1. How will the taxation system work under GST? Here’s a simple three step example

How will the taxation system work under GST? Here’s a simple three step example

The implementation of GST involves three steps, from manufacturing to wholesale and finally retail.

By: | Updated: August 3, 2016 5:39 PM
GST Bill, how GST works, GST primer, GST explained, what is GST, GST bill today, gst bill today news GST is said to be one of the most important indirect tax reforms in India’s history. (Reuters Photo)

GST, or the Goods and Services Tax, is a much-talked about economic reform that the Parliament’s Upper house is all set to clear later in the day. GST is said to be one of the most important indirect tax reforms in India’s history. It will subsume a number of state level taxes and is expected to greatly reduce tax evasion in the economy. How does GST work? What are the various steps at which it is implemented? We take a look through this simple example:

The implementation of GST involves three steps, from manufacturing to wholesale and finally retail. To help you get a better understanding of GST, we take a look at the tax incidence that will come into play once the indirect tax reform is implemented. Let’s assume that a manufacturer of trousers buys raw materials like cloth, zips, thread, buttons and other equipment that is required to stitch the pants. This raw material costs the manufacturer Rs 200. This Rs 200 includes a 10% tax of Rs 20. Once the shirt is made, the manufacturer has added his own value to the input material. As a part of this example, if one were to assume that the value added is Rs 60, then the total cost of the trouser is now Rs 260 (Rs 200 + Rs 60). With a 10% tax rate, the tax on this trouser would be Rs 26. However, since the manufacturer has already paid Rs 20 as tax while purchasing raw material, under GST the tax incidence will now be only Rs 6 (Rs 26 – Rs 20).

Also read: How the ordinary consumer would be impacted by GST

Now, let’s see how GST works at the second stage, that is for the wholesaler. Now, the wholesaler would buy the trousers at Rs 260 and would keep a margin on it to make profit. Assuming that the margin is kept at Rs 40, the cost of the clothing item now becomes Rs 300. Applying the same 10% principle, the tax would amount to Rs 30. But, out of this Rs 30, Rs 26 are already accounted for from stage one. So the effective tax incidence for the wholesaler would be Rs 4 (Rs 30 – Rs 26).

The final stage is that of the retailer. Now that the retailer has bought the trousers at Rs 300, he would also keep a profit margin. Say the margin that the retailer decides on is Rs 20. The total cost now becomes Rs 320. Using the 10% rule, the tax would be Rs 32. However, with Rs 30 already accounted for in the earlier two stages, the tax incidence would be Rs 2 (Rs 32 – Rs 30). To sum up, the total GST for the entire chain, from manufacturer to retailer is Rs (20 + 6 + 4 + 2 = 32). The suppliers of inputs would be able to claim no tax credit, given the fact that they have themselves not purchased any item.

Watch: Simple Guide On Goods And Services Tax

The central taxes that would now be replaced by GST are; service tax, special additional duties of customs (SAD), Additional Duties of Excise (goods of special importance), Central Excise Duty, Additional Duties of Customs (commonly known as CVD), Duties of Excise (medicinal and toilet preparations), Additional Duties of Excise (textiles and textile products) and Cesses and surcharges in so far as they relate to supply of goods or services. On the state level that taxes that GST will subsume include: State cesses and surcharges, luxury tax, state VAT, purchase tax, central sales tax, taxes on advertisements, entertainment tax (not levied by local bodies), entry tax (all forms) and taxes on lotteries, betting and gambling.

A GST implementation date of April 1, 2010 was first announced in Budget 2006-2007. Since then it has taken over ten years for the GST Bill to be passed, and even now Finance Minister Arun Jaitley is non-committal on meeting the April 1, 2017 deadline. Jaitley has said that given the number of subsequent legislations that need to be passed, and a number of functional modalities, he would not like to comment on the date of GST’s rollout.

  1. M
    Mahalakshmi
    Jul 6, 2017 at 11:49 am
    Hi, I need some clarifications, I do air-conditioners to retailer and service also do what is my sgst rate and cgst rate and how to iput credit sgst and cgst
    Reply
    1. Maruti Hargude
      Jul 5, 2017 at 12:29 pm
      What is the benefit Of customer. He will need to pay same price before and after gst, then what is the change in market. What about remote village area of country. Does this is also levied on items like sugar and pen . In this case there is no any change in market. Because before gst customer pays rs. 5 for pen and rs.40 for sugar per kg. Then what is change in this market.
      Reply
      1. S
        Shivam
        Jul 5, 2017 at 12:29 am
        Yes it's was helpful I. Understanding gst
        Reply
        1. V
          V.M.ALI
          Jul 1, 2017 at 5:10 pm
          How can it be in the case of a cinima? Where the raw materials are different and producer,distributer exibitor etc.
          Reply
          1. Vinayak Upadhyaya
            Jul 1, 2017 at 4:32 pm
            How a retailer and a whole r of a departmental store with thousands of items will calculate different items from different sources?And it is only possible by a software handled by a trained person.
            Reply
            1. Sunil Voraram
              Jul 1, 2017 at 12:36 am
              I am not able to understand the proper taxation of GST and how it works. Even though the assumption r given i am totally getting confused.
              Reply
              1. S
                S.K.Guha
                Jun 29, 2017 at 4:53 pm
                Very good and understanding article. Clears the confusion of get.
                Reply
                1. D
                  Deepak Sharma
                  Jun 27, 2017 at 8:28 pm
                  Prime Minister Mr. MODI ji and finance minister Mr. Arun Jetaly disision of GST, we are accepting this is good India.
                  Reply
                  1. V
                    vipul
                    Jun 13, 2017 at 10:00 pm
                    how to charge GST on supply of labour within state and out of state . We are registered in Maharashtra and our company received order for for supply of labour in Gujarat , so may we have to registered our company in Gujarat ?
                    Reply
                    1. W
                      wealthcareindia
                      Jun 6, 2017 at 6:01 pm
                      Thanks for providing such a valuable GST knowledge to user .We are comprehensive Financial Planning Company committed to helping you improve your long-term financial success.For More Info :- : www.wealthcareindia /
                      Reply
                      1. W
                        wealthcareindia
                        Jun 6, 2017 at 6:00 pm
                        Thanks for providing such a valuable GST knowledge to user .We are comprehensive Financial Planning Company committed to helping you improve your long-term financial success.
                        Reply
                        1. jay shah
                          Aug 3, 2016 at 12:56 pm
                          The problem with our country is - say from your example of a trouser maker, there is an evasion of tax across the value chain, right from the ZIP manufacture/supplier to end retailer and becomes difficult to tackle given the connivance of tax officials. This is especially true in the small scale industry. Yes, this may give government some ammunition to fight tax evasions, by enhancing vigilance on a particular group, say wrs, which might help break the chain of tax evasion. And key here, which most experts emphasis is the right implementation backed with a robust IT infrastructure.
                          Reply
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