[Economy 4 Newbie] VAT & GST (basic stuff) Mrunal http://mrunal.org/2010/02/economy-4-newbie-vat-gst-basic-stuff.

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1 of 7 6/27/2012 12:24 PM
I had bought above 3 things from another guy and had paid taxes.
When I sell lemon juice to you, you should not pay tax for those 3 things again! Because I already
paid tax on it earlier!
And if youve to pay that again =cascading effect =snowball =it keeps increasing =this is the
problem with sales tax.
So you should be required to pay tax only on the new value which I added to Lemon-Sugar-
Water.=this is the heart of VAT / GST=remove the cascading effects
This example applies to both VAT & GST (for GST more technical corrections given later)
Suppose this is the chain>
[Now don t j ust keep readi ng el se you l l get l ost/confused i n the exampl e so, keep a note & pen - and
make as di agram out of i t whi l e readi ng f ol l owi ng]
Whole-seller ->Me the ice-cream shop owner ->You, the customer
10% GST on on everything
1. I bought milk 100 Rs. +sugar 100 Rs. From the wholesaler
2. There is 10% Tax so, (10 Rs. On Milk +10 Rs. On Sugar) =20 Rs. Tax paid to wholesaler
3. Now I write it in my account-book that I paid 20 Rs. GST-Tax to him
4. I make icecream, Ive set the price 250 Rs.
a. Input cost=100 Milk +100 Sugar =200
b. +50 Rs. My profit margin (=this is the value I added)
c. =200 +50 =250.
(youd wonder why did not I count 20 Rs. Tax in input cost?well Ill recover those 20 Rs. in Point #8.)
5. On 250 Rs. Selling price, obviously 10% GST tax =25 Rs.
6. So customer has to pay 250+25=275 Rs. For Ice-cream, I collect that money.
7. Again in my book, I write that I got 25 Rs. GST Tax from customer.
8. But I dont have to pay that 25 Rs. To Govt. !! lolz because my book shows that I already paid 20 Rs.
To my previous wholesaler (who paid those 20 Rs. To Govt.)
9. Thus in my book I show calculation : 25 minus 20 =5 Rs. Only Ive to pay to Govt. as GST!
Take note friend, I had done value addition of only 50 Rs. & now Ive to pay tax of 5 Rs =see this GST is tax only
value that I added!
The technical words for this book-keeping etc. are tax credit/ setting off liability etc.
First, GST is not one there will be two GST on each good/service
1. State GST
2. Central GST
So in my GST example, Ive to keep two books one for SGST+one for CGST.
When you pay me money, Ive to write it in those two separate books again.
If the product goes from one state to another state then theyll charge IGST =integrated GST=central Govt. will
collect it. (currently Central Govt. takes about 2% Central Sales Tax on such deals, but itll stop after GST
comes.)
More on IGST will be written later,
For the time being, (just a crude example)
1. If Orissa wholesaler sells Steel pipes to Gujarat & has to give suppose 10 Rs. Tax then Orissa Govt.
will collect it & send it to Delhi.
2. Out of that, Delhi collects 5 Rs. Gujarat & keeps 5 Rs. For herself
Now the technically correct table
[Economy 4 Newbie] VAT & GST (basic stuff) Mrunal http://mrunal.org/2010/02/economy-4-newbie-vat-gst-basic-stuff.html
2 of 7 6/27/2012 12:24 PM
[Economy 4 Newbie] VAT & GST (basic stuff) Mrunal http://mrunal.org/2010/02/economy-4-newbie-vat-gst-basic-stuff.html
3 of 7 6/27/2012 12:24 PM
[Economy 4 Newbie] VAT & GST (basic stuff) Mrunal http://mrunal.org/2010/02/economy-4-newbie-vat-gst-basic-stuff.html
4 of 7 6/27/2012 12:24 PM
[Economy 4 Newbie] VAT & GST (basic stuff) Mrunal http://mrunal.org/2010/02/economy-4-newbie-vat-gst-basic-stuff.html
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February 8th, 2010 | Category: Economy
14 comments to [Economy 4 Newbie] VAT & GST (basic stuff)
vi pnip
February 9, 2010 at 9:48 am Repl y
as agai n ni ce col l ecti on wel l done and thanks .
vi pnip
February 9, 2010 at 9:50 am Repl y
as usual ni ce note a qui ck revi si on note thanks a l ot
Shikha
February 9, 2010 at 4:43 pm Repl y
how anci l l ari sati on i s advantageous i f i t i s agai nst nati onal pol i cy and di scourages growth of smal l scal e
i ndustry?
si lverspark
February 10, 2010 at 6:21 pm Repl y
good for economy-i di ots l i ke us!! ; )
juhi bansal
Apri l 3, 2010 at 11:40 am Repl y
hey i ts rel e kewl xtremel y compl i cated stuf transformed i nto etremel y si mmpl e stuffhats off 2 u
Vel murugan
February 21, 2011 at 8:33 am Repl y
wonderful arrangement of facts.
[Economy 4 Newbie] VAT & GST (basic stuff) Mrunal http://mrunal.org/2010/02/economy-4-newbie-vat-gst-basic-stuff.html
6 of 7 6/27/2012 12:24 PM
[Economy 4 Newbie] VAT & GST (basic stuff) Mrunal http://mrunal.org/2010/02/economy-4-newbie-vat-gst-basic-stuff.html
7 of 7 6/27/2012 12:24 PM