GST is a simple transformation of indirect taxes on goods and services in India, such as excise duty, VAT, Service Tax, etc. To elaborate, Goods and Service Tax (GST) refers to the tax on providing goods and services.
GST is a comprehensive, complex, and destination-based tax levied on every stage of the supply chain in India. Note that a single domestic indirect tax law for the entire country mobilises consolidating multiple taxes.
Components of GST
In the GST taxation system, you must pay tax at every distribution stage using credit notes. Previously, Internal Sales were the Intra-State sales of goods. In this case, they value both central and state GST. Inter-state sales trigger under the Integrated GST regime, where credits from the other state are availed.
Under this framework, three assessments exist: the Central Goods and Services Tax (CGST), the State Goods and Services Tax (SGST), the Union Territory Goods and Services Tax (UTGST), and the Integrated Goods and Services Tax (IGS).
- CGST: It is the tax levied on an intra–state sale, a transaction within a particular State, such as Maharashtra State.
- SGST: It is the taxation done by the state government on an end sale within a particular state; for instance, a sale made within Maharashtra only.
- IGST: It is a tax the central government collects for inter-state sales.
Understanding the Concept of GST
Let’s understand the basics of GST with a simple example:
A biscuit manufacturer purchases raw materials like flour, sugar, etc. The set of inputs increases in value when mixed with sugar and flour to become biscuits.
The manufacturers will sell these biscuits to a warehousing agent, who repacks them in cartons and labels them. This provides more GST value to the biscuits. The flavourist will add the flavours of the biscuits, increasing their shelf life.
Subsequently, the warehousing agent secures the customer’s transportation equipment and moves the lot from the retailer to the following consumer.
The retailer repacks the biscuits in more miniature mill packs and undertakes marketing expenditure, enhancing their value. These value additions are chargable with GST, which implies the tax on the value added at each level to the product before reaching the final consumer.
Objectives and Needs of GST
Below are the objectives and needs of GST:
- To Accomplish the Philosophy of ‘One Country, One Duty’
Goods and Services Tax or GST has subsumed several indirect taxes from the earlier taxation system, which was complex. When there is only the rate for the product or goods and services, the tax collection and compliance process is made more accessible.
The central government prescribes rates and policies and develops standard procedures such as e-way bills and e-invoicing. This affords minimal returns and deadlines for compliance with the tax laws, thus enhancing compliance.
- To Subsume a More Significant Part of the Expenses in India
India now has several indirect taxes such as service tax, verified tax or value-added tax, and central excise, which vary from state to state and from the central government. All the states in the team had no evidence of implementing a single tax for all goods and services.
The GST amalgamated these taxes into one head, significantly relieving the taxpayers from the numerous compliances and easing the complexity of tax collection and administration for the government.
- To Wipe Out the Flowing Impact of Expenses
Let’s understand GST, which eliminates the taxation chain. GST levies tax on the supply of goods, services, and products only on the net tax amount at each stage of the supply chain.
At the same time, it enables the free flow of input tax credits in the subsequent stages of the supply chain, hence discouraging a cascading tax effect.
- To Control Tax Avoidance
In India, GST regulations are more stringent than previous laws on indirect taxes. The legislation ensures that taxpayers can only recover input tax credits for invoices provided by suppliers and thus prevents fake invoice issues. E-invoicing reinforces this objective.
Due to its reach to the entire nation and GST’s centralised surveillance to identify defaulters and punish them severely, it has reduced tax evasion and fraud to the maximum.
- To Increase the Taxpayer Base
GST has brought methodical taxes on goods and services under one regimen and increased India’s registrant threshold limit.
More firms register for tax through this segment that realises through stricter norms on input tax credit laws that have noted unorganised sectors like the construction industry to enhance compliance and increase the capacity to collect tax.
- Online Procedures for Ease of Doing Business
Previously, taxpayers needed help with different tax authorities and offline procedures. Under GST, all processes, from registration to refunds and e-way bill generation, are online, simplifying compliance and improving ease of doing business.
The government plans to introduce a centralised portal for all indirect tax compliance, including e-invoicing and GST return filing, further streamlining the system.
- An Improved Logistics and Distribution System
A single indirect tax system under GST reduces documentation needs, improves transportation cycle times, and enhances supply chain efficiency.
The e-way bill system removes interstate checkpoints, boosting transit and destination efficiency. This leads to warehouse consolidation and significantly cuts logistics and warehousing costs.
Advantages of GST
GST has evacuated the cascading impact on many products and administrations. This has affected product fetching. Since the GST administration kills the assessment on a charge, merchandise fetching decreases.
Also, GST is innovatively driven. All the exercises, such as enrollment, return recording, and discount application, must be online at the GST entrance, which quickens the forms.
