GST-a godsend tax or a goods & services tax?

Vishwanath was listening to his son Rahul rendering almost like a chant the difference between direct taxes and indirect taxes. His son was preparing for Economics exam and as is he won’t, he would chant whatever he read, a practice his primary school teacher taught him that lasted well into his high school years.

Direct vs Indirect Tax

When Rahul chanted, Vishwanath learned the subject or it was as if son’s chant touched the father’s soul!

His chant went like this…a direct tax is one where impact and incidence are on the same person whereas indirect tax is one where the impact and incidence are on different persons!

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Vishwanath was curious about indirect taxes. How can one person pay the tax and another suffer the burden of the tax? What are those taxes was his question. Rahul paused his chant and started reading the book. Examples of indirect taxes are excise duty, sales tax etc. Excise duty is paid by the manufacturer but he collects it from his buyer who in turns passes on to his buyer till it reaches the final consumer. So the manufacturer pays and the consumers bear the tax. Same was the norm for tax on sales.

Value Chain

Rahul also read that indirect taxes are imposed at various stages of the value chain. What is this value chain? These words evoked a whole array of images to Vishwanath- right from wedding necklace to Usain Bolt powering the final lap of the relay… He interrupted Rahul and told him to explain.

When a manufacturer produces goods, he pays excise duty- a tax on manufacture while importer imports goods, he pays customs duty on value. When either of them sells the products to his wholesaler, he charges sales tax on the sale price including excise duty or customs. The wholesaler adds value to the product and sells to the retailer and levies sales tax and the retailer collects sales tax on the price he finally charges the hapless consumer. So economic activities create a chain of values.

Vishwanath was shocked to hear names of so many indirect taxes. Rahul told him that excise duties and its counterpart on service known as service tax and customs duties were collected by the Central Govt while the State Govts imposed VAT on sales, Purchase tax, Central Sales tax, luxury tax for staying in hotels, entertainment tax for watching movies, etc. It was as if Govts were competing with each other to pulverize the consumer with so many taxes and that too with taxes on taxes.

This made Vishwanath think and ponder over questions- why cannot indirect taxes be made fewer and simpler and that too levied only on the value created at each stage of the value chain? He asked his son.

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Value Added Tax

Rahul searched or rather rummaged through the book and replied that more than 100 countries in the world follow what is called Value-added Tax system where tax is levied only on the value created at each stage of the value chain. For example, a manufacturer buys raw materials for Rs 100 and pay tax on Rs 10 (10% of Rs 100), he adds a value of Rs 50 and so his sale value is RS 150. He collects the tax of Rs 15 (10% of Rs 150) from the wholesaler, retains Rs 10 and pay Rs 5 to the govt.

The wholesaler adds another Rs 50 value to the goods and sells at Rs 200 to the retailer, collects a tax of Rs 20 (10% of Rs 200), retains Rs 15 and pays Rs 5 to the govt.

The Retailer adds another Rs 50 and sells at Rs 250, collects Rs 25 (10% of 250), retains Rs 20 and pays Rs 5 to the govt.

The final price to the consumer is Rs 250 and total tax collected by the govt is Rs 25. This is called Value-added Tax. A tax simple to understand, easy to implement and less costly for the consumer.

Rahul added this value added tax goes by the name of Goods & Services Tax in many of the countries.

The words Goods & Services Tax made Vishwanath remember news on TV where for months together political parties were haggling over the passing of tax legislation called GST.

Was India planning to implement the same GST- a Goods & Services Tax or was it godsend tax?

A tax that could change the face of indirect taxation in India.

Will it really be a godsend tax for all? To know the answer, he decided to meet Mr E Prasanna, Rahul’s teacher in a few days time.

Vishwanath felt glad that he found answers to the following questions:-

1. What is an Indirect Tax and how is it different from Direct Tax?

2. What are the indirect taxes levied by the Central Govt and the State Govt?

3. What do you mean by value chain?

4. What is value added tax system and how it avoids tax on tax?

5. What is Goods & Service Tax?

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