Indian Government vs. Big Corporations: The Battle for Fair Markets

What is GST in India?

The Goods and Services Tax (GST) is a landmark tax reform introduced in India on July 1, 2017. It is a unified, multi-stage, destination-based tax levied on the supply of goods and services. GST replaced multiple indirect taxes such as VAT, excise duty, and service tax, creating a simplified taxation structure across the country.

Why Was GST Introduced?

 

Before GST, India had a complex tax system with different states imposing their own taxes, leading to inefficiencies and increased costs for businesses and consumers. GST was introduced to:

• Eliminate cascading taxes (tax on tax)
• Standardize taxation across the country
• Enhance compliance and revenue collection
• Make India a single, unified market

How GST Works: Example with numerical vaules

Consider a mobile phone manufacturer in Maharashtra. Before GST, the manufacturer paid excise duty on production, VAT on sales, and CST for interstate transactions. These multiple taxes increased the phone’s price for consumers.

With GST:

1. The manufacturer buys raw materials from Gujarat and pays IGST.
2. The manufacturer produces the mobile phone and sells it to a wholesaler, charging CGST and SGST.
3. The wholesaler sells the phone to a retailer in another state, applying IGST.
4. The retailer sells the phone to the final customer, charging CGST and SGST.

At each stage, tax is levied only on the value added, reducing the overall tax burden and making the product more affordable.

     

Below is an example to show the difference in the amount of tax payable under the old tax system and the GST system:
	Old Tax system	GST System
Value to Manufacturer
Cost of production	5,00,000	5,00,000
Profit Margin of 10%	50000	50000
Excise duty of 12%	60000	-
Total production cost	6,10,000	5,50,000
VAT of 12.5%	76250	-
SGST of 6%	-	33000
CGST of 6%	-	33000
Invoice value for manufacturer	6,86,250	6,16,000
Value to Wholesaler
Cost of goods	6,86,250	6,16,000
Profit margin of 10%	68625	61600
Total Value	7,54,875	6,77,600
VAT of 12.5%	94359
SGST of 6%	-	40656
CGST of 6%	-	40656
Invoice value to wholesaler	8,49,234	7,58,912
Value to Retailer
Cost of goods	8,49,234	7,58,912
Profit margin of 10%	84923.4375	75891
Total Value	9,34,158	8,34,803
VAT of 12.5%	116770	-
SGST of 6%	-	50088
CGST of 6%	-	50088
Invoice value to retailer	10,50,928	9,34,980

This example clearly illustrates how the GST system reduces the tax burden compared to the old tax regime due to the elimination of cascading taxes and the implementation of the input tax credit (ITC) mechanism.

Key Observations from the Example:

1. Tax Burden Reduction:

   • Under the old tax system, the final invoice value to the retailer is ₹10,50,928.
   • Under the GST system, it is ₹9,34,980.
   • Savings for the consumer: ₹1,15,948.

2. Cascading Tax Effect (Tax on Tax) Removed:

   • The old system had excise duty (12%) and VAT (12.5%) applied at multiple stages, leading to a tax-on-tax effect.
   • GST only applies to the final transaction value at each stage, and businesses can claim input tax credit (ITC), reducing the overall tax liability.

3. Streamlined Tax Structure:

   • The old system had Excise Duty + VAT at different rates.
   • GST replaced these with CGST & SGST (both 6%), making tax calculation easier.

4. Lower Cost for Businesses and Consumers:

   • The manufacturer, wholesaler, and retailer all pay less tax, which leads to lower product prices for consumers.
   • GST has simplified the taxation process by removing multiple layers of taxation.
   • It has lowered the overall tax burden on businesses and consumers.
   • The input tax credit (ITC) ensures that tax is only paid on the value addition at each stage.

Impact of GST on Consumers

• Lower prices: Since GST eliminates multiple tax layers, the final product often becomes cheaper.
• Transparency: A uniform tax rate reduces ambiguity and ensures better compliance.
• Ease of business: A single tax structure makes it easier for businesses to operate nationwide.

Conclusion

GST has transformed India’s taxation system by simplifying compliance, reducing tax burden, and creating a unified market. While initial challenges existed, GST has streamlined business operations and benefited consumers in the long run.

Stay tuned for the next blog post: Multi-stage Taxation in GST Explained!