CA Deepak Rathore

deepak rathore

What is GST??

It’s a single indirect tax Rate that will subsume several indirect state and federal taxes such as service tax rate, value added tax (VAT) and excise duty, and different state taxes, central surcharges, entertainment tax, luxury tax and a slew of related levies by local bodies. The GST is likely to be at 18 per cent, and is widely expected to be implemented next year in April. Luxury Goods, FMCG products, consumer durables, electronics items and readymade garments will become cheaper once GST is rolled out next year, but mobile phones, banking and insurance services, telephone bills as well as air travel will be dearer due to higher tax. Under the new indirect taxes regime, likely to take effect from April 1, 2017, levy on manufactured goods will come down, while consumers may end up spending more as service tax burden would go up, as GST is a consumption based tax.

GST IMPACT ON GOODS

Case-

Cost of Manufacturing : Rs 1000
Excise Rate : 12.5 % P.A
VAT :  12.5%
GST:   18%
Profit margin at each level @20% of the Cost

Impact-

  Current System GST
Stage Amount Amount
Manufacture to Wholesaler
Making Cost 1000 1000
Margin 200 200
Excise@12.5% 150
VAT@12.5% 169
GST@18%                                                 216
 
TOTAL COST 1519 1416
Wholesale to Retailer
Cost to wholesaler 1350 1200
Margin 270 240
VAT@12.5%                                                 203
GST@18%                                                 259
 
TOTAL COST 1823 1699
Retailer to Consumer
Cost to retailer 1620 1440
Margin 324 288
VAT@12.5% 243
GST@18% 311
 
TOTAL COST 2187 2039
COST TO CONSUMER 2187 2039
COST SAVING   148

Reconcilliation of Cost benefit

Reduction in Tax Paid
AS per VAT System 393  
AS per GST System 311.04 81.96
Reduction in Margin due GST    
AS per VAT System 794  
AS per GST System 728 66
 
Total 148

There is a cost saving to customer of Rs 148 on account saving on tax rates and margins. However it must be noted where the small scale industries manufacturing  the goods  are eligible to get exemption upto 150 Lacs clearance of Goods earlier. Now, have to pay the GST at the rate of 18%, as now proposed limit for GST is ten lakhs only. This will have an adverse impact on the Cost to Consumer. Assume for the same example that the Goods is manufactured by small scale industries.

  Current System GST
Stage Amount Amount
Manufacture to Wholesaler
Making Cost 1000 1000
Margin 200
Excise@12.5% Exempted
VAT@12.5% 150
GST@18% 216
TOTAL COST 1350 1416
Wholesale to Retailer
Cost to wholesaler 1200 1200
Margin 240 240
VAT@12.5% 180
GST@18%                                                259
TOTAL COST 1620 1699
Retailer to Consumer
Cost to retailer 1440 1440
Margin 288 288
VAT@12.5% 216
GST@18%  311
 
TOTAL COST                                             1,944  2039
COST TO CONSUMER 1,944 2039
*Loss to Consumer   -95

*There is a loss of Rs 95 to the customer. Therefore Govt need to reassess the GST applicability limit as it have an adverse impact to small scale industries or they may develop a concessional rate for small scale industries.

GST IMPACTS ON SERVICES:

Case-

Cost of Service : Rs 5,00,000
Service tax Rate : 15 % P.A
Profit margin @10% of the Cost
GST:   18%
Profit margin at each level @20% of the Cost

Impact-

  Current System GST
Stage Amount Amount
Loss to Consumer
Service Provider to Client
Cost of Service 5,00,000 5,00,000
Margin 50,000 50,000
Add: Service Tax 15% 82,500
Add; GST 18% 99,000
COST TO CONSUMER 6,32,500 6,49,000
Loss to client 16,500

Conclusion: Impact

1. GST has adverse impact on Service industries as Service tax rate is less than GST RATE.

2. The existing Threshold of goods under State VAT is Rs. 5 lacs for majority of states. A uniform state GST threshold across the state is desirable; therefore empowered committee had recommended a limit that is 10 lacs only which will have positive impact.

3. Adverse Impact to Small Scale Industries

4. Positive Impact to Manufacturer other than mentioned in Point 3

Therefore Govt will have to take all the necessary points into consideration, While Fixing a limit applicability and Rate of GST so that there should be no adverse impact on One Class of Entity. Govt should provide some sort of exemption by way of providing concessional rate or providing Relief in exemption limit in order to protect the interest of particular Class of Entity.

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3 responses to “GST: Chaos in Single Rate”

  1. Sanket Agarwal says:

    Good Going CA Deepak Rathore
    Very well written article
    Best Wishes for your future endeavours

  2. Srinivasan Subramanyam says:

    If the design of GST is as discussed above then there is no problem. But in the model law and the recent discussion it was told that the GST will be , CGST,IGST & SGST.
    Can you please clarify this.

  3. Cthulhu_Is_Love says:

    Thanks. This is wonderfully designed and lucid as well. Hope to see more articles from your side.

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