Indian Economy
GST Waiver will Increase Cost
- 20 May 2020
- 4 min read
Why in News
The Ministry of Finance is not in favour of granting Goods and Services Tax (GST) exemption, as has been demanded by various sections of the industry.
Key Points
- Providing GST exemption will have serious adverse implications on state finances, also businesses would suffer and consumers would be hit by price rise.
- Exemption would block Input Tax Credit (ITC) as manufacturers will pay GST on inputs but cannot claim ITC because the final product is tax-free. Thus, it will increase the cost of manufacturing, which will lead to increase in cost of products.
- The GST exemption will also increase compliance burden for manufacturers who would be required to maintain separate accounts for inputs and goods used for the production of the item.
- Further, the GST exemption provides incentive for imports, which do not have input taxes as compared to domestic supplies.
- This makes imported goods cheaper than locally produced goods.
- In the past when the GST exemption on sanitary napkins was allowed, it had led to similar hardship for domestic manufacturers of sanitary napkins.
Goods and Services Tax
- Goods and Service Tax (GST) is an indirect tax levied on the supply of final goods and services. The GST has subsumed indirect taxes like excise duty, Value Added Tax (VAT), service tax, luxury tax etc.
- It is essentially a consumption tax and is levied at the final consumption point.
- It is levied only on the value addition and is collected on goods and services at each point of sale in the supply line.
- The GST that a merchant pays to procure goods or services (i.e. on inputs) can be set off later against the tax applicable on supply of final goods and services. The set off tax is called input tax credit.
- The GST avoids the cascading effect or tax on tax which increases the tax burden on the end consumer.
Benefit of Input Tax Credit
- Imagine a manufacturer of shirts. He buys raw material or inputs — cloth, thread, buttons, tailoring equipment — worth Rs 100, a sum that includes a tax of Rs 10. With these raw materials, he manufactures a shirt.
- In the process of creating the shirt, the manufacturer adds value to the materials he started out with. Let us take this value added by him to be Rs 30. The gross value of his good would, then, be Rs 100 + 30, or Rs 130.
- At a tax rate of 10%, the tax on output (this shirt) will then be Rs 13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs (Rs 10).
- Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10).
- Rs. 10 is the input tax credit for the manufacturer.
