Indirect tax in India has driven businesses in restructuring and modelling their supply chain systems owing to multiplicity of taxes and costs involved. With hopes, that it will end ‘Tax Terrorism’.

The 122nd Constitution Amendment Bill came up in Rajya Sabha on August 3^rd, 2016 which was also boosted with good wishes by the opposition – Congress party, which holds crucial cards on the passage. Here’s how GST differs from the current regimes, how it will work, and what will happen if the Parliament clears the bill.

How the whole regime of GST will work?

There is an ambiguity that how wills GST effect the tax liability of the tax payers ‘Will it is advantages or not’. Here below is an illustration to resolve your queries.

1. Stage 1: MANUFACTURER

Let us understand with an illustration if an individual is a manufacturer.

Imagine a manufacturer A who manufactures garments. He buys raw materials say- clothes, equipments, other articles- worth Rs 200, a sum that includes a tax of Rs. 20. With the above raw materials A manufactures the garments for the consumers.

In the process of manufacturing the garment, A adds value to the materials and other articles which will make the garment more attractive and durable. Let us take this value adding by him to be Rs. 30. The gross value of his commodity will be Rs. 230 (200+30).

Also, a tax rate of 10%, i.e. tax output will be Rs. 23 (10% of Rs. 230). But as per GST, he can set off this output tax Rs. 23 against the tax he has already paid at the time of purchasing raw materials/inputs i.e. Rs. 20. Hence, the effective GST rate incidence on the manufacturer is only Rs 3 (23-20).

Therefore, the conclusion draw from the above illustration is that A can claim Credit of the Tax Paid at the end of the supply chain.

2. Stage 2: WHOLESALER

Let us understand with an illustration if an individual is a wholesaler.

The next stage is that the garment passes from the manufacturer (A) to the wholesaler (B). Here, B purchases it for Rs. 230, and adds on value (which is basically his ‘margin of profit’) of say Rs. 30. The gross value of the garment would then be Rs. 260 (230+30).

Also, a tax rate of 10% i.e. tax output will be Rs. 26. But again, under GST, B can set off the output tax of Rs. 26 against the tax on his purchase from A i.e. Rs. 23. Thus, the effective GST incidence on the wholesaler is only Rs. 3 (26-23).

Therefore, the conclusion draw from the above illustration is that B can claim Credit of the Tax Paid at the end of the supply chain.

3. Stage 3: RETAILER

Let us understand with an illustration if an individual is a retailer.

At the final stage, a retailer (C) buys the garment from the wholesaler. So the purchase price of garment is Rs. 260, he adds on value (which is basically his ‘margin of profit’) of say Rs. 40. The gross value of the garment will be Rs. 300 (260+40).

Also, a tax rate of 10% i.e. tax output will be Rs. 30. But under GST C can set off the output tax of Rs. 30 against the tax on his purchase from B Rs. 26, C brings down he effective GST incidence on himself to Rs 4 (30-26).

Thus, the total GST on the entire value chain from the raw materials/ input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through manufacturer, wholesaler and retailer i.e. Rs. 30 (20+3+3+4).

The GST Constitutional Amendment Bill has to go back to the Lok Sabha for ratification and further amendments. Once it is approved by Parliament and 50 per cent of state legislatures, the GST Council will have to work out the model GST Bills which will provide operational details.

Link: FAQs on GST

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