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How GST Works in India?

Prakash Matre
Prakash Matre at June 23, 2023

Know What is GST and How It Works

GST is indirect taxation that has comprehended prominent of India's indirect taxes. Moreover, it is a value-added tax levied on different stages such as manufacturer, sales, and consumption of goods or/and services. It is essential to see how will GST work in India, how the older indirect taxes used to work in India, and how GST works in India with example.

The Old Scenario of Indirect Taxation

The taxation power in India is divided between the State and the Centre. Moreover, there are two types of taxes in India: direct and indirect taxes. These forces are disseminated among them as per the location where they can levy tax.

In the earlier indirect taxation procedure, there were two difficulties. Let us understand these problems with an example, a shirt manufacturer manufactures a shirt; now, the central government used to levy the primary excise duty on the shirt that adds to the cost of the shirt. Once the customer buys the shirt, the state government collects the VAT (Value Added Tax). The observation approach for the corporation was complicated, and for the government, it was unmanageable under this indirect tax regime.

All About GST in India?

GST is India's most significant indirect tax reform introduced in India with a motive of One Nation One Tax to remove all the taxation barriers between states and create a single market that will be open to purchase and sell within the country freely. Eventually, the working of GST is to deliver financial freedom to Traders for free trade without many compliances. Now lets us know more about how does GST working.

However, GST is beneficial to the ordinary person, and how GST works from manufacturer to consumer in two ways:

  1. All the taxes are gathered at the pinpoint of consumption, reducing the product's price.
  2. Less tax responsibility as tax obstacles are smashed between the states, and there is no cascading impact that used to occur in the earlier indirect tax regime.

How Does GST Work in India?

Let us understand the working of GST in India

  • Stage 1: The Manufacturer

Suppose a shirt manufacturer buys raw material to manufacture a shirt worth 1000 INR and 60 INR tax. The manufacturer added a value of 300 INR to simulate the shirt. Now the total value of the shirt became 1300 (1000+300). Assuming the GST rate on shirts is 5%, that will be 65 INR. The manufacturer can set this applicable GST amount (65 INR) against the tax he paid on the raw material, i.e., 60 INR. Hence, the applicable GST rate will be only 5 INR (65-60). This makes GST a value-added tax.

  • Stage 2: Distributor or Service Provider

The next stage is where the goods are given to the distributor or service provider. The distributor buys the same shirt for 1300 INR and adds value to that shirt by around 200 INR. Now the value of the shirt will be 1,500, that is (1300+200). Under GST, he will need to pay a tax of approximately 75 INR (5%), which is set against the tax on the purchased shirt from the manufacturer, which is 65 INR. The distributor's total tax incidence underneath GST will be 75-65= 10 INR.

  • Stage 3: Retailer

This is the second last stage where the retailer gets the goods from the wholesaler or service provider. Taking the same example, the retailer adds a margin of 100 INR on purchasing a shirt. The total cost of the product will become 1600 INR (1500 + 100). Under GST, he will now need to pay tax (assuming a 5% rate of GST) that will become 80 INR that he can set off against 75 INR tax paid by the wholesaler. The tax incidence underneath GST on the vendor will be 5 INR (80-75).

  • Stage 4: End Consumer

This portion of 1600 INR is handled by the end customer buying this shirt.

The overhead illustrations are provided in How does GST work in India? We can conclude that GST is a value-added tax that provides the benefits of an input tax credit at every stage, excluding the end consumer stage. Therefore, we can convey that GST is one nation, one tax delivering monetary privilege to the merchants.

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