Introduction to GST- Types, Functions, And How Does it Work

Goods and Services Tax (GST) is a unified indirect tax imposed on India's supply of goods and services. This tax system aims to create a single market by eliminating the cascading effect of taxes and promoting ease of doing business. In this article, we will explore various aspects of GST, including the rules governing its implementation. By understanding GST, businesses and consumers can navigate the tax landscape more efficiently and comply with the necessary regulations.

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Meaning of GST

The Fundamental Principles of GST

Destination-Based Taxation Model

Value Added Tax (VAT) in GST

Input Tax Credit (ITC) Mechanism

Uniformity in Tax Rates

Transparency and Fairness in Taxation

Also Check: Basic Concept of Income Tax

How Does the GST Work?

Manufacturer’s Perspective

• A manufacturer buys raw materials for ₹100 and pays 5% GST, so the total cost becomes ₹105.
• The manufacturer adds ₹50 value to the product, selling it for ₹155.
• The GST on ₹155 is ₹8, but the manufacturer can subtract the ₹5 GST paid on the raw materials.
• Therefore, the net GST paid by the manufacturer is  ₹3 (₹8 - ₹5).

Service Provider’s Role

• A service provider buys a product for ₹200 and pays 5% GST, making the total cost ₹210.
• The provider adds ₹100 in value, charging ₹310 for the service.
• The GST on ₹310 is ₹15.5, but the provider can subtract the ₹10 GST paid on the product.
• Therefore, the net GST paid by the service provider is ₹5.5 (₹15.5 - ₹10).

Retailer’s Involvement

• A retailer buys a product for ₹250 and pays 5% GST, making the total cost ₹262.5.
• The retailer adds ₹25 margin, selling it for ₹287.5.
• The GST on ₹287.5 is ₹14.38, but the retailer can subtract the ₹12.5 GST paid on the product.
• So, the net GST the retailer pays is ₹1.88 (₹14.38 - ₹12.5).

Consumer’s Perspective

• A consumer buys a product for ₹300 and pays 5% GST, making the total cost ₹315.
• The consumer pays the full GST of ₹15 and cannot claim any input tax credit.
• The consumer is the final user, bearing the entire GST cost.

Types of GST

Advantages of GST

• No Double Tax : GST removed the tax-on-tax effect, lowering the overall cost of goods and making them cheaper for consumers.
• Simplified Taxes : GST replaced 17 different taxes, reducing compliance costs for businesses.
• Online Processes : All GST activities, like registration and tax payments, are done online, speeding up processes and reducing paperwork.
• Uniform Market : GST created a unified market across states, lowering the cost of goods.