GST made easy

What exactly is GST? If you are a poor soul like me who tried to search answers for questions like that one, you would have smacked your forehead and forgotten the question itself because of the sheer amount of technical gobbledygook thrown at you. If you are the kind of average, nontechnical person who can not even open a computer without using a hammer and chainsaw, don't worry. I have simplified things in the tradition of my "Made easy" series for you.

There are some things in life that it is better to just not even think about. And one of those things is Economics. Tax obviously is another such thing. Taxes are as inevitable as death they say. The only difference between death and taxes is that the Govt. doesn't meet every year to make death worse. As someone had quipped, "A fool and his money are soon parted. The rest of us wait until income tax time."

All taxes are classified as either Direct Taxes or Indirect Taxes. That personal income tax that you pay is a direct tax because you directly pay it to the Govt, Companies pay corporate tax and the rich pay wealth tax. On the other hand when you buy a parle G biscuit packet you do not directly pay the taxes to the Govt, the shopkeeper or somebody else does, you pay the MRP to him and he pays a portion of it to the Govt, that is an indirect tax. You don't really have to have an IQ of 445 to understand that.

There are various philosophies on how this should be done. There was this guy called Robin Hood as per English folklore who, according to legend, used to rob from the rich and give it to the poor. One philosophy called "Ability to Pay Principle" advocates that the Govt should be a bit like Robin Hood. Let us say that Shah Rukh Khan is crazy about Parle G biscuits and he buys thousand packets a year. I also do the same for instance. This might cost 5000 Rs. The MRP is inclusive of all taxes, meaning we end up paying indirect taxes for this, assume it to be 200 Rs. For SRK this might be just 0.000001 % of his income. But for a below poverty line guy this 200 Rs might be half of his monthly income. Isn't this injustice? BPL guy has to pay all he has, but SRK just has to pay 0.000001 %. This is kind of why the "Ability to Pay Principle" argues that there should be a way to make SRK pay more so that the BPL guy can spend the money he has on other essential things like gambling and alcohol! Now you know why we have Income tax slabs structured like that. This Robin Hood style of taxing is called as Progressive tax. Direct taxes like Income tax and Corporate tax are progressive. Indirect taxes like the Parle G tax are called as regressive taxes.

Can't they get all sentimental about justice and eliminate Indirect taxes then so that we only have progressive taxes? Not really. It's all right to save money, but too many are trying to save it from people they owe it to. Raja Harishchandra never told a lie they say, what they don't tell you is that Harishchandra never had to fill out a tax declaration form! Nothing makes a person more modest about his income than the time to fill out a tax form. The difference between tax avoidance and tax evasion is Jail, but such things have never stopped people from evading it anyway. Hardly 1% of our people i.e. only salaried bakras pay it, Imagine how difficult it would be to collect it from say another 50 crore people. Income tax Department might have to employ so many people that the cost of running the IT Dept itself might be more than the tax collected ! Indirect taxes are easier to collect and all 120 crore+ people are forced to pay them when they buy and sell things. So indirect taxes are required. GST is a tax reform that deals with Indirect taxes, it has nothing to do with Direct taxes like Corporate or Income tax.

In Sholay they show Gabbar and what happened to Thakur before they show what Jay and Viru do, don't they? Similarly we will flashback before we talk about GST. Sales tax was the Gabbar that we had. Let us assume that the Sales tax is 10% and you are running a kidnapping business. To run this business you might need Guns. The guy who made it might have used stainless steel, plastic, wood etc. To get all these he might have spent 10,000 Rs. 10% tax on this is 1000 Rs. He then prepares a gun and sells it to you for 15,000 Rs. You pay 10% as Tax, making the tax 1500 Rs. The problem here is that the guy who made the gun has included his tax of 1000 in the 15K price, your tax of 1500 includes a component that came from the 1000 that he added. You are paying tax on tax. This is called as cascading effect.

They introduced a concept called VAT to solve this cascading problem. VAT stands for Value Added tax. Basically the price of the gun is more than the Sum of prices of Steel, Plastic etc. This is because you can't kidnap people by showing them a piece of steel or wood or plastic, but you can do that by using a gun, Gun has more VALUE. This value was added by the dude who processed Steel, wood etc, assembled it and produced a gun. He added value. VAT says that only this value that he added should be taxed. He paid 11K, he sold it for 15K, So he added a value of 4K, only this is to be used for taxing. Cascading of taxes can be eliminated this way by VAT.

