04 March 2010
MR SHARMA, 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 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 RS.30 ON HIS PURCHASES WORTH RS.100 OF INPUT OF GOODS AND SERVICES USED IN THE MANUFACTURING PROCESS. THE MANUFACTURER WILL THEN PAY NET GST OF RS. 3 AFTER SETTING-OFF RS. 10 AS GST PAID ON HIS INPUTS (I.E. INPUT TAX CREDIT) FROM GROSS GST OF RS. 13. THE MANUFACTURER SELLS THE GOODS TO THE WHOLESELLER. WHEN THE WHOLESELLER SELLS THE SAME GOODS AFTER MAKING VALUE ADDITION OF (SAY), RS. 20, HE PAYS NET GST OF ONLY RS. 2, AFTER SETTING-OFF OF INPUT TAX CREDIT OF RS. 13 FROM THE GROSS GST OF RS. 15 TO THE MANUFACTURER. SIMILARLY, WHEN A RETAILER SELLS THE SAME GOODS AFTER A VALUE ADDITION OF (SAY) RS. 10, HE PAYS NET GST OF ONLY RE.1, AFTER SETTING-OFF RS.15 FROM HIS GROSS GST OF RS. 16 PAID TO WHOLESELLER. THUS, THE MANUFACTURER, WHOLESELLER AND RETAILER HAVE TO PAY ONLY RS. 6 (= RS. 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 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.
Table for understanding Stage of supply chain Purchase value of Input Value addition Value at which supply of goods and services made to next stage Rate of GST GST on output Input Tax credit Net GST= GST on output - Input tax credit Manufacturer 100 30 130 10% 13 10 13-10 = 3 Whole seller 130 20 150 10% 15 13 15-13 = 2 Retailer 150 10 160 10% 16 15 16-15 = 1
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