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GST Unravelled

With too much of waiting

(already

implemented

in

150

countries) and more than too much

of debate (both between our own
intellectual ministers and among
highly intellectual news readers),
GST Bill is finally around the corner
waiting for its approval and its time
we get our hold on what it means for us. As the name suggests its a tax on both goods and
services and is expected to cut short on the confusion among Indians as to when and how much
they should pay for what kind of consumables. GST plans to bring unification in Indian market
and replacing most (of-course nothing can be fool proof) indirect taxes with one tax-GST.
Let me explain with an illustration as to how it will effect pockets at every level of a
supply and distribution channel.
Selling

GST

Input

Net

Cost of

Premium

Price

GST

on

Tax

GST

Level in

procurement

Charged

(C=A+B

Rate

output

Credit

(G=E-

supply chain

(A)

(B)

(D)

(E)

(F)

F)

Producer

100

40

140

10%

14

10

Whole Seller

140

20

160

10%

16

14

Retailer

160

10

170

10%

17

16

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Now the above was explained for a small channel, but same would hold for large
industries too where the number of players are more. GST is required because although we had
a Central VAT (CENVAT) and a State Level VAT, they are not covering all the aspects like
capturing the chain of value addition in a supply chain below the stage of production as
explained above and it also didnt incorporate many taxes like excise duty, customs duty,
surcharges, etc. which is the key difference between GST and already implemented VAT. After
its implementation traders can gain credit on the taxes they paid on both goods purchased and
services availed and deduct it from the tax they will gain in passing on the product to next level
in chain.
The real problem in its coming to action is that so called tax unification scheme namely
GST is itself divided into 2 components- Central GST and State GST and each of them are
fighting for the percentage they get to keep of the taxes they procure from the approximately
3% Indian tax payers. The Central GST and the State GST would be applicable to all
transactions of goods and services except the exempted goods and services, goods which are
outside the purview of GST and the transactions which are below the approved limits and they
will be paid to the account of Central and State separately. Now this does not really decrease
confusion in our complex tax system, for e.g.
Suppose, the rate of CGST and SGST is 10% and 5% respectively. When an
advertising company located in Mumbai supplies advertising services to a company within the
State of Maharashtra for, let us say Rs. 100, the ad company would charge CGST of Rs. 10 as
well as SGST of Rs. 5 to the basic value of the service. He would be required to deposit the
CGST component into a Central Government
account while the SGST portion into the
account of the concerned State Government.
Of course, he need not again actually pay Rs.
15 (Rs. 10+Rs. 5) in cash as it would be
entitled to set-off this liability against the
CGST or SGST paid on his purchase (say, of inputs such as stationery, office equipment,
services of an artist etc.). But (here comes the funny thing) for paying CGST he would be
allowed to use only the credit of CGST paid (Rs. 10) on its purchase while for SGST he can
utilise the credit of SGST (Rs. 5) alone. In other words, CGST credit cannot, in general, be
used for payment of SGST. Nor can SGST credit be used for payment of CGST. So much
for a unified system.

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The respective rates (SGST for each individual state) are not yet decided as for that to
happen finance ministry has to individually sit with every states CM and come up with
individual package for everyone so that GST is launched country wise, because for the bill to
be passed by a two-third majority in all 29 states Legislative Assembly in not at all an easy
task. Still, with so much criticism and valuations it would bring a lot of added benefits like
more coverage, less confusion, price reductions which will lead to more consumption that
require more production which in turn will increase the C- Consumption by consumer
component of GDP equation and help in GDP growth.
I would now my so far the most boring blog by listing out the bottlenecks in the GST
implementation

Understanding the preparation needed for implementation at the Central and

State level

If the government machinery is efficient enough for the enormous change

Whether the tax payers are ready for the change

What impact will it have on Government revenue

Effect on small and large manufacturers, traders and end consumers

Will it really unify the tax system?

Sources

http://www.mapsofindia.com/my-india/government/gst-one-step-towardssimplifying-the-muddled-up-tax-system

http://indianexpress.com/article/business/business-others/what-is-gst-295138/

http://mrunal.org/2015/03/economy-lecture-gst-goods-services-tax.html

http://www.empcom.gov.in/content/20_1_FAQ.aspx

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Submitted byShivam Shukla (DM16244)

shivam.pgdm16c@greatlakes.edu.in, shivam_shukla@outlook.com
Great Lakes Institute of Management, Chennai
PGDM 2nd year
Ph- 0956620189