GST is a multi-stage tax levied on the value added at each stage of transaction from production to final sales to an end consumer. The tax paid on all purchases is called the output tax and the tax levied on all sales is called the Input tax. A GST registered enterprise pays tax to the government only if the output tax for the assessment period is more than the input tax paid by it. However, should the reverse be true, then the enterprise is entitled to a refund from the government within a declared period.

GST is designed to make the final consumer bear the burden of tax and spare the business of its incidence. It does so by introducing a mechanism that allows for the refund of tax that is levied on intermediate transactions between firms. The proposed GST is likely to be a dual system that will support a Central and State GST chain separately. These two chains would be independent of each other. This implies that GST registered companies will not be able to adjust the input credits of one chain against the other.

The Central GST chain is likely to integrate the existing excise duty and service taxes levied at the central level while the State level GST chain the current State-level VAT, other local levies and services tax on certain specific services on which States may get the powers to levy service tax. The input tax credit adjustments will operate within the respective chains but not across.

The cumulative incidence of the excise duty and the State VAT at present works out to around 24 per cent of the retail sales price. Under GST, the aggregate is expected to be significantly lower. The government is likely to start with a GST of 15% thereabouts and reduce it progressively as the tax base expands.

In advanced economies, the introduction of GST is usually accompanied by significant cuts in personal income tax as a means to reduce the income tax burden of the lower income segments that ends up paying tax that is disproportionately higher to their Income than the higher.

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About the Author:

The author is the Managing Director of Hydra Consulting Services having expertise in supply chain solutions, process design improvement, automation and integration with specific reference to the textile industry.