Chapter 3. How GST Works in India?

GST will be imposed on manufacturing, sale and consumption of goods and services rendered at national level. According to Indian Government, they will opt for Dual System GST, which means tax will be collected and levy by Centre and State. Imposing of tax and collected at Centre level will be CGST (Central Goods and Services Tax), and other, which will be levy and collected at State level will be SGST (State Goods and Services Tax).   

If we talk about GST, it is imposed on value added on goods and services at each stage while sale and purchase. What our present system says? It states that initially there is set off of taxes to be paid, means that every seller recover tax from buyers, which ultimately put burden of taxes to those who are end users( customers), of goods and services.

Let’s see the example and clearly understands, that how will GST work:

Suppose, in Distribution Channel, there are 3 people: Manufacturer, Wholesalers and Retailers. Assume, that Manufacturer of Shirt buys raw material like cloth, buttons, threads and other necessary things that is required to stitch the shirt, and it costs around Rs 200, included 10% tax of Rs 20. Now, shirt is ready and manufacturer added his own value to the material, say Rs 60. Then the total cost of shirt is RS 260 and tax for this will be Rs 26 (as 10% tax rate). Now, under GST taxation, manufacturer will only pay Rs 6 (as Rs 20 he has initially paid, so Rs 26- Rs 20 = Rs 6).

Next we move on to second stage, where Wholesaler buys the shirt from manufacturer for Rs 260 and to make profit, he will keep a profit, say Rs 40. Now the total cost for shirt is Rs 300. Tax rate would be same as mentioned above (10%), tax amount will be Rs 30. Earlier Rs 26 tax amount  already paid in first stage, so he need not to pay again and under GST, it will be calculated as : Rs 30 – Rs 26 = Rs 4 for wholesaler.

Final stage comes of Retailer, wherein retailer got the shirt from wholesaler at the cost of Rs 300, as he also wants to earn profit, so he added margin of Rs 20. Total Price for Shirt comes out to be Rs 320 and 10% tax rate is charged, so tax would be Rs 32. In stage second, Rs 30 already paid as tax, so tax incidence would be Rs 32 – Rs 30 = Rs 2.

In Nutshell, to sum up the total for GST for the distribution chain: Manufacturer – Wholesaler – Retailer is Rs 20 + Rs 6 + Rs 4 + Rs 2 = Rs 32.