Currently, anyone manufacturing a product, from a car to a bottle of deodorant, they have to pay the ‘Central Excise Duty’ to the Central Government. Moreover, when the product is sold, a State tax called ‘Value Added Tax’ (VAT) is to be paid too. There are also certain cess and surcharge which needs to be paid to the Central Government in addition to the Excise Duty. On the other hand, ‘Service Tax’ is to be paid on provision of services, such as hotel stay, cab service, travel through train or flight, gym subscription etc. But, after the advent of Goods and Service Tax (GST), all these taxes and more will be subsumed under its ambit
A consumer will get affected by GST due to 3 major changes:
1) Elimination of double taxation i.e. tax on tax
2) Common Input Credit System
3) Change in overall tax rates
Let us understand these points with some simple examples:
1) Double Taxation- As explained earlier, when a good is manufactured, Excise Duty is paid on it. Now when it is offered for sale, it is further taxed with VAT. This VAT is applied on the amount which is achieved after adding Excise Duty. Thus, the taxed portion is again getting taxed. Let’s take an example to understand this better.
Example: Mohan is a car manufacturer who sells cars directly to the customer. To simplify, let's take Excise Duty to be 10 per cent and VAT to be 10 per cent and GST to be 20 per cent.
In this example, on the manufacturing cost of car i.e. Rs. 3,00,000, 10 per cent Excise duty is applied, and then when it is sold to the customer, another 10 per cent VAT is applied on the cost. Imposing Excise duty along with VAT on a single item makes it a classic case of double taxation.
Now, in the GST system, since there will be a single tax on both the manufacture and sale of goods, the problem of tax on tax or double taxation will be eliminated.
Thus, as we can see in the above example, even when the total tax rate remains constant at 20 per cent in both the cases, under the GST system the final cost of the Car is Rs. 3000 lower than the old system.
2) Input Credit- If a manufacturer has paid tax (excise or service tax) on the purchase of raw material to make a product, he can deduct it from the tax he will pay for the finished good.
Eg: Mohan buys an engine for making the car for Rs. 1,00,000 which includes Rs. 10,000 as excise duty. Now he can use this credit of Rs. 10,000 and only pay Rs. 50,000 instead of Rs. 60,000 as he needed to do in pre-GST times.
Under the old system, ‘VAT’ is a State Tax while ‘Excise’ and ‘Service Tax’ are Central Taxes and credit of Central Tax and State Tax cannot be used against each other.
Thus, in the example below, Mohan cannot use the Rs. 10,000 excise duty paid on engine to pay less VAT.
Here, when a car engine is purchased, Rs. 10,000 is paid as Excise Duty and while the benefit of the same could not be used in the old system, under the new system it can be utilised, resulting in a lower cost to the customer.
Thus, as we can see in the above example, even when the total tax rate remains constant at 20 per cent in both the cases, under the GST system the final cost of the car is Rs. 10,000 lower than the old system.
3)Change in overall tax rates - The GST rates which are fixed by the Indian government are not sum of all the taxes as shown in the above examples (10 per cent Excise+ 10 per cent VAT does not mean that GST rate will be 20 per cent). However, though a balance has been be maintained, prices ought to come down or go up from previous levels as VAT rates are different from state to state.
Thus, for instance, where a movie ticket can become cheaper in Mumbai as an entertainment tax of 45 per cent will be replaced by GST of 28 per cent, it will become dearer in Delhi where entertainment tax is only 20 per cent.
Some goods and Services getting cheaper or dearer
The overall impact of GST is expected to lower the price of most goods and services; however, the impact of the price will be different in different states of India.
Under the current system, states have the power to fix the taxes on certain goods and services as per their economic policy. A very common example of the same is the different prices of the same vehicle in different states. But under the GST system, the price of almost all goods and services across states will become the same and, thus, lead to a change from the previous levels. There is a list of items and the impact on their prices with the application of GST.