How does taxation work in India?

India rolled out GST on July 2017. The government is collecting the taxes in a centralised system. How the government is collecting the payment & how the taxes in any businesses works? It is always a question for everyone. Here we can explore this.

Transaction 1:

Let assume a farmer is selling coconut to a coconut oil company (X) and here the transaction is cash and no bill. So the company bought the product worth of Rs. 100 in cash. No tax paid to the government.

Transaction 2:

The company made the coconut oil and it is selling to its distributor with the profit of Rs. 5 and it is a proper B2B (Business to Business) transaction. Transaction value is Rs. 105 + 5.25 (Tax 5%). Here the distributor paid Rs. 5.25 as tax to Oil company. The oil company will make this payment to the Government.

Over all tax received by the government: Rs. 5.25

Note: This amount can be claimed by the distributor while filing the sales tax. Distributor has the value of Rs. 5.25 to claim if the sale transaction is B2B.

Transaction: 3

The distributor is selling this product to the retail store and it is a proper B2B Transaction. And the distributor wants to make the profit of Rs. 5. So the transaction value is Rs. 110 + 5.5 (Tax 5%). Here the retailer paid Rs. 5.5 as tax to Distributor.

Distributor already has claim of Rs. 5.25. He can subtract this value from the amount he has to pay Rs. 5.5. The difference is Rs. 0.25. He has to pay Rs. 0.25 only.

Over all tax received by the government: Rs. 5.25 + 0.25 = Rs. 5.50

Note: The retailer can claim the amount he paid Rs. 5.5 while he file the sales tax if the transaction is B2B.

Final Transaction:

Final transaction divided into two category one is B2B and other one is B2C.

1. B2B (Business to Business)

The retailer is selling the product to the company (X) which wants to use the oil for their office purpose and it is a proper B2B transaction. Here the retailer is selling the product with the same profit of Rs. 3.5 but the tax will be added on the selling price of Rs. 119 + 5.95 (Tax 5%).

The retailer already has claim of Rs. 5.5. He can subtract this value from the amount he has to pay Rs. 5.95. The difference is Rs. 0.45. He has to pay Rs. 0.45 only.

Over all tax received by the government: Rs. 5.25 + 0.25 + 0.45 = Rs. 5.95

But the company X can claim the amount they paid Rs. 5.95 when they file sales return.

Over all tax received by the government: Rs. 0

2. B2C (Business to Customer)

The retailer is selling the same product to the end consumer (not a company) then the transaction will be like this. The retailer is planning to sell this product Rs. 119. The retailer paid Rs. 115.5 to buy this product. Profit is Rs. 3.5.

As this is B2C transaction the retailer couldn't claim the tax return.

Over all tax received by the government: Rs. 5.50

Who paid the tax amount?

The consumer, he only paid Rs. 119 from his pocket. Its split-up will be,

product cost: Rs. 110

Tax: Rs. 5.50

Profit to the retailer: Rs. 3.50

The amount which is collected by the customer and the amount received by the Government is same.

When the final transaction with the Business there is no income from the government. The government just give the money to run the business. The government is collecting the tax from the citizens only not from the business. To thrive the consumables they require business and they are encouraging them. This is how the taxation works in India.