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Unraveling The Mysteries Of GST With Samosas And Time Machines

It's not as complicated as it sounds. Honestly.

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At the stroke of midnight on June 30, 2017, Prime Minister Narendra Modi and soon-to-be-former-President Pranab Mukherjee each pressed a shiny button in the Central Hall of Parliament, heralding India’s headlong dive into a new tax regime.

To get an idea of how long and convoluted the process of getting to the button-pressing moment has been, it helps to know that the idea of a unified Goods and Services Tax (GST) dates all the way back to 1999. It took five separate legislations, four consecutive governments, at least three Parliamentary Committees, and a mind-boggling number of meetings with stakeholders for the idea to turn into reality. And as a result, we have now reached a point where anybody who writes a complete analysis of GST ends up writing a book and automatically gets awarded a PhD. #TrueStory

Tax law is one of the most complicated concepts known to man, created by man, and implemented on man.

Most people – and I include myself in this – tend to get this sinking feeling in their stomachs whenever they see an income tax form. They throw up their hands and tell their chartered accountant, “Oi CA, you only do it. I don’t know what is happening here. Just tell me how much I need to pay the Gormint and I’ll do it. Peace out!”

As a CA student you start your day by going to class where they teach you legitimate auditing and accounting practices. Then you go to an office where you figure out how to exploit the loopholes in these laws to get your way, to enable your client get maximum profits— basically the exact opposite of what you learnt in class. Then, after work, you go to another class which teaches you how to be an upstanding accountant in this universe full of douchebaggery. After that you go home with a massive headache, a soul-crushing feeling that something weird is going on in life.

A fully qualified CA’s brain works round the clock to rationalise the whole situation. They eventually learn to kill the voice of reason in their head, hail capitalism and just go with the flow.

Want services? Pay taxes

It doesn’t take a CA to understand the basic principle that underpins taxation though. You, the citizen, give the government a chunk of your money, which it then spends on providing services to you, protecting you, making GST ads starring Amitabh Bachchan and basically making sure that your life is comfortable. This system, however, works only when there is mutual trust between you and your government. When the government can trust you to pay up and you can trust the government to spend the money usefully.

If we lived in a utopian society, that is how it would be.

But…

BREAKING NEWS: UTOPIA IS A FIGMENT OF YOUR IMAGINATION. IT DOESN’T HAPPEN THAT WAY, OK? STOP DREAMING DREAMS AND GET REAL, OK? GET REAL.

Here’s how it actually goes down.

Income tax is the ideal way to tax a citizen since it is structured in a way that allows people to pay taxes in proportion to their earnings. Currently, anyone earning below ₹2.5 lakh annually is not required to pay income tax. But if you earn more than ₹10 lakh annually, you are required to give 30% of that money to the government. This ensures that resources are redistributed from those who earn more to those who earn less.

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Human nature dictates that everyone strives every day to work harder, maximise productivity, increase their pay and… of course, avoid paying taxes.

Unfortunately a nation of tax dodgers creates a bankrupt government and a bankrupt government is a useless government. So if people are not paying taxes directly, it has to ensure they pay in some other way.

That’s where GST comes in.

You’ve probably heard that out of 125 crore Indians, only 1.5% (1.9 crore) pay income tax. But this does not mean that only 1.5% people pay taxes, because indirect taxes, like GST, are levied on everyone, regardless of their ability to pay.

Enter Samosawala

Now, everyone loves samosas. Even though those oily, fried monstrosities were probably invented by the devil himself. Imagine you are on your way home when you’re suddenly hit by an epic wave of hunger. You spot a hole-in-the-wall shop with some glorious samosas on display.

“Yuss! SAMOSAS! Let us gorge on those lovely fatty devilish things!” cries your stomach. “Nooooo! Please. Stop this assault,” your heart begs. But your brain is probably wondering, “I wonder if this Samosawala pays taxes…”

Human nature dictates that everyone strives every day to work harder, maximise productivity, increase their pay and… of course, avoid paying taxes.

