In the current regime of indirect tax system, the chain of input credit, at a certain point, is broken. Let’s say Central Sales Tax (CST) applicable on interstate trade is non-creditable, leading to a break in the input credit chain. Similarly, a manufacturer charging excise duty on sale to a dealer causes the chain to break. This leads to taxes forming a part of the product cost.
In the year 2005, VAT was introduced with the similar objective to overcome cascading affect (tax on tax). If VAT was designed to eliminate it, how is it different in GST?
Yes, VAT eliminated the cascading tax effect on the state indirect tax, while the cascading effect of other indirect taxes still remained. GST allows for seamless flow of tax credit, and eliminates the cascading effect of all indirect taxes in the supply chain from manufacturers to retailers, and across state borders.
Let us examine this with an example of car as a product with overall rate of tax being considered @22% under existing and GST regime – to illustrate elimination of tax on tax
Savings of 5,280 catching your eyes! Isn’t it? Let’s us examine this.
If you observe closely, in the example, the taxes paid by dealer (CGST + SGST) to manufacturer is not added to cost. This is because GST allows the dealer to set off the tax liability of CGST+SGST. This is one of the fundamental features of GST, which allows seamless credit from manufacturer to dealer, and eliminates the cascading effect.