Contents

1. First the three Cs 2. Value Addition & Cascading affect, Snowball etc. 3. How do you calculate GST/ VAT actually? 4. Explanation 5. Now getting technically right about GST. 6. How is this better than Sales Tax? 7. Previous example again for Sales Tax 8. What is advantage of VAT/GST over Sales Tax? 9. Ancillarisation 10. Different tax for different use- not possible in Sales Tax 11. Why do we need GST? 12. Exemption from GST 13. Types of tax 14. Direct vs. Indirect Tax. 15. Progressive & Regressive 16. Why GST/VAT/Indirect Tax is regressive 17. Date Line for VAT

Before we understand the complex issues involved in GST (or VAT) we need to understand some very basic concepts.

Fiscal Federalism
1. Federalism =dad doesnt have full control over the family. Kids are free to decide on certain topics. 2. If youre living in a joint family, & want to move-out & start your own family, what do you need the most? = source of income, financial Independence 3. Thats why Constitution provides for separate tax powers to both Centre & State. 4. Here lies the problem; every state had different tax rates+ center beats his own drum with service tax/ CENVAT etc., so no smooth flow in trade.= bad for economy. First the 3 Cs 1. Compound interest = Interest on Interest

2. 3.

Cess = (surcharge levied on tax) = this is like tax on tax Cascading Effect= this is again Tax on Tax ..you pay tax on something on which

some tax is already paid.- more explanation below If youve to pay tax for something on which you already paid tax = this system is bad. Value Addition & Cascading affect, Snowball etc. y If I mix Lemon + Sugar + Water means, I added value to those individual

components and made a lemon juice. y I had bought above 3 things from another guy and had paid taxes. y When I sell lemon juice to you, you should not pay tax for those 3 things again! Because I already paid tax on it earlier! y And if youve to pay that again = cascading effect = snowball = it keeps increasing = this is the problem with sales tax. y So you should be required to pay tax only on the new value which I added to Lemon-Sugar-Water.= this is the heart of VAT / GST= remove the cascading effects How do you calculate GST/ VAT actually? This example applies to both VAT & GST (for GST more technical corrections given later) Suppose this is the chain--> [Now dont just keep reading else youll get lost/confused in the example so, keep a note & pen - and make as diagram out of it while reading following] Whole-seller ->Me the ice-cream shop owner -> You, the customer 10% GST on on everything Explanation 1. 2. I bought milk 100 Rs. + sugar 100 Rs. From the wholesaler There is 10% Tax so, (10 Rs. On Milk + 10 Rs. On Sugar) = 20 Rs. Tax paid to

wholesaler 3. Now I write it in my account-book that I paid 20 Rs. GST-Tax to him 4. I make icecream, Ive set the price 250 Rs. a. Input cost= 100 Milk + 100 Sugar = 200 b. + 50 Rs. My profit margin :D (=this is the value I added) c. =200 + 50 = 250.

(youd wonder why did not I count 20 Rs. Tax in input cost?...well Ill recover those 20 Rs. in Point #8.) 5. On 250 Rs. Selling price, obviously 10% GST tax = 25 Rs. 6. So customer has to pay 250+25= 275 Rs. For Ice-cream, I collect that money. 7. Again in my book, I write that I got 25 Rs. GST Tax from customer. 8. But I dont have to pay that 25 Rs. To Govt. !! lolz because my book shows that I already paid 20 Rs. To my previous wholesaler (who paid those 20 Rs. To Govt.) 9. Thus in my book I show calculation : 25 minus 20 = 5 Rs. Only Ive to pay to Govt. as GST! Take note friend, I had done value addition of only 50 Rs. & now Ive to pay tax of 5 Rs = see this GST is tax only value that I added! The technical words for this book-keeping etc. are tax credit/ setting off liability etc. Now getting technically right about GST. First, GST is not one there will be two GST on each good/service 1. State GST 2. Central GST y y So in my GST example, Ive to keep two books one for SGST+ one for CGST. When you pay me money, Ive to write it in those two separate books again.

If the product goes from one state to another state then theyll charge IGST = integrated GST= central Govt. will collect it. (currently Central Govt. takes about 2% Central Sales Tax on such deals, but itll stop after GST comes.) More on IGST will be written later, For the time being, (just a crude example) 1. If Orissa wholesaler sells Steel pipes to Gujarat & has to give suppose 10 Rs. Tax then Orissa Govt. will collect it & send it to Delhi. 2. Out of that, Delhi collects 5 Rs. Gujarat & keeps 5 Rs. For herself Now the technically correct table

