Nature and Features of GST — Destination-Based, Multi-Stage, Value-Added Tax

GST is best understood through three features that together define how it works.

Multi-stage: GST is collected at every stage of the supply chain — when a manufacturer sells to a wholesaler, when the wholesaler sells to a retailer, and when the retailer sells to the final consumer. Tax is charged at each of these stages, but because of the credit mechanism explained below, the tax paid at an earlier stage does not simply pile up on top of the next stage's tax.

Value-added: At each stage, the seller is allowed to claim credit for the GST already paid on their own purchases (called Input Tax Credit, covered in detail later in this chapter), and pays tax only on the difference — effectively, only on the value that particular stage has added. If a wholesaler buys goods for ₹1,00,000 (plus GST) and sells them for ₹1,20,000 (plus GST), the GST actually borne by the government from that stage works out to tax on the ₹20,000 of value the wholesaler added, not on the full ₹1,20,000 all over again. …