Goods and Services Tax will be trundled out in India in fewer days which will transfigure the way we take our taxes. Most of the individuals are not very clear about what and how GST will work and influence us? Here we have not enclosed in-depth particulars about GST like Input Tax Credit. The purpose of this content is to make individuals comprehend what is GST and how it works in a simple way.
Brief About GST
Goods and Services Tax has replaced all the indirect taxes which were implemented earlier. It is applicable for goods as well as services. Now the slogan – one nation one tax has been implemented all over India starting from manufacturers to consumers of the goods as well as services. All the other taxes are incorporated in this one GST.
Primarily Let Us Recognize The Distribution Network
The distribution network is a sequence of commerce or mediators through which things or services pass until it reaches the final user. It can comprise retailers, traders, distributors, and even the internet as well. When things go from one source to the other in the distribution network, the tax will be imposed at each stage. If in case you have not submitted your GST, then your registration could be cancelled by the authorities. It is very important to activate cancelled GST registration, or otherwise, they may take legal action against your establishment or shop.
Let us see how taxation works at each stage, in the distribution channel before GST and after GST implementation with Tax@10% as an example. At each stage, one has to show his Input Tax Credit(ITC) to pay tax only on value additions for example. Profit and not on the total.
- Before GST, tax is levied on the total cost i.e. Cost price + profit at each stage and resulted in cascading effect which is the tax on tax
- After GST, the tax will be levied on value additions which is the profit added at each stage in the distribution channel assuming one claims his input credit
- Note the below calculation is just an example to understand GST. In reality, the invoice raised by each participant in the distribution channel will be different from what you see here. In the invoice, the tax will be on the total cost and not on the profit. But while paying tax one has to show his input credit — which is the tax paid by the previous party in the distribution network — in the beneath example: supplier has to show the input credit i.e. tax paid by the constructor in order to pay his tax on the value totaling and not on the aggregate.
Tax Scheme Without GST Upshots In Dropping Effect
- In the above example before GST, the wholesaler pays 10% tax on the sum of cost price + profit in which his cost price comprises 10% tax previously paid by the maker
- Correspondingly, Retailer also pays 10% tax on the sum of cost price and profit, in which his cost price comprises 10% tax already paid by the supplier and industrialist