Goods and Services Tax (GST): Definition, Types, and How its Calculated

Goods and Services Tax (GST): Definition, Types, and How its Calculated

Before the Goods and Services Tax was implemented in India, the country’s tax structure was complicated and difficult to understand because of the presence of a multitude of indirect taxes that were levied by both the Central Government and the state governments. These taxes included the Entertainment Tax for movies, the Value Added Tax for sales, excise duties, the luxury tax, and many more. Consumers and companies alike found the overly complicated tax system to be one that was both inconvenient and difficult to understand. Goods and Services Tax is the Full Form of GST.

To make the tax system easier to understand and use, the Central Government made GST, which is a single law that combines several different taxes, such as service taxes, sales taxes, customs duties, excise duties, and VAT. The goal of the government in implementing the Goods and Services Tax as a replacement for the previous system was to provide a tax system that is less complicated and more transparent, which will be to the advantage of all taxpayers.

What is Goods and Services Tax?

The goods and services tax, sometimes known as the GST, is a kind of indirect sales tax that is collected by the central government and added to the price of certain products and services. The Goods and Services Tax is added to the price of the goods by the company, and a consumer who purchases the product is responsible for paying the sales price, which is inclusive of the GST. It is the responsibility of the company or vendor to collect GST and remit the appropriate amount to the government. In certain nations, it is also referred to as the Value-Added Tax (often abbreviated as VAT).

Unfortunately, there are others who argue that the Goods and Services Tax might have a disproportionate effect on individuals with lower and moderate incomes, hence worsening the issue of income inequality and contributing to social and economic inequities. In response, several nations have lowered or eliminated taxes on necessities like food and medical treatment. In addition to this, they have provided tax credits and rebates for families with lower incomes.

The vast majority of nations that use a GST have what’s known as a single unified GST system, which implies that the country as a whole is subject to a single tax rate. A nation that has implemented a unified Goods and Services Tax platform combines various central taxes (such as sales tax, excise duty tax, and service tax) with various state-level taxes (such as entertainment tax, entry tax, transfer tax, sin tax, and luxury tax), and then collects all of these taxes as a single tax. Almost everything in these nations is taxed at a single rate.

Types of Goods and Services Tax

Integrated Goods and Services Tax or IGST

The Integrated Goods and Services Tax, also known as the IGST, is a tax that falls within the regime of the Goods and Services Tax system and is levied not only on imports and exports but also on the supply of products and/or services that occurs between two states.

The Central Government is the entity that is responsible for the collection of taxes under the IGST. When the funds have been accumulated through the collection of taxes, the Central Government next distributes them to each of the individual states.

For example, if a merchant from Maharashtra sold items to a consumer in Karnataka for the total price of Rs. 5,000, then the Integrated Goods and Services Tax (IGST) would need to be paid since the sale was considered to be between two different states. The price of the commodities would come to Rs. 5,900 if the Goods and Services Tax rate that is applied to them is 18 percent. The collected IGST amount of Rs. 900 would be sent to the Central Government.

Central Goods and Services Tax or CGST

The Central Government of India is responsible for collecting the Central Goods and Services Tax, often known as the CGST, which is a tax that is imposed on all intrastate supplies of goods and services. This is controlled by the CGST Act, which states that the CGST rate cannot be higher than 14%.

This means that the Central and State governments would agree on the proportional combination of their respective taxes for revenue sharing.

State Goods and Services Tax or SGST

The State Goods and Services Tax, often known as the SGST, is a tax that falls under the regime of the Goods and Services Tax and is levied on transactions that take place within the same state. When there is a supply of products or services that occurs inside the same state, there is a levy placed on such transactions by both the state and the central governments. This means that both the Central Government and the State Governments will come to an agreement over the combination of their respective taxes with a suitable percentage for the revenue split between the two governments.

For instance, if a merchant from West Bengal sold products to a consumer in West Bengal valued at Rs. 5,000, then the Goods and Services Tax that is imposed on the transaction would be composed of a combination of CGST and SGST in equal parts. If the rate of GST that is being charged is 18%, then the total amount will be split evenly between the CGST of 9% and the SGST of 9%. In this scenario, the total price that the dealer would charge the customer will come to 5,900 Indian Rupees. The state government of West Bengal will get 450 Indian Rupees in the form of state goods and services tax (SGST) from the portion of income received from GST that falls under the heading of SGST.

