Cascading Effect and GST

cascading effect

Government is in advance stage of negotiation with the State Governments for fixing the revenue neutral rate or GST tax. One of the yard stick for deciding rate of GST is the amount of revenue to be forgone from taxes subsumed in the GST. As apparently, the Central Government loosing 12% (general rate) Excise Duty on manufacturing or import , 4% SAD on import, 2% CST on interstate sale, 12% Services Tax on services provided. Similarly State Governments will apparently, foregone 4%-12.5% of VAT and hefty amount of Entertainment Taxes and Octroi. Till now, the ITC Credit is not available to an great extent hence governments are realizing additional tax revenue through cascading effects

Lets take an below example to understand the cascading effect:

Assumptions:

  • Considered simplest supply chain

Value Chain

  • In entire supply chain, no profit margin has been added by the wholeseller and manufacturing.
  • Current rate of Excise Duty is 12%, CST is 2%, VAT on local sale is 12,5%
  • GST Rate is 26.5% which is equals to the sum of currently applicable indirect taxes i.e. Excise Duty 12% plus CST 2% plus VAT 12.5%

Table 1 : Illustrating the current scenario where a product cost to final consumer at Rs. 128.52 including indirect taxes of Rs. 28.52. As evident below, tax on tax is being charged at various points.

Manufacturer Wholeseller Retailer
Cost/Purchase Price (Rs.) 114.24 114.24
Sale Price  (Rs.) 100.00 114.24 114.24
Excise Duty @12%  (Rs.) 12.00
CST @ 2%  (Rs.) 2.24
VAT @ 12,5%  (Rs.) 0.00 14.28 14.28
Total Sale Price  (Rs.) 114.24 128.52 128.52

 

Table 2 : Illustrating post GST implementation scenario where a product will cost to final consumer at Rs. 126.50 including GST of Rs. 26.50. Please note that total percentage of Indirect tax i.e. 26.5% is remain unchanged.

Manufacturer Wholeseller Retailer
Cost/Purchase Price  (Rs.) 100.00 100.00
Sale Price  (Rs.) 100.00 100.00 100.00
GST @ 26.50%  (Rs.) 26.50 26.50 26.50
Total Sale Price  (Rs.) 126.50 126.50 126.50

 

Under the currently applicable tax regime, goods are costing to a consumer at Rs. 128.52 (table 1) whereas similar goods will cost at Rs. 126.50 (table 2) under GST regime. Hence, there exist cascading effect to the tune of Rs. 2.02. In real scenario, where the value chain is more drastic and complicated, the cascading effect of the taxes is much bigger. What so ever the amount of cascading effect, it is ultimately build into the cost of product/services and taken out from pocket of ultimate consumer.

In nutshell, even through the rate of GST remains equal to currently applicable indirect taxes such as Excise Duty, Service Tax, Sales Tax, VAT etc, the ultimate consumer will be benefited. Under  proposed GST scenario, tax on tax will not be charged and it will generate cost saving to the nation.

Apart from cost saving, GST will harmonies common national market, reduce compliances, eliminates multiple tax systems and authorities and bring ease to the business.

One thought on “Cascading Effect and GST

  • The implementation of GST will help create a common market in India and reduce the cascading effect of tax on the cost of goods and services. It will impact tax structure, tax incidence, tax computation, credit utilization and reporting, leading to a complete overhaul of the current indirect tax system.

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