How Does GST Eliminate Tax on Tax?

Goods and Service Tax (GST) is an indirect tax based on the destination principle which will be levied on the manufacture, sale and consumption of goods as well as services at the national level. GST will subsume 17 indirect taxes when it is rolled-out on July 1.


The advent of GST would usher in a host of benefits not limited to but including the removal of cascading effect of taxation i.e. incidence of tax on tax. The cascading effect of multiple tax levies acts like a hidden cost which makes Indian goods and services uncompetitive in the domestic and international market. To eliminate this effect of tax on tax, GST Bill was tabled before the Parliament.

GST Eliminate Tax


In the present tax regime, no tax credit was given for goods purchased outside the state however under GST, traders and businessmen can claim input tax credit. Similarly, excise duty could not be claimed unless the distributor re-produced the product and paid excise duty on the product. 

Let us understand the concept with an example. 

When Producer A sells his goods from Maharashtra to Punjab, he is eligible to collect both central sales tax (CST) and excise duty at the rate of 2% and 12.5%, since the sale is an inter-state one. Moreover, Trader B would not be eligible to receive credit of this CST and excise duty. Dealer B then sells the goods to Dealer C who lives in Noida and charges VAT on the sale of goods. Dealer C in turn sells the goods to Dealer D in Delhi who in turn collects CST and lastly, Dealer D sells these goods to the ultimate consumer, collecting VAT for his trouble. 

However, with the GST implementation, input tax credit (ITC) can be availed for both interstate purchase of goods and excise duty levied on them. ITC can be claimed on purchase and sale of services as well. Furthermore, since GST will eliminate the burden of tax on tax, the prices of various commodities and services will go down since businesses would be able to avail the benefit of input tax credit. It will also facilitate the transformation of the Indian economy into ‘One Nation, One Market’. 

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