There is another catch here. If this guy has to pay credit only for the Value added(4K), there should be proof that the tax for 11K has already been paid in the previous stage. This can only happen if the steel seller and plastic seller provide proper bills, if he doesn't give the bill then the gun guy has to give the full tax. My guess is that the gun guy will show his gun and ask the Steel guy to produce bills. This way VAT and GST try to address tax evasion.

But there is more. Say you have the Gun factory in Bihar. The dude would have paid an excise tax(manufacturing tax) of 10%. (Again, if the manufacturer had purchased steel from Karnataka, he would have paid Karnataka’s state taxes on buying Steel)You would have loaded the guns in a truck, speaking of trucks, have you seen the long lines of trucks in the check posts near state borders? There is an entry tax at every state. If your truck moves through four states and you pay an entry tax of 10% at every state border. Then the seller again adds his profit and you pay 10% on his offer. This is insane! It's like tax on tax on tax on tax on tax! Not to mention the losses caused by delays in trnsportation because of such long lines(Imagine the truck owner getting a loan at 30% to finance things from a rowdy loan shark! He can't return it until he gets paid by the buyer)
And have you seen the kind of houses these Sales tax inspectors have built? When getting bribes is easy people build houses like that. VAT doesn't address this, GST does.

Another problem is that the taxation is different in every single state for every different thing. Another problem happens when states promise X years of tax free status to new factories. Clever companies simply move their entire factories after X years to another state to take advantage of this. Another thing is the problem of Imported goods. Now the tax on domestic goods is higher, imported goods have a low tax, with GST they will levy the same tax for imported goods(Does that remind you of Make in India?)

Right now there are so many taxes with so many clauses that nobody really understands what exactly is going on. So many state taxes and central taxes only add to the fun. So the next time(There won't be a next time) your CA friend says that he understands these umpteen number of taxes, consider the possibility that he is lying on your face. GST tries to address this having a simple tax, that is UNIFORM and is easy to calculate and collect and understand.

One more thing is Service tax. As a part of your kidnapping business you might have employed people whose job is to make calls and threaten people and negotiate ransoms. They are not producing any physical good like a gun, They are producing a Service. Tax on this is called as Service tax. Again the cascading can occur because VAT does not cover Service taxes. GST tries to solve this(Think about the full form of GST - Goods and SERVICES Tax). This way GST is like a sequel to VAT with a much bigger star cast and a better script that addresses the plot holes!

GST introduces 5 rates - 0,5,12,18 and 28%. With our SRK story it is easy to understand why. 0 and 5% are for things that the poor guy needs(Essential items). 18 and 28% taxes are for things that our BPL guy doesn't probably need. These are for people who can afford to pay more. Have you ever seen a poor guy paying 1200 a month for phone or internet bill? No, only upper middle class and above can afford that. 28% especially targets the Shahrukhs of the world(Luxury items). It's the Govt playing Robin Hood. "A fine is a tax for doing wrong and a tax is a fine for doing well", afterall!

All said, GST is not really about making things cheaper or costlier. It is about collecting tax from more people, it is about making taxation simpler and uniform. Some things might be cheaper and some costlier, that is only a side effect, not the main intention. The idea is that having 5 taxes is simpler than having 35 taxes with hundred different rates. It is also intended increase the ease of doing business. The whole thing started in 2004 and it took so much time to get things done. As mentioned already, GST tries to replace 35 taxes with 5 for instance. One problem with that is that States lose many of their taxes. That meant hundreds of meetings and negotiations with states on how it is to be handled, you know how these meetings generally go, don't you? Also, That is sort of why there is a state GST and a Central GST and an IGST(for interstate things). State GST is to make up for the money that states lose.
Nothing ever happens here without a number of ifs and buts. It is the same with GST, many things are excluded, making it more complicated than it should have ideally been. That way it is a simple but complicated system!

I will end this with a joke:
BOSS: Integrity and wisom are essential to success in this business. Integrity means when you promise a customer something, keep that promise even if we lose money.
NEW Employee: And what is wisdom?
BOSS: Don't make such promises

It's too early to say whether GST will do everything that it is intended to do. You can never underestimate the ingenuity of our people when it comes to jugaads and bending rules. I think it will do good to a good extent, let us wait and watch.