How ITC must benefit consumer
Due to avoidance of double taxation at each level, the tax burden on consumers is supposed to be way less and the price is supposed to be lower but is it happening in reality???
Here is an example
The manufacturer for example purchases goods worth Rs 50 and converts it into a product which adds a value of Rs 50 to it. For selling the product, he pays Rs 10 as tax on Rs 100. Hence, the distributor’s price is Rs 110. While selling, the distributor adds a profit margin of Rs 20 and pays 10% tax of Rs 13 on Rs130. Hence, the wholesaler’s price is Rs 143. Assuming that at every further stage the profit margin is Rs 20, the wholesaler will sell it for Rs 179.3 to the retailer who will further sell it to the consumer for Rs 219.23 after adding taxes and profit margins.
Now let’s see how taxes are levied under the GST regime. This time the manufacturer who had purchased raw materials worth Rs 50 will get the credit of taxes paid on the raw material purchase. Hence, when he adds a value of Rs 50 to the product, and the price of the product becomes Rs100, the taxes will work as follows. He has to pay Rs 10 @ 10% on the price of Rs 100 as GST, and he will receive a credit of Rs.5 as input tax credit paid at the time of purchase of raw materials because the raw material supplier will have to pay Rs 5 to the government (assuming that he is not taking credit on purchases). (Rs.50 x 10% = Rs 5). The tax amount at this stage will hence be Rs 5.
Similarly, at the next stage when the distributor adds his profit margin of Rs 20 (100+20), the value of goods will now be Rs 120 and the taxes @10% will be Rs 12. The input tax credit on this will again be Rs 10 that was paid to the manufacturer. Hence, the taxes at this stage will be Rs 12 – Rs10 = Rs 2.
This input tax credit will ultimately reduce the final price to the wholesaler, retailer and the consumer too. Assuming that Rs 20 is added at each stage, tax at the wholesaler stage will be Rs 2, and at the retailer stage will again be Rs 2. Hence, the final price to the consumer for the item will be (160 + 5 + 5 + 2 + 2+2) = Rs 176. This concept of GST being a destination-based tax makes it easy to calculate and carry forward. The price difference is Rs 43 for the end consumer due to the input tax credits received under the GST regime. more
Here is an example
The manufacturer for example purchases goods worth Rs 50 and converts it into a product which adds a value of Rs 50 to it. For selling the product, he pays Rs 10 as tax on Rs 100. Hence, the distributor’s price is Rs 110. While selling, the distributor adds a profit margin of Rs 20 and pays 10% tax of Rs 13 on Rs130. Hence, the wholesaler’s price is Rs 143. Assuming that at every further stage the profit margin is Rs 20, the wholesaler will sell it for Rs 179.3 to the retailer who will further sell it to the consumer for Rs 219.23 after adding taxes and profit margins.
Now let’s see how taxes are levied under the GST regime. This time the manufacturer who had purchased raw materials worth Rs 50 will get the credit of taxes paid on the raw material purchase. Hence, when he adds a value of Rs 50 to the product, and the price of the product becomes Rs100, the taxes will work as follows. He has to pay Rs 10 @ 10% on the price of Rs 100 as GST, and he will receive a credit of Rs.5 as input tax credit paid at the time of purchase of raw materials because the raw material supplier will have to pay Rs 5 to the government (assuming that he is not taking credit on purchases). (Rs.50 x 10% = Rs 5). The tax amount at this stage will hence be Rs 5.
Similarly, at the next stage when the distributor adds his profit margin of Rs 20 (100+20), the value of goods will now be Rs 120 and the taxes @10% will be Rs 12. The input tax credit on this will again be Rs 10 that was paid to the manufacturer. Hence, the taxes at this stage will be Rs 12 – Rs10 = Rs 2.
This input tax credit will ultimately reduce the final price to the wholesaler, retailer and the consumer too. Assuming that Rs 20 is added at each stage, tax at the wholesaler stage will be Rs 2, and at the retailer stage will again be Rs 2. Hence, the final price to the consumer for the item will be (160 + 5 + 5 + 2 + 2+2) = Rs 176. This concept of GST being a destination-based tax makes it easy to calculate and carry forward. The price difference is Rs 43 for the end consumer due to the input tax credits received under the GST regime. more
Viewed by 2526
View all 18 comments Below 18 comments
Presently I doubt that the final selling price is happening as per this procedure because the price has not declined to this scale. In some cases the prices have increased marginally or reduced only marginally. I think the tax credit taken by the wholesaler/distributor or retailer is added to the profits and they have now started earning fat profits.. more
Jul 27
As far as input tax credit is concerned more or less GST and VAT are same in principle. In GST, you get refund of tax paid at input stage against tax charged at output stage. Similarly in VAT also, the tax is charged on the value addition at each stage. So more or less it is same. more
Jun 27
Practically it is NOT because the Greed overcome to social responsibility backed with in-activeness of the governing Bodies/Authorities. more
Jun 23
