When the Goods and Services Tax (GST) was introduced in India in July 2017, it was called a game changer. Before GST, businesses had to deal with multiple indirect taxes like excise duty, VAT, service tax, and entry tax. Each of these taxes was levied at different stages, often leading to “tax on tax,” making goods more expensive and the system confusing.
GST replaced this with a unified tax system. Today, it is collected in a structured way from the point where goods are produced to the point where we, the consumers, make a purchase. To understand this better, let’s walk step by step through the supply chain.
Stage 1: The Manufacturer – Where the Journey Begins (Building the Foundation)
Take the example of a textile company making shirts. To manufacture a shirt, the company buys fabric, buttons, and thread from different suppliers. Each of these suppliers charges GST on their goods, which the manufacturer pays.
Now, when the shirt is ready and sold to a wholesaler, the manufacturer charges GST on the selling price of the shirt. But here’s where Input Tax Credit (ITC) makes the system efficient: the manufacturer can deduct the GST already paid on inputs (fabric, thread, etc.) from the GST collected on the sale.
In short, the manufacturer only pays GST on the value added during production.
Stage 2: The Wholesaler – Adding Another Link (Passing the Baton)
The wholesaler buys the shirts from the manufacturer, already inclusive of GST. Suppose the wholesaler decides to add their margin and sells to a retailer. They will again charge GST on this higher price.
But just like the manufacturer, the wholesaler also enjoys ITC. The GST they already paid to the manufacturer is deducted from the GST they collect from the retailer. This ensures tax is levied only on the wholesaler’s margin and not on the entire price repeatedly.
This stage demonstrates how GST prevents the “tax on tax” problem that existed in the old system.
Stage 3: The Retailer – The Final Business Player (The Final Bridge)
Now, the shirts are in the hands of the retailer, who buys them from the wholesaler. Again, GST is included in the purchase. When the retailer sells the shirt to you and me, they charge GST on the final price.
Like the earlier players, the retailer can also claim ITC for the tax already paid to the wholesaler. However, once the shirt is sold to us, the process of claiming credits stops.
Stage 4: The Consumer – Where It All Ends (Carrying the Final Burden)
Finally, we purchase the shirt from the retailer. At this stage, we pay GST on the full retail price. Unlike businesses, we cannot claim input credit. For us, GST is simply part of the cost of the product.
This is why GST is called a destination-based tax—it is ultimately collected where the goods or services are consumed.
A Real-Life Example – The Journey of a Shirt
1.Manufacturer:
Cost of raw materials = ₹500 + GST (₹90 at 18%) = ₹590
Sells shirt to wholesaler for ₹1,000 + GST (₹180) = ₹1,180
Manufacturer claims ITC of ₹90 (already paid on raw materials).
Net tax paid to government = ₹180 – ₹90 = ₹90
2. Wholesaler:
Buys shirt at ₹1,000 + GST = ₹1,180
Sells to retailer for ₹1,500 + GST (₹270) = ₹1,770
Wholesaler claims ITC of ₹180 (already paid to manufacturer).
Net tax paid to government = ₹270 – ₹180 = ₹90
3. Retailer:
Buys shirt at ₹1,500 + GST = ₹1,770
Sells to consumer for ₹2,000 + GST (₹360) = ₹2,360
Retailer claims ITC of ₹270 (already paid to wholesaler).
Net tax paid to government = ₹360 – ₹270 = ₹90
4. Consumer:
Buys shirt for ₹2,000 + GST = ₹2,360
No ITC available. Consumer bears the full GST (₹360).
Notice how at each stage, businesses only pay tax on their value addition while the government still receives the full GST amount (₹90 + ₹90 + ₹90 = ₹270). The consumer, in the end, carries the entire burden.
Why This Chain Matters – More Than Just a Tax
Transparency: Every stage of the supply chain is accountable.
Fairness: Businesses are taxed only on what they add, not on the total value.
Efficiency: No cascading of taxes—unlike the old regime.
Revenue Stability: The government collects tax at each stage, but the final burden falls on consumption.
Final Thoughts
GST may appear complicated on paper, but when you look at the journey of a single product—from manufacturer to wholesaler, retailer, and finally to us—it becomes clearer. The tax baton is passed along the chain, adjusted at every step through input credits, and finally rests with the consumer.
For the government, GST provides steady revenue. For businesses, it creates a level playing field. And for us, the consumers, while it means paying a little extra on our bills, it also means a simpler, cleaner tax system that avoids hidden charges.
In the end, every time you look at a bill and see GST added, remember: it’s the final step of a long tax journey that started much before the product reached your hands.
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by Jyotsana Sigar, BA LLB, Lovely Professional University
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