Like previous Value Added Tax, the GST is also a multi-stage, destination-based tax which will be levied at every stage where some value addition is done to a product.
So, what is the difference between the existing tax structure and the GST apart from the fact that the new regime will reduce a basket of taxes to mere three categories and four calculation slabs?
PRESENT TAXATION VS GST
Taxes are levied as the government believes that by adding value to some product, a business person earns money.
Under the present taxation system, the value chain of a product is fractured for the purpose of collecting taxes. There are excise duties, sales tax, purchase tax, entry tax and also VAT among various others.
The central government taxes manufacturing while states levy taxes on trading under the existing taxation regime. The GST will integrate taxation in the country. There are three kinds of GST - State GST, Central GST and Integrated GST when a product moves from one state to another.
But, the real difference between the existing and the GST regime would be in introduction ofinput tax credit mechanism. This is expected to reduce tax burden on the end buyers, simply, consumers.
WHAT IS INPUT TAX CREDIT?
Input tax credit is a mechanism of tax calculation which allows a business person in the value chain to avoid double taxation. This, in turn, reduces the tax burden on the consumer.
The GST like VAT is an indirect tax, which is a liability that is passed on to someone else for payment. Under the existing system, a shopkeeper has to deposit VAT on all its sales to the government. The shopkeeper passes on the liability to the customers, who end up paying VAT.
This is because the shopkeeper has already paid tax on his input purchases. If he pays the VAT from his own pocket, he would be actually paying tax twice for the same product.
Now under GST, the shopkeeper would not pass the entire VAT to the customer but only tax liability of that portion of the value chain which was created at his place. For the previous purchases, he can claim input tax credit by deducting the amount of tax he already has paid to the last seller.
UNDERSTAND IT BY AN EXAMPLE
Suppose a manufacturer intends to buy raw material for his product whose cost is Rs 100. For sake of convenience, assume tax rate at 10 per cent for both existing and GST regimes. So, the manufacturer would buy the raw materials at Rs 110.
The manufacturer would process the raw material, called value addition. If the value added (including profit) is Rs 50. Then the cost becomes Rs 160 and at 10 per cent tax, the new cost becomes Rs 176.
The retailer buys the product at Rs 176. The retailer, now, adds value to the product like tagging, labeling etc. Suppose the value addition by retailer is Rs 20. The cost becomes Rs 215.6 (Rs 196 (170 + 20) + Rs 19.6 @10 per cent tax).
So, the consumer would be paying Rs 215.6 to buy this product. His tax burden would be Rs 45.6 (Rs 10 + Rs 16 + Rs 19.6).
HOW GST WILL CHANGE THIS
Now, under GST which allows claiming input tax credit, the manufacturer buys the raw material at the same Rs 110. But, when he fixes the selling price for his product, he is not required to pass the liability of Rs 10 as VAT to his customer. He is not required to pay that amount again. He can claim the input tax credit for Rs 10 that he already has paid to the raw material seller.
The manufacturer under GST would pay Rs 5 as tax at 10 per cent for value addition of Rs 50 at his stage. This reduces the purchase price of the retailer, who will buy the product at Rs 165. (Rs 100 + Rs 10 + Rs 50 + Rs 5). Earlier, he bought the same product at Rs 176.
The value addition of Rs 20 by retailer would not attract a tax of Rs 2. This means that the retailer would fix the price at Rs 187 (Rs 165 + Rs 20 + Rs 2 at 10 per cent tax) for the final consumer, who earlier purchased the same product at Rs 215.6.
The tax burden on the consumer is Rs 17 under the GST as against Rs 45.6 under the existing taxation system. The same input tax credit system by virtue of being beneficial for a business person would ensure expansion of tax base.