A cotton mill, which buys no taxed inputs, sells cloth to a tailor for Rs 2,000 and charges GST at 5 per cent. The tailor makes shirts from this cloth and sells them for Rs 3,000, also charging GST at 5 per cent. With input tax credit available, how much GST does the tailor deposit, and what is the total GST collected at the two stages?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs 50; total Rs 150
Under GST, the tax paid at the previous stage is set off against the tax due at the next stage. So each seller in effect pays tax only on the value it adds.
Given:
Value of cloth sold by the mill = Rs 2,000
Value of shirts sold by the tailor = Rs 3,000
GST rate = 5 per cent
Tax at each stage, with credit for the tax already paid:
GST paid by the mill = 5% of Rs 2,000 = Rs 100
GST due on the tailor’s sale = 5% of Rs 3,000 = Rs 150
GST deposited by the tailor = Rs 150 − Rs 100 = Rs 50
Total GST collected = Rs 100 + Rs 50 = Rs 150
Option (1) Rs 150; total Rs 250 — Incorrect. This gives the tailor no credit for the Rs 100 already paid on the cloth.
Option (2) Rs 155; total Rs 255 — Incorrect. This taxes the tailor on Rs 3,100, a value that includes the Rs 100 tax paid on the cloth. That is the cascading of tax which GST removed.
Option (3) Rs 50; total Rs 50 — Incorrect. This leaves out the Rs 100 that the mill deposited at the first stage.
Option (4) Rs 50; total Rs 150 — Correct. The tailor’s Rs 50 is 5 per cent of his value added of Rs 1,000. The total of Rs 150 is 5 per cent of the final value of Rs 3,000, so no tax is charged on tax.
NCERT (2026-27): “Box 5.3: GST: One Nation, One Tax, One Market … As there have been a number of intermediate goods/services, which were manufactured/provided in the economy, the pre GST tax regime imposed taxes not on the value added at each stage but on the total value of the commodity/service with minimal facility of utilisation of Input Tax Credit (ITC). The total value included taxes paid on intermediate goods/services. This amounted to cascading of tax. Under GST, the tax is discharged at every stage of supply and the credit of tax paid at the previous stage is available for set off at the next stage of supply of goods and/or services. It is thus effectively a tax on value addition at each stage of supply. …” |