How is this better than Sales Tax? Previous example again for Sales Tax y I made Ice-cream, but Im not going to get any benefit for paying 20 Rs. Tax to wholesaler, thus my input cost is y 200 Rs. + 20 Rs. Tax = 220 input cost y I need to keep 50 Rs. My profit margin./ value addition y So my products value = 220 input+ 50 profit = 270 Rs. y Youll pay 270+ 27 Rs. Tax= 297 Rs. Compare, as customer, how much Tax more you paid? Sales Tax minus GST = 27 25 =2 Rs. I paid wholesaler how much tax? =20 Rs. Now what is 10% of 20 Rs.? = 2 Rs. See the connection?= in Sale tax regime, you were paying Tax, on a Tax which was paid in previous purchase by me. (those 2 Rs.) What is advantage of VAT/GST over Sales Tax? 1. In GST your icecream is cheaper by 2 Rs! Because there is no tax on tax (=cascading tax) 2. Since I the wholesaler have to pay only Rs. 5 as Tax, but for that I need to write in book ,that I already paid 20 Rs. To previous wholesaler + need to give you bill = bookkeeping = transparency in accounts = no tax evasion 3. In saletax, I would have sold ice cream with out giving bills, = thus Govt. wont get a penny of tax out of me (even when their intention was to get 27 Rs.!!) , here theyll get

total 25 Rs. (wholesaler guy gave them 20 Rs.+ I give 5 Rs.) so theyre getting 2 Rs. Less but since people will stop evading taxes = Govt.s Revenue income increases. 4. Since Im not doing Tax evasion, I dont have to bribe the sale tax inspector= he wont bribe the Revenue minister = less black money (or atleast Ill pay less bribe than before since Im doing less tax evasion ;) ) 5. In Sales Tax--no harmony in the rates of sales tax on different commodities among the States. Not only were the rates of sales tax numerous (often more than ten in several States), and different from one another for the same commodity in different States (no free flow of trade between the states) Some more advantages over sales tax ancillarisation y large manufacturers (like automobile, machinery etc.)need lots of spareparts to make a product. y If such components are purchased from outside, tax is payable. y However, if the same components is manufactured inside the factory, no tax would be payable. y Thus, manufacturers are tempted to manufacture parts themselves instead of developing ancillary units for supply of the same. y This is against the national policy, because it discourages growth of Small Scale Industry and increases concentration of economic power. Different tax for different use- not possible in Sales Tax Same article may be used for various purposes e.g. Copper may be used for utensils, electric cables or air conditioners. Government would naturally like to vary tax burden depending on use. However, this is not possible as when Copper is cleared from factory, its final use cannot be known. Thus Concessions on basis of END use is not possible. Therefore, Govt. devised the solution VAT Why do we need GST? 1. VAT = only for Physical Goods 2. GST= Goods + Services 3. The shortcoming in CENVAT of the Government of India lies in non-inclusion of several Central taxes in the overall framework of CENVAT, such as additional customs duty, surcharges, etc.,

4.

State-level VAT structure there are also certain shortcomings as follows. There are,

for instance, even now, several taxes which are in the nature of indirect tax on goods and services, such as luxury tax, entertainment tax, etc., and yet not subsumed in the VAT. 5. State VAT is calculated on (selling price+CENVAT) = cascading (tax on tax!) 6. GST combines VAT+ Service Tax = easier implementation; But problem- only Central Govt. got powers to collect Service Tax (= need Constitutional amendment to empower state Govt. collect it) Following Central Taxes will be merged into GST Central Excise Duty Additional Excise Duties The Excise Duty levied 4 Medicinal +Toiletries Service Tax Additional Customs Duty aka Countervailing Duty (CVD) Special Additional Duty of Customs - 4% (SAD) Surcharges Cesses. Following State Taxes will be merged into GST VAT / Sales tax Entertainment tax (except by the local bodies). Luxury tax Taxes on lottery, betting and gambling. State Cesses and Surcharges (on goods/service) Entry tax not in lieu of Octroi.

Exemption from GST 1. tobacco, alcohol & petro products= No GST 2. Product made in SEZ going to export = no GST 3. Product of SEZ sold within India = Yes GST 4. Imported Items = YES GST 5. Low GST Tax for essential items (like medicines) 6. High GST tax for general items (like perfumes) Now some other basic stuff.

Types of tax Direct vs. Indirect Tax. y Income Tax, Corporate tax etc are direct tax means the one who benefits from it directly pays. y Sale tax, GST,VAT etc are indirect tax, because the shopkeeper/businessman himself is not paying, actually the tax is paid by the customer. (because theyll calculate it) Progressive & Regressive y Progressive tax = if youre rich youve to pay more tax (income tax is progressive) y Regressive Tax = if youre rich youve to pay less tax. (like indirect taxwhy? Read below) Why GST/VAT/Indirect Tax is regressive In indirect tax, 1. poor guy earns 100 Rs/day, buys a Soap worth Rs. 10 => out of that Rs. 1 goes to GST (1% of his income gone in GST) 2. Rich guy earns 1000 Rs/day but same as above (0.1% income gone in GST) 3. So poor guy spends more money out of his income for paying that indirect-tax, hence indirect tax is regressive. Date Line for VAT y VAT was introduced at the Central level for a selected number of commodities in terms of MODVAT with effect from March 1, 1986, and in a step-by-step manner for all commodities in terms of CENVAT in 2002-03. y Subsequently, after Constitutional Amendment empowering the Centre to levy taxes on services, these service taxes were also added to CENVAT in 2004-05. y When Central Govt. responded positively in providing Central financial support to the States in the event of loss of revenue in transitional years of implementation of VAT. y As a consequence of all these steps, the States started implementing VAT beginning April 1, 2005. After overcoming the initial difficulties, all the States and Union Territories have now implemented VAT.