GST from a Beginner Perspective

Finally, NDA Government managed to pass the historic Goods and Service Tax (GST) in the Upper house of Indian parliament, which was pending for almost 2 years since Prime Minister Modi assumed power. Although NDA Government didn’t have enough numbers in the upper house, somehow managed to pass the bill with the help of regional parties.

Yes, GST is coming into force from 1st July 2017.

I would like to narrate GST from my perspective and I want to share how it will benefit a common citizen.

GST goes with a tag line, “One India, One Tax”. The reason behind this tag line is, Different tax rates has been followed in different states of India. If you’re a resident in Tamil Nadu, you can see lot of cars with Puthucheri registration. People from Tamil Nadu bought (few years back) cars and other vehicles from Puthucheri as the cost is less (Due to tax) comparing to Tamil Nadu. This is one example which I would like to quote on the different tax rates being followed in different rates.

GST also goes with a tag line no more “Tax on Tax”. In general, central government levy excise tax on products that is being manufactured. For manufacturing the product, a manufacturer would buy the raw materials with the tax.

Raw Materials Cost = Cost of Raw Materials (Includes Profit Margin) + Tax for raw materials

(115 = 100+15)

Manufacturer cost = raw material cost + Production cost + Profit Margin+ Manufacturer Tax

(148=110+10+10+18)

After production, from manufacturer end to the distributor would be

Distributer cost = Manufacturer cost + Profit Margin+ Distributor Tax

(180=148+10+22)

If the products move to other state, then equation would go like this

Consumer cost = Distributor cost + Seller Margin + Consumer Tax

(215=180+10+25)

So the total cost of the product is Rs.215. This is how the tax system works in India.

After the implementation of GST, the formulas would change as follows

Raw Materials Cost = Cost of Raw Materials (Includes Profit Margin) + Tax for raw materials

(110=100+15)

Manufacturer cost = raw material cost + Production cost + Profit Margin+ Manufacturer Tax (Original Tax-Tax Paid on Raw Material)

(133 = 110+10+10+ (18-15))

Distributor cost = Manufacturer cost + Profit Margin + Distributor Tax (Original Tax –Manufacturer tax)

(143=133+10+ (22-18))

Consumer cost= Distributor Cost +Seller margin + Consumer Tax (Original Tax –Distributor tax).

(156=143+10+(25-22))

So the total cost of the product is Rs. 156 after implementing GST

From the figures you can guess how GST is going to be the real game change in the Indian Economy. There are certain things still pending, which seriously needs some insight. They are,

1. For the article sake I have generalized Central Tax and State tax as Tax. Although Central Tax is same all over the country, State tax may differ based upon the states. As per GST all the states are going to follow a generalized tax, thereby setting up single market. Although this will boost the economically backward states, I am not sure how other state governments going to handle this, especially when larger portion of the state government is Tax.
2. Here after we are going to have only two tax. Central GST and State GST. Still government hasn’t decided about the tax percentage for the central and state. I am not sure how government is going to implement this federal system, where we have divided politically as well as economically.
3. Alcohol and Petroleum products are exempted from GST. Personally I feel this would be the biggest drawback. I am not sure how prices would stable, when petroleum products prices are unstable across the country. One good news for people of Tamil nadu is, Puthucheri will continue to produce low cost Alcohol.
4. GST would eliminate corruption and black money from India is the biggest myth. It is said that, If the sellers don’t pay tax on what he sells then he cannot expect benefit from where gets. GST will be success only when the chain is not broken. I am not sure how chain will not be broken.

Hope, GST will be revolutionary tax reform in the free India. Below is my video on GST in Tamil

Thanks and Regards
Praveen Kumar Rajendran
praveenkumar558@gmail.com
Chennai.

June 18, 2017