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.
Author Bio
Good Going CA Deepak Rathore
Very well written article
Best Wishes for your future endeavours
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.
Thanks. This is wonderfully designed and lucid as well. Hope to see more articles from your side.