GST Tax Regime and Previous Tax System – What’s the Difference?

GST has replaced a big list of indirect taxes since July 2017. While many have hailed the bold move brought about by the central government, many traders and manufacturers are still confused about what is in it for them by moving from indirect taxes to GST. Here is a simple way to articulate the difference between the current GST tax regime and the previous tax systems.

GST Tax

What taxes are now withdrawn?

Indirect taxes that are no longer applicable after the nation-wide implementation of GST are as below-

  • Customs Duty- It is to be paid on products coming from outside India. This is eventually borne by the end consumers as well as retail store owners.
  • Service Tax– This was the tax levied on services rendered by individuals, companies, or professionals.
  • Central Excise Duty– This tax was levied on product or goods manufacturers. They earlier had the option to shift the burden of tax further down the supply chain i.e. to retail store owners and wholesalers.
  • Sales Tax– This tax was levied on retail store owners for products sold. This was eventually passed on to end consumers by charging sales tax on goods and service
  • Value Added Tax (VAT) – This tax was levied at every stage as the product moved from production, warehousing, transportation, wholesale, retail, and then to the end consumer.

What is the current working of indirect tax under GST?

The present system of GST operates on the principles of ‘One Nation, One Tax, One Market’. In the earlier system, as the product changed hands multiple times (manufacturer, distributor, wholesaler, retailer), all the  taxes were eventually borne by the consumer in the form of a higher MRP. Thus, the end customer had to pay for the cascading effects of taxes levied at every stage the product changed hands. However with the current GST system in place, the customer no longer has to bear these cascading taxes.

This has had a positive impact especially on the movement of goods across different states. For example, a car part (induction motor), it goes through the following steps and taxes are levied at each level in the older system

1 – Produced in a factory in Sanand (Gujarat) and collected Excise Duty and CST,

2 – Sold to a dealer in Gurgaon (Haryana) and collected CST,

3 – Sold to auto service station in Amritsar (Punjab) and collected VAT

Under the present system of GST

1 – Produced in a factory in Sanand (Gujarat) and collected 18% GST on the manufacture,

2 – Sold to a dealer in Gurgaon (Haryana) and collected 18% GST on distribution and got input tax credit for 18% GST on the manufacture,

3 – Sold to an auto service station in Amritsar (Punjab) and collected 18% GST on retail on and got input tax credit for 18% GST on distribution

The tax rate works out to 14.1% in the previous system as compared to 12% (in this illustration). This way, the product will be available to the end consumer at a lower price because of the removal of cascading effect of paying taxes at every stage of the movement of goods right from production in one state to consumption in another state.

Hopefully, these pointers will help decode the difference between the previous list of indirect taxes and the existing GST.

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