Union Territory Goods and Services Tax or UTGST

UTGST stands for the Union Territory Goods and Services tax, which is a tax that must be paid on all transactions involving goods and services that take place in the Union Territories. It is imposed on the distribution of goods in the Andaman and Nicobar Islands, Lakshadweep, Daman Diu, Chandigarh, and Dadra and Nagar Haveli.

It is important to keep in mind that the UTGST is only applicable in Union Territories that do not have a legislature.

As a result, the only tax that has to be paid in Delhi, Puducherry, and even the recently created UTs in Jammu and Kashmir is the state goods and service tax (SGST). Even having a complete understanding of what the UTGST stands for is not sufficient. You also need to be familiar with the current rates.

In the UTs, the Central Government is responsible for collecting this tax, which functions as a substitute for the Goods and Services tax levied by the individual states(SGST). Hence, the UTGST percentage is the same as the SGST percentages (2.5%, 6%, 9%, and 14%).

GST Exemption

When it comes to the Goods and Services Tax, it is just as essential to be aware of the things that are subject to taxation as it is to be familiar with the categories of things that are exempt from the tax. Similar to other taxes, there are a few instances when the GST does not apply to goods or services. The following is a list of some of the exemptions that can be claimed under the Goods and Services Tax:

The Goods and Services Tax does not apply to any of the services that are associated with agriculture, such as harvesting, plantation, supply, packaging, storeroom, renting or leasing of machinery, and so on. Yet, this does not apply to the practice of rearing horses.
The Goods and Services Tax does not apply to a number of services that fall under the categories of healthcare and education. Examples of these types of services include catering for midday meals, services offered by clinics and veterinary offices, and emergency medical services. Additionally included on the list are the services provided by ambulances and charitable organizations.
Traveling via bus, train, subway, auto-rickshaw, etc.
Transport of agricultural products and transport of goods outside of India
Services for the government and foreign diplomats
Service provided by the Reserve Bank of India (RBI) or any foreign diplomatic mission stationed in India is exempt from India’s Goods and Services Tax.
Services provided by an arbitral tribunal, partnership firm of advocates, or senior advocates to a person or business entity whose total annual revenue is up to INR 40 lakhs.
Services provided by exhibition organizers for international business exhibitions; services provided by tour operators for international tourists; etc.

Some of the other services that are exempt from the GST, according to the list of exemptions Include:

The services that tour guides provide to tourists from other countries.
Services offered by libraries.
Religious ceremony services.
The transmission and distribution of electricity.
Services provided by authorized sporting organizations.

Advantages of GST

Online processes to simplify business

Previously, taxpayers had a difficult time interacting with several taxing authorities under each tax law. Because businesses were required to comply with a multitude of different tax regulations and keep separate records for each, this ultimately led to confusion as well as an unnecessary amount of paperwork. To make things even worse, the process of filing taxes was often difficult, time-consuming, and filled with mistakes.

The implementation of the Goods and Services Tax, on the other hand, has resulted in a significant shift in the manner in which companies submit their tax returns. Because nearly all GST processes are now carried out online, it is now much simpler for taxpayers to complete their returns in a timely and precise manner without having to deal with any complications. Because the Goods and Services Tax is now a single, unified law that applies throughout India, companies no longer have to worry about complying with a variety of different tax laws.

To achieve the concept of “One Nation, One Tax”

One Nation, One Tax has been a desire of the Indian government for a very long time. This dream has now come true. In July 2017, a new era began with the implementation of GST. The Goods and Services Tax is a single tax system that has replaced all previous indirect taxes such as VAT, excise duty, and service tax. The transition to a single tax system has resulted in a number of positive changes for both consumers and businesses.

One of the most significant benefits of having a single tax is that all of the states adhere to the same rate for any given item or service. Previously, each state levied its own sets of taxes, which resulted in a confusing and complex tax system for businesses. Because of the Goods and Services Tax, all states in India now have the same rate of taxes, which makes it simpler for companies to prepare their budgets. As a result, there is no longer a need to keep separate accounts for each of the states in which the company does business.

Corruption-free tax administration

When taxes are involved, there is a greater likelihood of fraudulence and corruption on the part of businesses. One of the key goals of GST was to enhance openness between the government and businesses in order to help prevent corruption. The following is a list of some of the developments that came about as a result of the Goods and Services Tax, which made the taxation system more resistant to corruption:

Linking the GST and PAN registrations
Reporting and matching on the invoice level
Credits Reconciliation
Creating electronic waybills (e-way bills)
Monitoring of the transportation of products
The appointment of a GST Commissioner to conduct an investigation
The Directorate General of Risk Management and Analytics

GST composition scheme

The Goods and Services Tax composition plan was established in India to ease the compliance load of small enterprises. Those who choose this plan will pay taxes at a set rate based on how much their firm makes. A system like this will ensure a higher level of compliance while requiring less extensive tax record upkeep.

