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CA Foundation · Business Economics · Public Finance

Under the Goods and Services Tax (GST) system in India, a manufacturer supplies goods to a wholesaler. The manufacturer collects 12% GST on the invoice amount. Subsequently, the wholesaler supplies the same goods to a retailer and collects 12% GST again. Which fundamental principle of GST does this multi-stage collection process exemplify?

The correct answer is the destination-based consumption tax principle with input credit mechanism. GST allows each business stage to claim credit for taxes paid upstream, ensuring tax falls ultimately on the final consumer, not on intermediate transactions. This prevents tax-on-tax cascading and ensures the tax burden lands at the destination of final consumption.

  1. AProgressive taxation principle
  2. BThe destination-based consumption tax principle with input credit mechanismCorrect
  3. CThe ability-to-pay principle
  4. DThe benefit principle of taxation

Explanation

GST operates on the destination-based consumption tax principle where each stage collects tax but receives credit for tax paid at the previous stage. The manufacturer pays GST on raw materials and collects on sales; the wholesaler collects but claims credit for the manufacturer's GST. This prevents tax cascading. Option A relates to progressivity (not applicable to GST's uniform rate structure). Options C and D are alternative taxation principles unrelated to GST's multi-stage design.

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