The Goods and Services Tax (GST) is believed to be the single most powerful tax reform that India will see. The objective is to break down state boundaries and end the headache of multiple taxes. So Central Excise Duty, VAT, Service Tax, Swachh Bharat Cess, Octroi, Luxury Tax, Special Additional Duty, Entry Tax and so on will be substituted with one GST.
To simply understand a very complex taxation system, we break-down the details.
For sale within a state, currently we pay VAT, Excise Duty and Sales Tax. But under the new system, we will only pay a State GST (SGST) and Central GST (CGST). For sale outside the state, we pay a Central Sales Tax, Excise and a whole host of other local taxes. Under the new GST system of taxation, we will pay a fixed Integrated GST (IGST) which will be collected by the centre. For example, a phone manufactured in Tamil Nadu and sold in Punjab will cost the same if the phone were to be sold within Tamil Nadu.
Under the current regime, hypothetically speaking, a 100 rupee phone manufactured in Chennai sent in a truck to Chandigarh through six states with each state levying tax plus the central taxes will cost 130 rupees by the time it reaches its destination. But Under GST, assuming the revenue neutral rate to be 18%, a 100 rupee phone manufactured in Chennai sent in a truck to Chandigarh will cost just 118 rupees by the time it reaches because we will pay one Integrated GST (IGST) to the central government.
So GST aims to make India one unified market, provided all states implement GST and all states comply with the same rates. So while it is a tall order, it will need every state to come together to make it happen!
Video: The Quint
Music courtesy: BigBangFuzz