Goods & Service tax is a value-added tax which is levied on the manufacture, sale & consumption of goods & services. Goods & service tax has subsumed various indirect taxes such as VAT, service tax, excise duty, entertainment tax, CST, Luxury tax, entry tax, etc. GST is a comprehensive, multi-stage, destination-based tax which is levied at every stage of value addition.
GST is an Indirect tax that is levied on the goods & services at every stage while reaching from a manufacturer to a consumer. A comprehensive & continuous chain of Tax Credits is offered in case of GST from the manufacturers point to the consumer point thereby charging tax only on the value-added amount at each stage of the supply chain. The Supplier of goods & services is allowed to avail the credit of GST paid on the purchase of goods & services by setting off this GST Credit against the amount of GST payable on the output sale (goods & services supplied by that person). Therefore, only the final consumer bears the Goods & Service Tax as all the suppliers can set off their GST Payable from the GST paid at Purchase.
A manufacturer ABC LTD Supplies Raw fabric to the company named PQR LTD. who is involved in the manufactureof clothes. The manufacturer then sells the clothes to the retailer XYZ LTD and finally, the retailer sells the product to the consumers.
ABC Ltd purchases fabric worth $ 500,000/- and paid GST on it @ 5%. So the total amount paid by ABC Ltd for procuring fabric is $ 525000/- which includes GST of $ 25,000/-.
Now ABC Ltd sold these fabrics to PQR Ltd for $ 600,000/- plus GST @ 5%. So total amount paid by PQR Ltd to procure the fabric is $ 630,000/- which includes GST of $ 30, 000/-
So ABC Ltd collected $ 630,000/- including GST of $ 30,000/-. The GST amount collected by ABC Ltd is to be paid to the government subject to the adjustment of input tax credit available on purchases. So the ITC available with ABC Ltd is $ 25,000/- and its output tax liability is $ 30,000/-. It means the net amount of GST to be paid to the government by ABC Ltd is $ 5,000/-. So it can be seen the net amount of GST actually paid by ABC Ltd is on the margin amount only i.e. on the value addition.
Now input available with PQR Ltd is $ 30,000/-. The PQR Ltd further after manufacturing cloth from the fabric sold them to XYZ Ltd for $ 1,200,000/- plus GST@12%. The other consumables purchased by PQR Ltd to be used in the process of manufacture worth $ 120,000/- plus GST @18%. So the total amount paid by PQR Ltd for purchasing the consumables is $ 141,600/- which includes GST of $ 21,600/-. It means the total amount of input tax credit available with PQR Ltd is $ 30,000+$ 21,600= $ 51600/-. The sales consideration received by PQR Ltd is $ 1,344,000/- which includes GST of $ 144,000/-. So the output tax liability for PQR Ltd is $ 144,000/- and the input tax credit available is $ 51,600/-. The net amount of tax payable by PQR Ltd to the government is $ 144,000 – $ 51,600 = $ 92,400/-
Now input available with XYZ Ltd is $ 144,000/- The XYZ Ltd further sold the cloth to the end consumers. The total amount of sales consideration received by XYZ Ltd from all the consumers is $ 1,800,000/- plus GST @12% i.e. $ 2,016,000/-. The output tax liability for XYZ Ltd is $ 216,000/-. The net amount of GST to be paid by XYZ Ltd to the government after adjusting the available ITC is $ 216,000 – $ 144,000= $ 72,000/-. We can see the total amount of GST is finally passed on to the end consumer.
Types of GST in India
CGST – Central Goods & Service Tax
CGST is the kind of tax that is levied by the Central government and paid by the taxpayer to the central government. CGST is applicable when the supplies are made within the same state (intrastate supply).
SGST – State Goods & Service Tax
SGST is the kind of tax which is levied by the state government in their respective state where the transaction occurs. SGST is applicable when the supplies are made within the same state (intrastate supply).
UGST – Union Territory Goods & Service Tax
UGST is the kind of tax that is levied by union territory government in their respective union territory where the transaction occurs. UGST is applicable when the supplies are made within the same union territory (intrastate supply).
IGST – Integrated Goods & Service Tax
IGST is the tax levied by the government when there are interstate supplies i.e. the supplier and the buyer is located in different states. Also, IGST is applicable in the cases of import & export.
Different types of taxes are applicable as follows:
- If the supply is made within the state then CSGT and SGST/UGST are applicable. Half of the GST amount is paid as CGST and the other half is to be paid as SGST/UGST (as the case may be).
- If the supply is inter-state (between different states) then in such case the whole amount is payable as IGST.
- An important source of Income: Indirect taxes contribute a lot to the revenue of the government. In India, around 50% of the total revenue of central and state governments is from Goods & Service tax.
- Taxes on the supply of goods & services: GST is a tax levied on each stage of manufacture of goods, purchase, or sale of goods or import/export thereof. For example, the Manufacturer charges GST on goods produced by him then the retailer charges GST on the cost-plus markup and finally sells the goods to the consumer.
- Shifting of burden: The indirect tax shifts the burden of taxes from supplier to the consumer. As seen above, the supplier charges GST on the goods & services supplied by him from the customer and pay to the government.
- Raises the price of goods & services: GST increases the overall price of the product as the indirect tax charged at every step leads to an increase in price at each level thereby raising the overall price.
- Regressive in nature: The indirect taxes are usually regressive as the poor and rich both have to pay tax at the same rate of tax which further increases.
Goods & service tax is a kind of indirect tax which is levied at a prescribed statutory rate on the manufacture or sale of the goods & services. GST is an important source of income for the government. The supplier is required to pay net GST to the government i.e. GST charged at sales minus GST paid at the time of purchase.