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GST : The beginners guide

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Introduction : GST stands for Goods and Services Tax. Goods and Service Tax (GST) is a type of tax introduced in India from July 2017. GST is a consumption based tax, ultimately borne by the end consumer of a goods or service. Throughout the value chain, businesses and consumers pay GST on their purchases. But in case of purchases made by a business for sale to a customer, then the business can claim input tax credit to set-off GST liability. Thus, through the use of input tax credit mechanism, the GST liability is pushed to the end-consumer.

What is full form of GST : where GST is the statutory nickname to obviate the necessity of referring to the Act under its full and descriptive title. Its object is identification, and not description, of the purpose of the Act. Where as the GST full form, the long title Goods and Service Tax set out at the head of a statute, gives a fairly full description of the general purpose of the Act and broadly covers the scope of the Act.

What is “Goods and Services Tax – GST” and why it is implemented : The goods and services tax (GST) is an indirect federal sales tax that is applied to the cost of certain goods and services. The business adds the GST to the price of the product; a customer who buys the product pays the sales price plus GST; and the GST portion is collected by the business or seller and forwarded to the government.

Among the alien countries, France was the first country to implement the GST in 1954, and since then an estimated 160 countries have adopted this tax system in some form or another. Some of the countries with GST include Canada, Vietnam, Australia, Singapore, UK, Monaco, Spain, Italy, Nigeria, Brazil, and South Korea. This list in now updated by introduction of India into GST Nation from 1st July 2017.

From the list mentioned above, most countries with a GST have a single unified GST system, which means that a single tax rate is applied throughout the country. A country with a unified GST platform merges central taxes (e.g. sales tax, excise duty tax, and service tax) with state-level taxes (e.g. entertainment tax, entry tax, transfer tax, sin tax, and luxury tax) and collects them as one single tax. These countries tax virtually everything at a single rate.

While India is having a dual GST model, which is presently reckoned to be the biggest tax reform in the country’s tax history in decades. The main objective of incorporating the GST is to eliminate tax on tax i.e. double taxation which cascades from the manufacturing level to the consumption level. This could be understood well when we follow a product right from the manufacturing state to its selling state.

 Stage 1 : Obtaining Raw materials (Manufacture making Pens)  A manufacturer who making Pen, now obtains the raw materials for, say Rs. 10 which includes a 10% tax. This means that he pays Rs. 1 in tax for Rs. 9 worth of materials.
 Stage 2 : Value Addition in the Process stage  In the process of manufacturing the Pens, he adds value to the original materials say of Rs. 5, for a total value of Rs 10 + Rs. 5 = Rs. 15.

Then the 10% tax due on the finished good will be Rs. 1.50. But under the GST model, this additional tax can be applied against the previous tax paid by the manufacturer to bring the effective tax rate to Rs. 1.50 -Rs. 1.00 = Rs. 0.50 paise.

 Stage 3: Moving the finished Product for sale  The wholesaler purchases the Pen for Rs. 15 and sells it to the retailer at a Rs. 2.50 markup value for Rs. 17.50. The 10% tax on the gross value of the good will be Rs. 1.75 which he can apply against the tax on the original cost price from the manufacturer i.e. Rs. 15. The wholesaler’s effective tax rate will, thus, be Rs. 1.75 – Rs. 1.50 = Rs. 0.25 paise.
 Stage 4 : The product now moves to retailer from where it results in hand of end customer  If the retailer’s margin is Rs. 1.50, his effective tax rate will be (10% x Rs. 19) – Rs. 1.75 = Rs. 0.15 paise. Total tax that cascades from manufacturer to retailer will be Rs. 1 + Rs. 0.50 + Rs. 0.25 + Rs. 0.15 = Rs. 1.90 paise.

This above example of Cascading was prevalent in post GST era, where the taxes were paid on the value of goods and margin at every stage of the production process. This certainly then translated into a higher amount of total taxes paid, which was then carried down to the end consumer in the form of higher costs for goods and services. Therefore, Implementation of GST system in India was the only measure left with the government to flush the evil effects of Cascading and to ensure reduced inflation in the long run.

To sum it up we can say that GST is he clear winner in the fight between Cascading effect and Erstwhile hole taxation laws. Because the old tax laws were incompetent to evade the effects cascading into the taxation system which then resulted in high prices for the products and also lacked transparency. But with GST, everything is sort, the input tax credits are available at every stage of movement of supplies and the customers could also know as how much tax a product bears right from its production stage to consumption stage.

The same is the story with Tally.ERP 9 a leading software segment player known for its simplicity. Tally.ERP 9 has evolved from the introduction of GST on July 1 2017 where it brought modules for consolidated return filing GSTR 3B,then introduced GSTR-1 and GSTR-2 return forms for convenience of filing from its own ERP Software. Then it moved a step higher by bringing in features for processing reverse charge mechanism. Then in its latest module released 6.4 it brought in the features to generate eway bill from the software. The compatibility with Tally.ERP software is such that even a person from non commerce background could easily learn to journalise accounting transactions with ease and comfort. And being a GST ready candidate, Tally.ERP 9 ensures that GST compliance requirements are taken proper care of.

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