Below is a comparison of the old and the new GST system to understand its advantages:
| Old Tax System | GST System |
| The price of a commodity sold from Ludhiana to Jaipur= ₹500 | The price of a commodity sold from Ludhiana to Jaipur= ₹500 |
| VAT @10%= ₹50 | CGST@5%= 25, SGST@5%=25 |
| Cumulative cost= ₹550 | Cumulative cost= ₹550 |
| Adding Seller Profit= ₹500 | Adding Seller Profit= ₹500 |
| Selling Price= ₹1050 | Selling Price= ₹1050 |
| CST@10%= ₹105 | IGST@10%= ₹55 |
| Total cost= ₹1155 | Total cost= ₹1105 |
How to Calculate GST?
In the formula utilised for calculating GST, citizens need to get the rate of GST in a few categories. The modern structure for GST has four portions: 5%, 12%, 18%, and 28%.
The consumption tax has seven specific commodity rates, categorised in different Schedules of GST Rates Booklet for Goods. They are as follows:
- Schedule I: Nil Rated
- Schedule II: 0. 25%
- Schedule III: 3%
- Schedule IV: 5%
- Schedule V: 12%
- Schedule VI: 18%
- Schedule VII: 28%
The Formula for GST Calculation
If a good or service is sold for Rs 1,000 and the applicable GST rate is 18%, then the net price charged = 1,000 + (1,000 x (18/100)) = 1,000 + 180 = Rs 1,180
Below is an example table assuming a standard GST rate of 18%.
| Product/Service Description | Price Before Tax (₹) | GST Rate (%) | GST Amount (₹) | Price After Tax (₹) |
| Product A | 1,000 | 18 | 180 | 1,180 |
| Product B | 2,500 | 18 | 450 | 2,950 |
| Service C | 3,000 | 18 | 540 | 3,540 |
| Product D | 4,500 | 18 | 810 | 5,310 |
| Service E | 5,500 | 18 | 990 | 6,490 |
Calculation Breakdown
- GST Amount: Price Before Tax * (GST Rate / 100).
- Price After Tax: Price Before Tax + GST Amount.
Below is another similar example for different products/services with various GST rates.
| Product/Service Description | Price Before Tax (₹) | GST Rate (%) | GST Amount (₹) | Price After Tax (₹) |
| Product F | 1,200 | 5 | 60 | 1,260 |
| Product G | 2,800 | 12 | 336 | 3,136 |
| Service H | 1,500 | 18 | 270 | 1,770 |
| Product I | 3,600 | 28 | 1,008 | 4,608 |
| Service J | 4,400 | 18 | 792 | 5,192 |
How to Calculate Different Types of GST Using the GST Formula?
Due to the rearrangements of the roundabout tax assessment administration, calculating the pertinent charges has become much less complex.
The GST rates appropriate for different products or administrations can vary depending on the nature of the exchange, interstate or intrastate.
Intra-State GST Calculator
- CGST= Applicable on GST Rate/2 (for 28%, CGST will be 28/2=14%)
- SGST/UTGST = Applicable GST Rate/2 (for 28%, SGST will be 28/2=14%)
So, CGST + SGST/UTGST = Applicable GST Rate
Inter-State GST Tax Calculator
In the case of inter-state transactions, here is how to calculate GST:
IGST= Applicable GST rate
Methods to Calculate GST
Here are the methods to calculate GST:
- Forward Charge Mechanism (FCM)
The most common method of calculating GST directly on the sale price of goods or services is through the transaction value method.
GST = Transaction Value x GST Rate
- Reverse Charge Mechanism (RCM)
Applicable when the recipient of goods or services is liable to pay GST instead of the supplier.
Formula= (MRP x 100) / (100 GST Rate)
- Composition Scheme
GST is lower for small taxpayers based on taxpayer turnover rather than individual invoices.
GST= Turnover x Composition Rate
- Mixed Supply
When goods or services are supplied together for a single price, businesses can provide each separately. The highest GST rate of the items applies to the total value.
GST = Total Value x Highest GST Rate
- Composite Supply
When goods or services are supplied together, they are naturally bundled. The GST rate applicable to the principal supply applies to the total value.
GST = Total Value x Principal Supply GST Rate
- Input Tax Credit (ITC) Mechanism
To determine the net GST payable, subtract the input tax credit (GST paid on purchases) from the GST collected on sales.
Net GST Payable = GST on Sales – GST on Purchases (ITC)
These methods ensure GST accurately applies to the nature of the transaction and applicable regulations.
Summing Up
Understanding the methodologies used to calculate GST is crucial for accurate tax compliance and streamlined business operations. By simplifying the calculation and administration of tax, GST will result in a more transparent and consistent tax system, ultimately benefiting both taxpayers and governments.
