GST Explained with the Help of Example
Let’s assume that a manufacturer of shirts buys raw materials like cloth, zips, thread, buttons and other equipment that is required to stitch the pants. This raw material costs the manufacturer Rs 200. This Rs 200 includes a 10% tax of Rs 20. Once the shirt is made, the manufacturer has added his own value to the input material. As a part of this example, if one were to assume that the value added is Rs 60, then the total cost of the trouser is now Rs 260 (Rs 200 + Rs 60). With a 10% tax rate, the tax on this trouser would be Rs 26. However, since the manufacturer has already paid Rs 20 as tax while purchasing raw material, under GST, the tax incidence will now be only Rs 6 (Rs 26 – Rs 20).
Now, let’s see how GST works at the second stage, which is for the wholesaler. Now, the wholesaler would buy the shirts at Rs 260 and would keep a margin on it to make a profit. Assuming that the margin is kept at Rs 40, the cost of the clothing item now becomes Rs 300. Applying the same 10% principle, the tax would amount to Rs 30. But, out of this Rs 30, Rs 26 are already accounted for from stage one. So the effective tax incidence for the wholesaler would be Rs 4 (Rs 30 – Rs 26).
The final stage is that of the retailer. Now that the retailer has bought the shirts at Rs 300, he would also keep a profit margin. Say the margin that the retailer decides on is Rs 20. The total cost now becomes Rs 320. Using the 10% rule, the tax would be Rs 32. However, with Rs 30 already accounted for in the earlier two stages, the tax incidence would be Rs 2 (Rs 32 – Rs 30). To sum up, the total GST for the entire chain, from manufacturer to retailer is Rs (20 + 6 + 4 + 2 = 32). The suppliers of inputs would be able to claim no tax credit, given the fact that they have themselves not purchased any item.
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