02 June 2017
This provision is made with the intent that any benefit received by supplier is passed on to the receiver also.
To explain it, let's assume you are a trader. You made a purchase of X goods, say, at Rs. 112 (Rs. 100 Base Value + Rs. 12 Excise). You as a trader were not eligible for credit of CENVAT i.e. Rs. 12 excise paid on your purchases. Further while selling this good, you would have been considering Rs. 112 (i.e. Rs.100 + Rs. 12) as your cost and adding your sale margin to arrive at a final price on which you would charge VAT. Assuming you sell it on 20% profit, your final price must be Rs. 134.40/unit (Rs. 112 Cost + Rs. 22.40 Profit).
Now, as a matter of transition, GST allows you credit of 40% of Excise Paid on your purchases. In this case you will get a credit of 40% of Rs. 12 i.e. Rs. 4.80. Thus it would no more be a part of your cost, which will now be only Rs. 107.20 (i.e. Rs. 100 + Rs. 12 - Rs. 4.80). The provision demands that you add same percentage of your sales margin on Rs. 107.20 instead of Rs. 112, while selling it. Thus in this case, you final selling price be Rs. 128.64 (i.e Rs. 107.20 Cost + Rs. 21.44 Profit) instead of earlier Rs. 134.40
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