A product has to go through different stages before it reaches the end consumer, and there are several taxes applicable throughout this process. However, this situation will change in the GST ( Goods And Service Tax ) regime. Here’s an illustration to understand how:

Take Clothes manufacturing as an example and 10% as the GST applicable.

The manufacturer buys raw material worth INR  200 that is inclusive of the GST of INR 20

He then adds his own value of INR 30 to the materials during the manufacturing process. This brings the gross value of the product to INR 230

Now, the total tax amount on the output of the apparel comes to INR 23 (10% of 230) . In the current tax system, the manufacturer would be required to pay a tax of INR 23. however, under GST he can set some of his tax off as he has already paid it while purchasing the raw materials. Therefore, the final GST that the manufacturer will incur will be of INR 3 total tax amount till now minus the tax he has already paid) i.e. INR 3 (23-20)

Here, the apparel is passed from the manufacturer to the wholesaler at a gross value 230 inclusive of the GST of INR 10% of 230 .The wholesaler then adds his value (his margin) of INR 20 making the total INR 250 (230+20) . This brings the total tax amount on the final to INR 25 (10% of 250) Like the manufacturer, the wholesaler too can set off this tax amount with the tax that he has already paid for while purchasing the goods from the manufacturer. Thus, the final GST for the wholesaler would be INR 2 (25-23)

Stage 3: Retailer

In this final step, the retailer buys the apparel from the wholesaler at a gross value of INR 250 that is inclusive of the GST of INR 25 (10% of 250). He then adds his value or margin of INR 50 making the total cost of the goods INR 300. The GST applicable here is INR 30 (10% of 300) ,but since the retailer has already paid a tax while purchasing the goods, he can set it off. Thus, the final GST incidence for the retailer would be INR 5 (30-25).

At the end, since the retailer will sell the product at INR 350 , the GST paid by the customer would be INR 35(10% of 350) only. This number would have been much higher in our current tax structure. Thus GST has changed the entire scenario of the tax collection at each stage of value addition . And made it easier for both customers and businesses . Now I will discuss more about GST ( Accounting, filing returns ,credit utilization ,CGST,SGST IGST etc. ) in my next series of articles.