GST or Goods and Services Tax: An Easy Explanation

 GST or Goods and Services Tax: An Easy Explanation

The Goods and Services Tax or GST is the new indirect tax system of the Government of India, which is going into effect from 1 July 2017. But what is GST and how will it improve the current tax structure? An even more important question is why India needs a new tax system? We will answer these questions in this detailed article.

What is GST?

The Goods and Services Tax or GST is a comprehensive, multi-level, destination-based tax that will be levied on every value addition.

To understand this, we have to understand the words under this definition. Let us start with the word 'multi-level'. Any item passes through several stages from manufacture to final consumption. The first step is to buy raw materials. The second stage is production or manufacturing. Then, there is the arrangement of materials for storage or storage. After this, the product comes to the retailer or retailer. And in the last stage, the retailer sells the final product to you or the end consumer.

GST will be levied at these stages, and will be a multi-level tax. how? We will see shortly, but before that, let us talk about 'Value Addition'.

Suppose the manufacturer wants to make a shirt. For this, he will have to buy a thread. This thread will become a shirt after manufacture. So this means, when it is woven into a shirt, the value of the yarn increases. Then, the manufacturer sells it to a warehousing agent who adds labels and tags to each shirt. This becomes another enhancement of value. The warehouse then sells it to a retailer who packages each shirt separately and invests in the marketing of the shirt. Investing in this way increases the value of each shirt.

In this way monetary value is added at each stage which is basically value addition. GST will be levied on this value addition.

There is one more word in the definition that we need to talk about - destination-based. GST will be levied on all transactions occurring throughout the manufacturing chain. Earlier, when a product was manufactured, the Center imposed excise or excise duty on the manufacturing. In the next step, the state adds VAT when the item is sold. Then there will be a VAT at the next level of sales.

Now, GST will be levied at every stage of sales. Suppose the entire manufacturing process is taking place in Rajasthan and the final sale is taking place in Karnataka. Since GST is levied at the time of consumption, the state of Rajasthan will get revenue in the stages of production and warehousing. But when the product goes out of Rajasthan and reaches the end consumer in Karnataka, Rajasthan will not get revenue. This means that Karnataka will earn revenue on the final sale, as it is a destination-based tax. This means that Karnataka will earn revenue on final sales, as it is a destination-based tax and this revenue will be collected at the final destination of sales which is Karnataka.