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GST – What it is and its working

April 19, 2017by yograj rathod0
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From the time that it has come into the picture, GST (Goods and Service Tax) has remained the talk of the town. Many debates and speculations have been made on how this revolutionary measure will turn out, whether the government will be able to pass this bill in both the houses of parliament (Lok Sabha and Rajya Sabha) and successfully execute it. Now, with the Lower House passing all the GST Bills, it remains to be seen whether the Bill will meet its deadline of 1st July 2017 or not. Here is a brief description about GST and how it will impact the prices of goods and services once it is implemented.

What is GST?

GST is value added tax levied at all levels in the chain of supply with allowing credit on tax paid on input acquired for use in making the supply. The GST is a Value-added Tax (VAT) proposed to be a comprehensive indirect tax levy on the manufacture, sale, and consumption of goods as well as services at the national level. It will replace all indirect taxes levied on goods and services by the Indian Central and state governments. It is aimed at being comprehensive for most goods and services.
The GST has been bifurcated into four variants namely Central Goods and Services Tax (CGST), the integrated-GST (IGST), the State Goods and Services Tax (SGST), and the Union territory GST (UTGST). All these variants of GST have been passed in the Lok Sabha without any amendments from the opposition party.

Working of GST (Dual Taxation System)

  1. Sale and resale within a state

Sale and resale within a state

As shown in the above figure, if the goods are transported from Ahmedabad to Vadodara, then the sale takes place in the same state (Gujarat) and hence, both SGST and CGST will be levied on the goods. Again if the goods are sold from Vadodara to Surat, the sale is within one state only, thus bot CGST and SGST will be applicable, but in this case, input credit of SGST and CGST would be claimed and remaining amount would go the respective governments.

  1. Sale within one state and resale in another state

Assume that goods are manufactured in Mumbai and sold in Nagpur. As the sale is done within the same state (Maharashtra), SGST and CGST will be levied on the goods. Hence, the tax will be paid to the state as well as central government. Now, if the goods are resold from Nagpur to Chennai, IGST comes into play because the selling of goods happens from Maharashtra to Tamil Nadu. Below given figure will further clear your understanding:

Sale within one state and resale in another state

Here, both input taxes are taken for credit against IGST and as the state government credit is used to pay the CGST, but the SGST did not go to the Central government. In such cases, State Govt. will have to compensate the Central government by transferring the credit to them.

  1. Interstate sale and Intrastate Resale

Assume that goods are being sold from Mumbai to Ahmedabad. Now, this being an interstate sale, IGST will be levied and so, the tax will be collected by the Central Govt. only. Again if the goods are resold from Ahmedabad to Surat then both CGST and SGST would be levied because the transaction is intrastate. So, both Central and State governments will collect taxes.
Interstate sale and Intrastate Resale

Here, 50% of the IGST i.e. Rs. 100 is claimed as the credit against SGST and CGST, but the IGST did not go to the State (Gujarat) government and yet the credit got claimed against SGST. Now, since this is a loss to the State (Gujarat) government, the Central government will have to compensate the Gujarat government by passing on the credit to them.

The GST, now being passed by both the houses, is likely to knock the doors of India on 1st July. However, there is much confusion around how the GST will actually work and how much percentages of tax would be levied on goods and services because one good has multiple usages in different states of India. Still, it is would be advisable to tie up the shoelaces and be ready for the revolutionary tax reform.


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