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CMA Intermediate · Direct and Indirect Taxation · Concept of Indirect Taxes

A manufacturer in a State buys raw material for ₹1,00,000 plus 18% tax. It sells the finished goods for ₹1,50,000 before tax at 18%. Under a VAT/GST type credit model, what is the tax payable in cash by the manufacturer, assuming credit is fully available? Under a cascading model with no credit, what extra tax cost is borne in the manufacturer's cost?

Cash tax payable is ₹9,000, being output tax of ₹27,000 less input tax credit of ₹18,000, which equals 18% on value addition of ₹50,000. Without credit, the ₹18,000 paid on inputs would remain embedded in cost, creating a cascading effect.

  1. ACash tax ₹9,000; extra cost under no-credit model ₹18,000Correct
  2. BCash tax ₹27,000; extra cost ₹18,000
  3. CCash tax ₹9,000; extra cost ₹9,000
  4. DCash tax ₹18,000; extra cost ₹27,000

Explanation

Output tax = 18% of 1,50,000 = ₹27,000. Input tax = 18% of 1,00,000 = ₹18,000. Net cash tax = 27,000 − 18,000 = ₹9,000, which is 18% of value added of ₹50,000. Without credit, the ₹18,000 input tax becomes a cost. Option B ignores credit.

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