The roadside samosawala is, most likely, not declaring how much he earns from his delicious, evil enterprise. But again, remember how I said before that everybody kinda pays taxes anyway? He does too. Although he’s not paying income tax, he will inevitably end up paying indirect taxes on a bunch of different things that he’s buying to run his business.

The oil he uses to fry his heathen snack might be refined sunflower oil, the price of which would include a tax component. He’s also paid tax on the utensils he cooks in, the phone he uses to coordinate deliveries and the paper napkins he distributes.

Since he’s buying all of these things with cash and also spending cash to buy whatever he needs for his personal consumption, there is no need for him to bother declaring income or even keeping accounts. So while he doesn’t pay income tax, he does pay indirect tax. This is a person operating in the informal economy.

A samosawala who has a brand name and chain of swanky outlets, is more likely to maintain accounts and pay taxes as opposed to the other guy. She operates in the formal economy. Why? Because her restaurants will have expenses like air conditioning and advertising and possibly even a tie-up with a delivery app. All of that cannot be paid for in cash alone, given the enormity of the operation. She will need bank accounts, an accounts team and a small army of CAs advising her on how to maximise profits.

By pushing the magic GST button, the government is initiating a process that will bring the roadside samosawala into the formal economy and make him pay taxes.

Wait, how does that process work exactly? Allow me to illustrate with the help of some good old fashioned time travel.

GST: Taxing Value Added to a Motorised Time-Machine

One day, Dr Brown from Back To The Future wakes up and says, “I’m done with my life of adventure and bending time and space and all that. I want to earn some good paisa now. I’m going to mass manufacture my epic time machine car and sell it in the open market.”

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So the Doc starts a car company. That car requires many components from many different vendors. One vendor will supply the flux capacitor for the time machine, another will provide the engine, and yet another will provide the time-and-weather-resistant tyres.

Assuming Doc pays ₹100 for each of these three components, of which ₹10 is tax, he’ll spend ₹300 in all, paying a total tax amount of ₹30.

On the factory floor, he assembles all the components together and builds the motorised time machine. He decides to sell the finished product for ₹1000. Of course, he’ll have to pay another ₹100 tax on that. All in all, Doc ended up paying ₹130 bucks in indirect tax to our overlords in Delhi.

Doc: “But wait, this makes no sense Marty McFly. I've already paid tax on the components and I have to pay tax again on my car?”

Marty: “True true. You know what, we have two options: Either we go completely underground and do everything in cash because the system is goshdarn unfair, or, we go back in time, become legislators and implement a whole new type of tax.”

Doc: “Hmm... The first plan sounds exciting, but let's go with the second one.”

So Marty and Doc go back in time and win elections (of course they do, they’re from the future!) and lead the effort to implement a ‘Value Added Tax’.

The concept is simple: The tax Doc was paying for the components (₹30) will be offset against the tax he’s paying on his sale (₹100). Doc will ask his component suppliers to provide proof of tax payment. He will then use that proof to say, “Listen gormint, I’ve already paid my suppliers and paid ₹30 tax on it. So I am going to cut that out from that tax I pay on my sale.” And thus, he ends up paying a total of ₹70 (₹30 will be removed from the ₹100 tax he pays on the final sale) in tax as opposed to the ₹130 he was paying earlier.

PROFIT MAXIMISED!

This is what the GST is: a tax on the value that a businessman adds to the product, not the product itself. The ‘value’ Doc added was assembling the car, for which he put in effort, time, rent, labour, machine expenses, testing charges, etc. He ended up adding ₹700 on an earlier value of ₹300, so he should only pay tax on the value added, which is ₹70.

Having succeeded with their ingenious plan, Doc and Marty travel forward in time to July 1, 2017. Doc hires Marty as his financial advisor and they become rich selling high-speed time machines.

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A Surgical Strike on the Supply Chain

GST is going to be disruptive for one very important reason: all the stakeholders in the supply chain will need to report their sales, show how much tax they paid and then pass it on to the next guy in the the line that leads to the final product, and finally the consumer.

The Government doesn’t really have to move a finger here.

The formal businesses with their formal suits and formal formality will fall in line because they want that succulent input credit in order to maximise profits.

