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HomeBusiness and AccountsWhat is Goods and Services Tax (GST) and How is it Calculated?

What is Goods and Services Tax (GST) and How is it Calculated?

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GST stands for “Goods and Services Tax,” and it is a comprehensive indirect tax levied on the supply of goods and services in India. It replaced a complex web of indirect taxes that were previously imposed by both the central and state governments. The implementation of GST was a significant tax reform aimed at simplifying the tax structure, reducing tax evasion, and promoting ease of doing business in the country.

Key Features of GST

Key features of the Goods and Services Tax (GST) in India include:

Single Tax: GST replaces multiple indirect taxes, including central excise duty, service tax, value-added tax (VAT), and others, with a single tax.

Destination-Based Tax: GST is a destination-based tax, meaning that the tax is levied at the point of consumption rather than at the point of origin of goods or services.

Dual Structure: GST in India has a dual structure, involving both the central government and the state governments. It is divided into Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST). Additionally, an Integrated Goods and Services Tax (IGST) is levied on interstate transactions.

Input Tax Credit: One of the core principles of GST is the availability of input tax credit, which allows businesses to claim credit for taxes paid on their purchases. This helps eliminate the cascading effect of taxes and reduces the overall tax burden.

Threshold Exemption: Small businesses with a turnover below a certain threshold are exempt from registering for GST.

GST Council: A GST Council consisting of representatives from the central and state governments decides the tax rates, exemptions, and other related matters. This allows for a collaborative approach to tax policy decisions.

Tax Slabs: GST is implemented with multiple tax rates, including standard rates, reduced rates for certain goods and services, and zero-rated (tax-free) supplies.

Online Filing: GST filings, including returns, payments, and registrations, are done online through a unified portal, making compliance more efficient.

The introduction of GST in India took place on July 1, 2017, and it marked a significant shift in the country’s taxation landscape. While GST aimed to simplify the tax structure and make it more transparent, its implementation was a major undertaking that affected businesses and consumers alike. The new tax system was designed to create a unified market, reduce tax evasion, and foster economic growth by removing barriers to interstate trade and commerce.

How the GST is Calculated?

Goods and Services Tax (GST) is calculated on the value of goods and services at each stage of the supply chain. It is based on the concept of input tax credit, which allows businesses to claim credit for taxes paid on their purchases. The GST calculation involves a few key components:

Taxable Value: The taxable value is the actual price paid for the goods or services before GST is applied. It is also referred to as the “transaction value.”

GST Rate: GST in India is divided into different tax rates, including 5%, 12%, 18%, and 28%, along with a lower rate for specific items and a zero-rate for certain supplies. The GST rate applicable to the particular goods or services being supplied determines how much GST will be levied.

Calculation of GST: To calculate GST, you need to multiply the taxable value by the applicable GST rate. The formula for calculating GST is:

GST Amount = Taxable Value × Applicable GST Rate

Inclusive vs. Exclusive: GST can be calculated either on an inclusive or exclusive basis. When calculating GST on an inclusive basis, you’re adding the tax amount to the initial value to get the total amount paid by the customer. When calculating GST on an exclusive basis, you’re calculating the tax amount separately from the initial value.

Input Tax Credit: Businesses can claim input tax credit for the GST paid on their purchases. Input tax credit reduces the amount of GST a business has to pay on its sales.

The formula for calculating input tax credit is:

Input Tax Credit = GST Paid on Purchases

Output Tax: Output tax is the GST collected from customers on sales. It’s calculated by multiplying the selling price by the applicable GST rate.

The formula for calculating output tax is:

Output Tax = Selling Price × Applicable GST Rate

The net GST payable by a business is the difference between the output tax (GST collected from customers) and the input tax credit (GST paid on purchases). If the input tax credit is greater than the output tax, the business can claim a refund of the excess credit.

It’s important to note that the actual calculation might be more complex in cases involving multiple tax rates, exemptions, and special provisions. Additionally, some items might have specific rules or rates assigned to them. Businesses need to ensure that they understand the applicable GST rates and rules that pertain to their specific industry and the goods and services they deal with.

For accurate GST calculations, it’s recommended to consult with a tax professional or refer to official GST guidelines and resources provided by the tax authorities.

GST Rates on Different Goods

As of my last knowledge update in September 2021, the Goods and Services Tax (GST) rates in India vary depending on the type of goods or services being supplied. The rates are categorized into multiple slabs, including 5%, 12%, 18%, and 28%. Additionally, certain goods and services are exempt from GST, and some are subject to a 0% rate (i.e., zero-rated). Please note that GST rates and classifications may have changed since then, so it’s important to verify the current rates with official sources. Here is a general overview of GST rates for different categories of goods:

GST Rate: 5%

  • Essential items such as milk, eggs, fruits, vegetables, cereals, and other basic food products.
  • Medicines and healthcare services.
  • Travel by air economy class.

GST Rate: 12%

  • Processed food items like frozen meat products, cheese, butter, ghee, dry fruits in packaged form, etc.
  • Apparel and clothing below a certain price threshold.
  • Industrial intermediaries such as bio-gas, wind turbine, etc.

GST Rate: 18%

  • Most goods and services fall under this category.
  • Household items like soap, hair oil, toothpaste, etc.
  • Electricals like fans, switches, wires, etc.
  • Industrial intermediaries like sugar, tea, coffee, edible oils, etc.

GST Rate: 28%

  • Luxury and premium items.
  • Automobiles, motorcycles, and aircraft.
  • High-end electronics, such as televisions, monitors, etc.
  • Tobacco products, aerated drinks, and luxury services.

Zero-Rated GST (0%)

  • Exports and supplies to Special Economic Zones (SEZs).
  • Some essential food items like rice, wheat, pulses, etc.

Exempt from GST

  • Unprocessed food items like fresh fruits and vegetables, unbranded atta, etc.
  • Healthcare and educational services.
  • Postal services.
  • Renting of residential properties, etc.

Keep in mind that this is not an exhaustive list, and there are specific rules and exceptions for various goods and services. GST rates are subject to change based on government policies and decisions. It’s advisable to check the official GST portal or consult with tax experts for the most up-to-date and accurate information regarding GST rates on different goods and services.

Conclusion

Goods and Services Tax (GST) is a significant indirect tax reform introduced in India to simplify the tax structure, promote transparency, and create a unified market for goods and services. GST replaced a complex web of indirect taxes with a more streamlined system that involves different tax rates based on the category of goods and services. The key features of GST include input tax credit, destination-based taxation, and a dual structure involving central and state governments.

GST rates are categorized into slabs of 5%, 12%, 18%, and 28%, with certain items being exempt or subject to a zero-rate. These rates vary based on the nature of the goods or services, with essential items and basic necessities generally attracting lower rates, and luxury goods and services falling under the higher rate slabs. The introduction of GST has had a significant impact on various sectors of the economy, aiming to enhance compliance, curb tax evasion, and create a more competitive business environment.

It’s important to note that GST rates and regulations may have evolved since my last update in September 2021, so I recommend referring to official government sources and consulting tax professionals for the most current and accurate information related to GST.

Read more: Company Registration Process in India: Business Structures and Procedure

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Rajesh Pant
Rajesh Panthttps://managemententhusiast.com
My name is Rajesh Pant. I am M. Tech. (Civil Engineering) and M. B. A. (Infrastructure Management). I have gained knowledge of contract management, procurement & project management while I handled various infrastructure projects as Executive Engineer/ Procurement & Contract Management Expert in Govt. Sector. I also have exposure of handling projects financed by multi-lateral organizations like the World Bank Projects. During my MBA studies I developed interest in management concepts.
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