Goods and services Tax explained by an example – GST

1 year ago sarkariadmin 1

Step1 : Lets take an example, when a manufacturer of Jeans. He buys raw materials or inputs — cloth, thread, buttons, tailoring equipment — value Rs 200, a sum that includes a tax of Rs 20. Using these raw materials, he manufactures a Jeans.
In the process of creating the Jeans, the manufacturer adds value to the materials he started out with. Let us take this value added by him to be Rs 50. The gross value of his good would, then, be Rs 200 + 50, or Rs 250.
At a tax rate of 10%, the tax on output (this Jeans) will then be Rs 25. But under GST, he can set off this tax (Rs 25) against the tax he has already paid on raw material/inputs (Rs 20). Therefore, the effective GST incidence on the manufacturer is only Rs 5 (25 – 20).

Step2 : The next step is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs 250, and adds on value (which is basically his ‘margin’) of, say, Rs 20. The gross value of the good he sells would then be Rs 250 + 20 — or a total of Rs 270.
A 10% tax on this amount will be Rs 27. But again, under GST, he can set off the tax on his output (Rs 25) against the tax on his purchased good from the manufacturer (Rs 25). Thus, the effective GST incidence on the wholesaler is only Rs 2 (27 – 25).

Step3 : In the final step, a retailer buys the shirt from the wholesaler. To his purchase price of Rs 270, he adds value, or margin, of, say, Rs 10. The gross value of what he sells, therefore, goes up to Rs 270 + 10, or Rs 280. The tax on this, at 10%, will be Rs 28. But by setting off this tax (Rs 28) against the tax on his purchase from the wholesaler (Rs 27), the retailer brings down the effective GST incidence on himself to Re 1 (28–27).
Thus, the total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs 20 + 5 +2 + 1, or Rs 28.