Goods and Services Tax (GST): Definition, Types, and How It’s Calculated


Goods and Services Tax
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GST stands for Goods and Services Tax. It is a value-added tax that is levied on the supply of goods and services in India. GST is a comprehensive, indirect tax that is levied on the manufacture, sale, and consumption of goods and services at the national level.

GST is a multi-stage tax, which means that it is levied at every stage of the supply chain, from the manufacture of goods to the final sale to the consumer. However, GST is designed to be a self-policing tax, with input tax credits being available at each stage to offset the tax paid at the previous stage. This helps to minimize the burden of GST on businesses and reduces the cascading effect of taxes on the final price of goods and services.

GST is administered by the Central Board of Indirect Taxes and Customs (CBIC) and is governed by the GST Act. GST is levied at different rates depending on the nature of the goods or services being supplied. There are four main GST rates in India: 5%, 12%, 18%, and 28%. In addition, there are special rates for certain goods and services, such as 0% for essential goods and services and a higher rate for luxury goods.

GST is an important reform in the indirect tax system in India and has replaced a number of other indirect taxes, such as the central sales tax, state VAT, and other taxes on services. GST has helped to create a single national market for goods and services and has made it easier for businesses to operate across state borders.

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Types of GST

There are three main types of GST in India:

  1. Central GST (CGST): This is a tax that is levied by the central government on the supply of goods and services. CGST is applicable to inter-state supplies of goods and services, as well as to the supply of goods and services within a state if the supplier is not registered under the GST Act.
  2. State GST (SGST): This is a tax that is levied by the state government on the supply of goods and services within the state. SGST is applicable to intra-state supplies of goods and services.
  3. Integrated GST (IGST): This is a tax that is levied by the central government on the supply of goods and services that takes place between states. IGST is applicable to inter-state supplies of goods and services.

In addition to these three main types of GST, there are also several special rates that apply to certain goods and services, such as 0% for essential goods and services and a higher rate for luxury goods. GST is generally levied at different rates depending on the nature of the goods or services being supplied. There are four main GST rates in India: 5%, 12%, 18%, and 28%.

How GST is Calculated?

GST is calculated by applying the applicable GST rate to the value of the goods or services being supplied. The value of the goods or services is generally the sale price of the goods or services, exclusive of GST.

For example, if the sale price of a product is Rs. 100 and the GST rate is 18%, the GST payable on the product would be calculated as follows:

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GST = Sale price x GST rate = Rs. 100 x 18/100 = Rs. 18

So, the total price of the product, including GST, would be Rs. 100 + Rs. 18 = Rs. 118.

If you are a GST-registered business and you are making a supply of goods or services, you are required to charge GST on the supply and collect it from the customer. You are then required to pay the GST collected by the government.

If you are a GST-registered business and you are making a purchase from another GST-registered business, you may be able to claim a credit for the GST paid on the purchase. This is known as an input tax credit. You can use the input tax credit to offset the GST that you are required to pay on your own supplies.

GST is an indirect tax, which means that it is passed on to the consumer in the form of higher prices for goods and services. However, the GST system is designed to minimize the burden of GST on businesses by allowing them to claim input tax credits for the GST paid on their purchases. This helps to reduce the cascading effect of taxes on the final price of goods and services.


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Michelle Gram Smith
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