For example, the typical taxpayer is required to hand in one yearly return (GST-9) in addition to the three monthly returns known as GST-1, GST-2, and GST-3. If, on the other hand, you have filed for a composition scheme under GST, then the filing process becomes simpler for you since you only need to submit one quarterly return (GSTR-4) and one annual return (GSTR – 9A).

After registering for the composition scheme under the GST, you will become eligible to pay tax at a set rate that ranges from 1% to 6% of your entire turnover. Therefore, whether you are in the business of producing ice cream, cigarettes, or pan-masala, you are required to pay a tax of 1% depending on the total amount of your sales.

Increased amounts of exports

The introduction of the Goods and Services Tax in India has significantly altered the business landscape worldwide. As a result of the implementation of the Goods and Services Tax, significant central and state levies such as the Central Sales Tax (CST) and the Value-Added Tax (VAT) has been absorbed, making production in India more affordable than it has ever been before. Because manufacturers can now make items at cheaper prices, the “Make in India” campaign is getting a big boost, which provides them with an unfair advantage in the market.

As a result of the Goods and Services Tax, the cost of producing items that are “Make in India” would reduce, which will contribute to a rise in India’s exports. Because their manufacturing costs are cheaper, Indian manufacturers are able to sell their wares at more reasonable rates, which makes their items more appealing to customers in other countries. This would lead to increased revenue in foreign currency for the nation, which will further boost the economy of the country.

Taking E-commerce operators into consideration

E-commerce merchants did not have a clear legal definition prior to the implementation of the GST laws. They were charged varying amounts under different tax regimes. Because of the different regulations that each state put in place for e-commerce enterprises, there was an excessive amount of misunderstanding around these businesses. E-commerce businesses were considered to be intermediaries and were exempt from paying VAT in many regions, including Kerala, Rajasthan, and West Bengal. Within the state of Uttar Pradesh, they were given the status of VAT-compliant businesses and were required to register their delivery trucks in order to be taxed.

Because of the new GST Scheme, all of these misunderstandings have been cleared up. The GST regulations have established e-commerce businesses as distinct entities and have implemented certain measures for them.

History of GST

The history of the Goods and Services Tax is a story of resilience and political will. It was in the year 2002 that India’s former Prime Minister Atal Bihari Vajpayee first suggested the concept of a Goods and Services Tax for the country. An emergency committee was formed to create a model for the nation, and nothing was accomplished for many years.

Two years later, in 2004, the Kelkar Task Force on Fiscal Responsibility and Budget Management suggested implementing fully integrated GST over the whole country. During the Union Budget of 2007-08, the Union Finance Minister stated April 1, 2010, as the start date for GST implementation. However, since there was little political agreement, the implementation was repeatedly pushed back.

The Constitutional (122nd Amendment) Bill 2014 on GST was introduced into Parliament by the NDA government on December 19th, 2014. After much debate, the bill was finally approved by the Lok Sabha on May 6th, 2015. The bill was referred to a committee comprised of representatives from both houses of parliament on May 14th, 2015. The GST Bill was eventually approved by the Rajya Sabha on August 3, 2016, after the committee’s suggestions were taken into consideration. After a sufficient amount of state governments ratified it and the president of India gave his consent, the Constitution (101st Amendment) Act of 2016 became law.

On March 29, 2017, the Lok Sabha, after receiving the consent of the GST Council, enacted the following central legislations:

GST Bill, 2017
SGST Bill,2017
The Integrated GST(IGST) and UTGST Bill of 2017
GST (Compensation to Cess) Bill, 2017

On June 30th, 2017, both the SGST and UTGST Acts have been enacted by all States and Union territories. As a result, the date for the implementation of GST was decided to be July 1, 2017. The Goods and Services Tax was implemented in India, marking a key turning point in the country’s economic history and setting the way for a tax structure that is more streamlined and effective.

How to Calculate GST

Depending on the kind of product or service that is being taxed, the Goods and Services Tax rate might range from 5% to 12% or 18%, or 28%.