If however, the guy who sells weather-and-time-proof-tyres to Doc turns out to be a shady dude who only wants to deal under the table, the Doc will pay ₹100 bucks for the tyres and then pay an additional ₹10 tax on the shady tyrewala’s behalf when he’s selling his final product. The tyrewala can’t give the Doc the proof of tax payment on his components because he’s not paying the tax.

The other thing the Doc might do is increase the price of the car by ₹10 to cover his loss. In which case, you, the motorised time-machine buyer, will end up paying more for the product.

Now that Doc and Marty have taken so much effort to go back in time and introduce a new type of tax, they probably don't want to deal with suppliers like the goddamn tyrewala who doesn't pay taxes on his end. They will simply switch suppliers and go with someone else: a ‘formalised’ business.

What happens to the shady tyrewala? Well, either his business dies because nobody wants his tyres anymore or he starts paying taxes and becomes legit.

Welcome to the Machine

Another big feature of this new tax regime is that everything is automated. The vendors supplying components to the Doc don’t need to give him a piece of paper proving that they have paid the tax. Instead, they will simply share their GST Identification Number (GSTIN) with him.

All the Doc needs to do is enter the GSTIN of his suppliers when he files his own return and the tax already paid will be auto-deducted. The whole supply chain will now be automated, so every instance of trade and the tax paid on each trade will be registered on the GST Network (GSTN) server.

That is why the whole country is losing their minds over registration: They need that goshdarn number.

The whole operation depends on this behemoth called GSTN and people in the know say that the software that is running it all is having teething troubles. Tweets with screenshots of error messages, screaming, “IT’S NOT HAPPENING AAAAAAAA! NOOOOO!” have become quite common.

The small business folks who can’t afford tax consultants or haven’t ever met one IRL are obviously panicking. There is this insane push from the big business folks to be GST compliant all the way down to the bottom of the ladder.

“Register for GST now or we ain’t trading with you,” they say.

The little people who are already struggling to make sense of this complicated system now start panicking even more.

And making the problem infinitely worse are all the crazy, doom and gloom Whatsapp forwards spreading all manner of misinformation.

Step into the shoes of the small business person and just imagine losing all of your business in a single day because you don’t know how to work the Internet and register your business on a website.

According to reports, 45% of all our businesses are informal and employ 80% of our workforce. Any business that has an annual turnover of over Rs 20 lakh is required to register on GSTN. The panic is very real right now.

But the fact of the matter is that the peeps at the top, who want to milk every drop of input credit they can find, will push the peeps below them to register. It is an inevitability that has been set in motion.

Small business owners are huddled together whispering to each other, “Brace Yourself, Winter is Coming.”

Informal businesses are also really worried about the fact that there are 5 different rates of tax (0%, 5%, 12%, 18% and 28%), which could possibly keep changing every other month. Keeping track of all that and estimating how it will affect their profits is not something they are looking forward to.

The main reason why the Government has been pushing so hard to implement this as soon as possible, even at the cost of disrupting the whole economy for the foreseeable future, is…

At the end of it all, enormous amounts of sweet, sweet tax money will start flowing in. Nobody can really estimate how much additional tax will be generated because there is no way to tell how many businesses will be formalised. Once they do get formalised however, they will keep paying taxes for as long as they exist. Everyone in Government can see that it’s gonna be a CRAYZEH amount of money.

PSA: DON’T PANIC!

So are we all screwed?

Temporarily, yes.

But in the long-term, hopefully, these chinks will be ironed out and the system will become smooth.

What you can do to avoid panic and help the whole thing work, is to try and understand GST better instead of running around in circles screaming unintelligibly. If you’re a business owner who is trying to figure out what GST is all about, check out this detailed FAQ. The Government has also put out detailed help modules on how to deal with GST. If the website doesn’t work, which is quite likely going by the existing evidence, tweet to @askGST_GoI. They are doing a great job of responding. Another Twitter handle to hit up with GST-related tech queries is @askGSTech.

Meanwhile, I’m going to jump in my amazeballs time-machine-car and fly off into the future where all of this has already been taken care of and GST is already a well-oiled, lean, mean, tax machine.

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