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\u00a0the 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.