GST removes Double tax effect
Abhishek Kumar / 2020-01-31 04:42:54
In the previous regime of tax system, the chain of input tax credit, at a particular point, is broken. Let’s say Central sales tax (CST) applicable on interstate trade is non-creditable, resulting in an opportunity in the input credit chain. Similarly, a manufacturer charging excise duty on sale to a dealer causes the chain to interrupt. This ends up in taxes forming a part of the merchandise price.
Vat Introduces to eliminate cascading effect?
In the year 2005, VAT was introduced with the similar objective to beat cascading effect (tax on tax). If VAT was designed to eliminate it, however is it completely different in GST?
Yes, VAT eliminated the cascading tax impact on the state tax, whereas the cascading impact of other indirect taxes still remained. GST permits for seamless flow of reduction, and eliminates the cascading impact of all indirect taxes within the offer chain from manufacturers to retailers, and across state borders.
1- A government implies a 2% tax on all goods produced and distributed.
2- A company sells Rs.1,000 worth of stone for a tax-included cost of Rs.1,020 (Rs.1000 + 2% cascade tax) to an artist.
3- The artist makes a sculpture out of the stone and intends to make Rs.2,000 when he sells it to an art dealer, so he adds this amount to what he paid for the stone to get Rs.3,020, and then adds on the cascade tax which brings the total to Rs.3,080 (Rs.3020 + 2% tax)
4- The art dealer intends to make Rs.5,000 from the sculpture and he adds the amount bringing it to Rs.3,080 for a pre-tax Rs.8,080, He then adds the 2% cascade tax for a total price of Rs.8,242.
5- In total, the government collected taxes of Rs.20 + Rs.60 + Rs.162 = Rs.242, which is actually an effective tax rate of Rs.242/Rs.8,000 = 3.025%.
Simply, we said taxpayers need to obtain GST Registration Online to easily eliminate the cascading effect.