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Quick guide to understand how GST puts a check on cascading effect of tax
GST is set to become one of the biggest fiscal reform that our country is going to witness. All businesses, small or large are going to get impacted because of this paradigm shift in the indirect tax regime. Policymakers have consistently resonated the benefit of a unified taxation system in a federal country like India.
There is a long list of benefits, which are being claimed as a result of GST law and one such benefit is the removal of the cascading tax effect. In simple words “cascading tax effect” means a tax on tax. It is a situation wherein a consumer has to bear the load of tax on tax and inflationary prices as a result of it.
Let’s assume, when Manufacturer “A” sells his goods from Gujarat to Haryana, he is liable to collect both Excise Duty and Central Sales Tax at the rate of 12.5% and 2% respectively, being an inter-state sale. Further, Dealer “B” will not get any credit of this Excise Duty and CST. Dealer “B” in turn sells it to Dealer “C” in Gurgaon and charges VAT on such sale. Dealer “C” sells it to Dealer “D” in Delhi and collects CST, and finally, Dealer “D” sells these goods to the end consumer in Delhi, collecting VAT.
To make it more simple, we have presented below this example on how in a practical scenario cascading of the taxes takes place and how GST is aimed to fill up these loopholes.
This is just one example and a very small value chain, in contrast usually movement of goods takes longer channel. Thus, it will not be unfair to say that end consumer are going to get most out of GST, and once these prices fall, demand will rise and the economy will blossom.