A. What is GST?
Goods and Service Tax (GST) is a destination based tax which will be implemented from 1st July, 2017. It is one indirect tax for the whole of India which will make it one unified common market.
It is levied at the time of consumption of goods or services by the ultimate consumer. After its implementation, it is expected to remove the cascading effect of tax-on-tax which is prevalent presently in the current tax regime. It will replace all the Indirect Taxes currently levied and collected by the Central and State Government like VAT, CST, Excise Duty, CST, Entertainment Tax etc.
B. How does GST work?
GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer.Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage.The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
Let us understand this with an example below:-
Stage 1: At Manufacturer’s End
Imagine a manufacturer of, say, toys. It buys raw material or inputs worth ₹1000, which includes a tax of ₹100. With these raw materials, it manufactures a toy. In the process of manufacturing the toy, it adds value to the raw materials he started out with.
Let us take this value added by him to be ₹300. Gross Value will be ₹1300 (₹1000 + ₹300).At a tax rate of 10%, the tax on output (toy) will then be ₹130.
But under GST, the manufacturer can set off the tax of ₹130 against the tax he has already paid on raw material (i.e. ₹100). Therefore, the effective GST incidence on the manufacturer is only ₹30 (₹130 – ₹100).
Stage 2: At Wholesaler’s End
This stage describes the situation when good manufactured passes from the manufacturer to the wholesaler.
The wholesaler purchases the toy for ₹1300, and adds certain value (or margin) of, say, ₹200. The gross value of the good he sells would then be ₹1500 (or ₹1300 + ₹200). A 10% tax on this amount will be ₹150.
But again, under GST, the wholesaler can set off the tax on his output of ₹ 150 against the tax paid on the goods purchased from the manufacturer of ₹130.
Thus, the effective GST incidence on the wholesaler is only ₹20 (₹150 – ₹130).
Stage 3: At Retailer’s End
In the final stage, a retailer buys the toy from the wholesaler and sales it to the ultimate consumer. The retailer adds value (or margin) of ₹100 to his purchase price of ₹1500. Thus the retailer sells the toy to ultimate consumer at ₹1600.
The output tax will be ₹160. But retailer can set off output tax of ₹160 against the tax paid on purchases from the wholesaler. Hence, the effective tax paid by the retailer is only ₹10 (₹160-₹150).
Thus, the total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer is, ₹160. (₹100 + ₹30 + ₹20 + ₹10). This has also removed the cascading effect of tax-on-tax.
Hit Cascading Effect to know more!!