Though the Government has set high rates of GST on some products and services, the impact of GST would not effect the final prices much because of the input credit claim.
Take a look at the calculation of Input Tax Credit under GST
GST wll be rulled out from 1st July, 2017 and it will be charges on almost all the goods and services we consume. The department has set five different rates for GST i.e 0%, 5%, 12%, 18% and 28% that will be charged of different goods and services.
Presently different taxes are charged at different stages of manufacturing, trading and service providing, after the GST rule out almost all the indirect taxes will be substituted by the GST, and because of the input tax credit the tax will be charged only on the value additions to the goods and services at different statges.
Firstly lets speak out the meaning of the input tax credit :
Input refers to the raw materials or services that a manufacturer of services provider uses for the production of goods or provide output services. The taxes that are paid by a manufacturer on raw materials used for the manufacturing of goods are known as input tax, in the same way the taxes paid by a manufacturer or service provider on the sale of product or services are called output tax.
under GST regime, GST is charged on both the goods and the services the input credit can be claimed on both sale of goods and service provided.
The taxpayer will need to pay only the difference between the output tax and the input tax credit.
Lets take an Example of a manufacturing concern who manufactures steel pressure cookers. Lets assume that he brought raw material worth Rs. 1000 for manufacturing the pressure cooker and other raw materials worth Rs. 100. The rate of GST on steel is 18% and the other material was of 28% rate. The manufacturer paid input credit of Rs. 180 + Rs. 28 = Rs.208/-
Lets suppose the manufacturer after incurring all expenses of manufacturing pressure cooker and after adding a reasonable profit the manufacturer sell the pressure cooker to the distributer at Rs. 1,500/-.
Now as a simple calculation the manufacturer should charge Rs. 270/- as GST and make an invoice of Rs. 1,770/-, But thats not the case under GST.
under the GST regime the manufacturer will subtract the input tax credit of Rs. 208/- input tax credit from the output tax liability of Rs. 270/- and the final bill amount will be Rs. 1,500 + 62 = Rs. 1,562/-
The concept of input tax credit is same as present in case of VAT and Service Tax but the scope of the input tax credit has been widened so as to enable all the indirect tax payers to claim the benefit of the input tax credit against the present tax system under which the input credit of Central Sales Tax was not available and cross credit of service tax to VAT and vice versa was not available.
As the input tax credit will be available at each stage of service and manufacturing , the final cost of the products and services must come down.