India’s Prime Minister Mr. Narendra Modi gave a green signal to the biggest tax reform since India’s independence. India is now officially under a unified tax regime, which has made the tax structure much simpler. This will make India much more business-friendly which would lead to greater economic prosperity in the near future. GST is designed to be electronic with no manual filing of returns, this will ensure higher transparency and accountability, and will reduce the overall complexity, thus making everything simple and smooth.
GST (Goods and Services tax) taxation laws will put an end to multiple taxes like excise, CST, VAT, service tax etc; these taxes were levied on different stages of a product (Manufacturing, distribution, wholesale and retail) in the previous taxation system.
Here’s a simple story which will help you understand GST without any previous financial knowledge.
“Suppose a kid named Rahul has his birthday tomorrow. He goes to his father and asks him to buy a box of chocolates so that he can distribute the sweets among everyone in his class.
He wakes up to go to his school and on his way meets his classmate Akash, he wishes Rahul and Rahul gives him a chocolate.
Rahul reaches his school and his father takes his leave and wishes him once again, to which Rahul gives one chocolate to his father; meanwhile, the school guard standing near by listens to this conversation and goes forward to wish Rahul: and Rahul being a kind kid offers one chocolate to the school guard.
He finally reaches to his class and the teacher announces his birthday and he starts distributing the chocolates to everyone, including Akash, who already got one chocolate.
After some time the principal decides that whenever anyone in the school has his birthday, they have to submit the sweets box to him and he will distribute it evenly to everyone in the class.”
Now, consider these chocolates as taxes, and Akash, Rahul’s father, school guard, and other classmates are the various departments collecting taxes from us. Rahul had to pay the taxes at various stages. Also, Akash ended up eating two chocolates.
After the principle implemented the new system, collection and distribution of chocolates will be done in a unified and simpler way. It eliminates double distribution of chocolate and increases the transparency. This is GST.
Also, earlier government of India used to differentiate between goods and services, this will stop under GST, it will reduce the confusion in determining what constitutes a good and what constitutes a service.
GST will be of three types- State (SGST), Central (CGST) and Integrated (IGST). If something is produced and sold in the same state, it comes under SGST & CGST. If the same product is sold in a different state, the taxation will come under IGST.
I hope you have got an idea about GST, and how it will work. We will be going over other aspects of this taxation system in the coming articles. Stay tuned.
If you have any doubts/questions, feel free to reach me in the comment box down below.