Q 2: What is GST? How does it work?
Q 2: What is GST? How does it work?
Ans: As already mentioned in answer to Question 1, GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the producer's point and service provider's point upto the retailer's level. It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods 32 and services. 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.
The illustration shown below indicates, in terms of a hypothetical example with a manufacturer, one wholeseller and one retailer, how GST will work. Let us suppose that GST rate is 10%, with the manufacturer making value addition of ₹ 30 on his purchases worth ₹ 100 of input of goods and services used in the manufacturing process. The manufacturer will then pay net GST of ₹ 3 after setting-off ₹ 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of ₹ 13. The manufacturer sells the goods to the wholeseller. When the wholeseller sells the same goods after making value addition of (say), ₹ 20, he pays net GST of only ₹ 2, after setting-off of Input Tax Credit of ₹ 13 from the gross GST of ₹ 15 to the manufacturer. Similarly, when a retailer sells the same goods after a value addition of (say) ₹ 10, he pays net GST of only Re.1, after setting-off ₹ 15 from his gross GST of ₹ 16 paid to wholeseller. Thus, the manufacturer, wholeseller and retailer have to pay only ₹ 6 (= ₹ 3+Rs. 2+Re. 1) as GST on the value addition along the entire value chain from the producer to the retailer, after setting-off GST paid at the earlier stages. The overall burden of GST 33 on the goods is thus much less. This is shown in the table below. The same illustration will hold in the case of final service provider as well.
Stage of Supply Chain
Purchase Value Of Input
Value at Which Supply Goods and Services Made to Next Stage
GST on Output
Input Tax Credit
Net GST=GST on output-Input Tax Credit
13–10 = 3
15–13 = 2
16–15 = 1
GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the producer’s point and service provider’s point up to the retailer’s level. It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods and services.
Imagine a manufacturer of, say, shirts. He buys raw material or inputs such as 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).
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