the tax on
final product. Credit would then be available on the calculation of GST.

How to calculate GST?

Suppose a manufacturer buys his inputs for production at Rs.10 and then he makes the product with
value add which costs Rs.30. The his total cost on goods would be Rs.30, so assuming GST is 10%, GST
on output would be Rs.3 and input tax credit would be 10% of cost of input, which would be Re1. So net
GST to be paid would be GST on output minus the input tax credit, ie; Rs.3 – Re1 = Rs.2. This is how net
GST would percolate down the value chain – from the manufacturer to the wholesaler and then to the
retailer and as it goes down the chain, as the purchase price goes on at each level, the net GST would
come down.

Will it generate additional revenue for the state and Centre?

That is the basic objective. Revenue collection could either go up or remain neutral, at the most.
Currently, the centre gets no share of the income from tax earned by the states but now, under GST, the
Centre would also become a direct beneficiary. In manufacturing, excise is currently the single point levy
and when goods were sold, the margins are not getting taxed. So now under GST, margins will get taxed.

What are the challenges?

Amendment of the Constitution would be required for the implementation of the GST, as it is has to now
allow the state and the centre to levy taxes on goods and services. The mechanics is a long drawn
process and as it is be introduced across all states and the Centre simultaneously, it would require a lot of
ground work. Another big challenge is that there has been a consensus between the state and the centre
over the law and the various procedures required for implementation as both would now require a uniform
law to get the GST into place. Then there is also the question of classification of consumption and
services, which remains unclear. Taxes such as octroi, purchase tax on food grains, entertainment tax
levied by municipal/local governments, and stamp duties are to continue, and this would not really help
being about rationalisation. This again is a huge political challenge.

Does this mean higher prices for common man?

The introduction of GST would remove all the current effects on pricing due to levy of CENVAT and
service tax and its cascading effect. Currently, both the Centre as well as states, levy tax on production,
manufacture and many more, which add on to the cost of the goods and is passed on to the consumer.
Under GST, the central taxes – service, excise, additional excise and customs duties, countervailing duty,
surcharges and cesses, all will be subsumed under GST. On the state level - VAT, entertainment tax,
luxury tax, taxes on lottery, betting and gambling, state cesses and surcharges, will all come under GST.
Hence the idea of GST is that the taxation burden would reduce as it goes down the value chain and by
the time it gets to the consumer, rates would be lowest.