In order to calculate the Goods and Services Tax applicable to a purchase made in India, you will first need to determine the overall cost of the product or service that is being purchased. Consider that you are interested in purchasing a toy that costs one hundred rupees. To determine the Goods and Services Tax, just multiply the price of the item by the applicable GST rate. Therefore, 100 multiplied by 0.05, which is the decimal equivalent of 5%, is 5. Therefore, the Goods and Services Tax on the toy is 5. The price of the toy, which is one hundred rupees, plus the GST, which is five rupees, brings the total to one hundred and five rupees, which is the price of the toy including GST.

Another example: let’s pretend you just spent five hundred rupees on a shirt. To determine the Goods and Services Tax, you must first multiply 500 by 0.18, which is the decimal representation of 18%. The result is 90. Therefore, the GST on the clothes comes to ninety rupees. To get the final price of the shirt with GST included, combine the shirt price (500) and the GST rate (90) together.

It is essential to keep in mind that the Goods and Services Tax does not apply to all products and services and that there are a number of exemptions and specialized rules.

Overview of the Diverse Tax Rates on Products and Services

The Goods and Services Tax slabs in India, which are broken down into four different categories, are intended to provide a tax structure that is both fair and equitable. The goods and Services Tax rates improve social welfare and encourage responsible spending by placing luxury products and services in the higher tax levels while retaining necessary services and food items in the lower tax brackets. With more than 1,300 items and close to 500 services divided into four tax brackets (5%, 12%, 18%, and 28%), consumers and companies have access to a wide variety of goods and services at affordable prices. Gold has its own, higher GST slab of 3%, whereas semi-precious and raw precious stones have a lower, more favorable GST slab of 0.25 percent. Because the Goods and Services Tax framework encompasses such a broad spectrum of taxable goods and services, the Indian economy is in a strong position to experience both long-term expansion and ongoing development.

5 Percent

Spices, sugar, edible oil, coffee, and tea, along with chocolates, coals, and even life-saving pharmaceuticals, are just some of the numerous necessities of our daily lives that fall within the 5% rate slab. The range of services that fall under this category is very broad and essential, including everything from newspaper printing and foreign vessel transport to the rental of fuel-free motor taxis (EV) and AC contract transport services. Notably, this rate slab also includes air travel for pilgrimage, tour operator services, aircraft leasing, and advertising space in print media. All of these services are provided at a reasonable price and are tailored to meet the requirements that you specify in order to meet your demands.

12 Percent

The tax rate of 12% is applied to a variety of different products and services; however, the primary items that contribute to this slab are processed meals, computers, and accessories. In addition, the tax is applicable to a variety of services, including rail transportation of goods, air travel (excluding economy class), restaurant services (excluding liquor license and air conditioning and heating services), accommodations renting between Rs. 1,000 and Rs. 2,500 per day, and hotel accommodations with a transaction value between Rs. 1,000 and Rs. 7,500. Therefore, be aware that you can be liable for the 12% tax rate whether you’re investing in a new laptop, reserving a hotel room, or treating yourself to a great lunch out.

18 Percent

The 18% GST rate is applicable on a variety of products, including furniture, branded clothes, CCTV cameras, and aluminum foil. Other things that may be purchased here include cookies, bamboo, cakes, grain, curry paste, envelopes, and footwear with prices of more than 500 Indian Rupees. The 18% slab on the services side applies to hotels with room rates between Rs. 2,500 and Rs. 5,000 per night as well as telecom and IT services. Hotels with air conditioning that also provide alcoholic beverages are included in this category.

28 Percent

This category accounts for 19% of the Goods and services that are available. This category includes a broad range of goods and services. This slab offers an abundance of amenities, ranging from energizing aerated water to opulent hotels with five stars. There are a variety of commodities available for purchase, some of which are personal use airplanes, shining ceramic tiles, high-quality paint, and effective vacuum cleaners. And if you’re seeking high-end services, you may enjoy exciting gaming and betting in racing clubs, lavish stays in hotels with nightly room rates of Rs. 5,000 or more, and the newest blockbuster movies at the theater. So whether you’re a lover of cocoa-free chocolates or a seasoned theatergoer, the 28% slab applies to you.

Conclusion

The Goods and Services Tax has completely altered the method that is used to collect taxes in India. Businesses and customers alike are reaping the benefits of a more streamlined and simpler approach, which has resulted in improved efficiency and transparency of the tax system. Every business, no matter how big or little, can now compete on the same level, which is good for the economy. In addition, the introduction of the GST has resulted in an enhanced level of compliance and accountability, which has made it possible for the government to finance essential social programs and infrastructure projects for the advancement of society. In a nutshell, the Goods and Services Tax has completely altered the manner in which taxes are administered in India, and the beneficial effects of this change will continue to be seen for many years to come.