The present structure of Indirect Taxes is very complex in India. There are so many types of taxes that are levied by the Central and State Governments on Goods & Services. The current tax regime is unfairly skewed against most producers.

How GST can save on Taxes?

Let’s outline and simplify the current system of taxes and GST to see how it operates. Let’s take an example of Tooth Paste Manufacturer. Let’s assume there is a tooth paste manufacturer that procures raw materials at 1000 Lacs per batch:

  • 500 Lacs of raw material from the same state; and
  • 500 Lacs of raw material from the other state
  • The manufacturer keeps his operating profits at 200 Lacs; and
  • Encumbers a processing cost of 100 Lacs.

The flow would look something like this:

Taxes to be paid

Parameters In current Regime In GST Regime
Total tax to be paid on sale: 65 Lacs 65 Lacs
Credit Available: 25 Lacs 35 Lacs: [25 Lacs(VAT)+ 10 Lacs(CST)+ 5 Lacs(Entry Tax)]
Net taxes paid: 40 Lacs 25 Lacs
Savings: 0 15 Lacs

The producer in the current regime only has an input tax credit of 25 Lakhs. In GST regime the producer will get the credit of VAT, CST as well as Entry Tax. The GST hence, reduces the tax burden on producers.

The GST also subsumes within it the taxes like Excise Duty, Additional Custom Duty, Luxury Taxes etc. This means that in GST regime the producers will be relieved of filling multiple returns.

For service providers like web development companies which are unable to take the credit of VAT paid on infrastructure cost will now be able to take credit of VAT in this new regime. The GST hence, reduces the tax burden to some extent on service providers too.


GST is clearly a long term strategy; it would lead to ease of doing business, a higher output and more employment opportunities. Initially however, it is likely cause high inflation rates, administrative costs, and face stiff oppositions from states due to loss of autonomy.

Content Courtesy: www.taxguru.in

Leave a Reply