What is GST (Goods and Services Tax)? An Ultimate Guide

Think of the Goods and Services Tax (GST) as a simplified highway toll system for the economy. Instead of businesses and consumers stopping at multiple tax checkpoints, GST creates a seamless flow, ensuring that goods and services move freely across the country with a single tax. But What is GST exactly, and how does it impact the daily life of businesses and individuals alike?  

Whether you're a business owner calculating your costs or a consumer buying everyday products, understanding What is GST is crucial. It not only streamlines taxation but also boosts economic efficiency. Let’s explore the ins and outs of GST and see why it plays such a vital role in modern commerce. 

Table of Contents 

1) What is GST? 

2) Objectives of GST 

3) How Does GST Work? 

4) Principles of GST 

5) GST Slab Rates 

6) GST Registration Process 

7) Required Documents for GST Registration 

8) Benefits of GST 

9) Drawbacks of GST 

10) How to Calculate GST? 

11) GST Calculation Formula 

12) Conclusion 

What is GST? 

Goods and Services Tax (GST), is an all-encompassing tax imposed on each added value, involving multiple stages and being based on the final destination. It was created to consolidate all indirect taxes into one system, simplifying the previous tax framework. Since its introduction in India on July 1, 2017, GST has revolutionised the taxation system for goods and services throughout the nation. 

GST is a revolutionary tax reform designed to simplify India's complex indirect taxation system. By consolidating various taxes into one, GST aims to eliminate the cascading tax effect and promote uniformity across industries.
 

 

Objectives of GST 

The following are the objectives of GST: 

1) Simplification of the Tax Structure   

GST streamlines India’s previously complex indirect tax system by replacing multiple taxes—such as excise duty, service tax, and VAT—with a single, unified tax. This simplification makes compliance easier for both businesses and individuals.    

2) Elimination of the Cascading Tax Effect   

GST eliminates the cascading effect, where taxes were imposed on top of other taxes at each stage. Now, tax is levied only on the value added at every point in the supply chain, allowing businesses to offset input taxes against their output tax liability.   

3) Creation of a Unified National Market   

By removing inter-state tax barriers, GST enables the seamless movement of goods and services across states. This integration fosters fair competition and strengthens economic unity within the country.   

4) Expansion of the Tax Base   

GST increases tax compliance by bringing more businesses into the formal economy. Entities with turnover exceeding certain thresholds are required to register, capturing transactions that previously went unrecorded.   

5) Enhancing Transparency and Reducing Tax Evasion   

With digital platforms for registration, return filing, and payment, GST improves monitoring and verification. This transparency curbs tax evasion and promotes greater accountability within the tax system.  

6) Boosting Economic Growth   

GST helps streamline supply chains and lower transaction costs, stimulating investment and consumption. The simplified tax regime fosters economic growth by encouraging business activity and improving market efficiency. 

How Does GST Work? 

The working of the GST is in the following steps: 

1) From the Manufacturer's Perspective 

For manufacturers, GST makes tax payment easier at each step of the production process. Businesses can receive credit for taxes already paid to ensure that the final tax is only applied to the value-added portion, collected at each step of value addition. 

2) The Role of the Service Provider 

Service providers also gain advantages from the simplified system of GST. They apply GST to their services and can deduct this tax using the GST they have already paid on business expenses. This not just guarantees adherence but also encourages openness in service pricing. 

3) The Retailer's Participation 

The final consumers pay GST to retailers. Having paid GST on the items they purchased to sell, they are eligible to recover Input Tax Credit (ITC), allowing them to only be taxed on the amount added to the goods at the retail level. 

4) The Consumer's Viewpoint 

For customers, GST ensures transparent pricing. In contrast to the old system, which included hidden taxes in the price, GST is added openly in each phase. This guarantees an equitable, standardised pricing system nationwide. 

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Principles of GST 

Now when you have an idea about what is GST, then let's discuss about the principles of GST (Goods and Service Tax): 

1) Destination-based Taxation Model 

This model ensures that tax revenue is allocated to the state where goods are consumed rather than where they are produced. This approach promotes fair distribution of tax revenue among states and eliminates the cascading effect of taxation. Previously, tax revenue was collected by the state where goods or services were manufactured or sold. 

2) Value Added Tax (VAT) in GST 

Under GST, VAT is applied only to the value added at each stage of the supply chain. This prevents double taxation on the same value and ensures that the final consumer bears the tax burden. 

3) Input Tax Credit (ITC) Mechanism 

The ITC mechanism allows taxpayers to claim credit for the tax paid on inputs used in producing or supplying goods and services. This reduces tax costs, prevents cascading taxes, and ensures efficient taxation.  

For example, manufacturers can offset taxes paid on raw materials against taxes collected on finished goods. To claim ITC, businesses must meet certain conditions, such as being registered under GST, possessing valid tax invoices, and using eligible inputs for business purposes. 

4) Uniformity in Tax Rates 

GST has standardised tax rates across the country, replacing multiple indirect taxes imposed by central and state governments. The GST system includes four tax slabs: 5%, 12%, 18%, and 28%. Goods and services are categorised into these brackets based on their nature, necessity, and luxury. The online GST verification process is straightforward. 

5) Transparency and Fairness in Taxation 

GST has enhanced the visibility and accountability of the tax system. Taxpayers can easily track the tax paid at each stage of the supply chain and claim input tax credits. This system has also reduced opportunities for tax evasion and ensured tax equity. 

GST Slab Rates 

GST is categorised into four tax slabs: 5%, 12%, 18%, and 28%. Essential items, such as food grains, are either taxed at the lowest rate or exempted altogether, while luxury goods are subject to the highest tax rate. These slabs help maintain equity across various income groups and product categories. 

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GST Registration Process 

Under the GST system, any businesses that are required to pay service tax, VAT, or central excise must register for goods and service taxes. A candidate can start the process of GST registration on the GST portal. After submitting the application, the online portal will immediately provide the ARN status. 

By utilising the ARN, an individual can verify the status of their application. Candidates can also submit questions if necessary. Typically, taxpayers will get their GST registration certificate and GSTIN in about a week after their ARN is generated. 

ARN is the acronym for Application Reference Number and is utilised for monitoring the status of a GST registration application. Every taxpayer registered with DOT is assigned a 15-digit code known as GSTIN. Businesses with a yearly revenue exceeding 20 lakhs their GSTIN. 

Required Documents for GST Registration 

Here are the GST registration papers needed by different eligible users in order to finalise the procedure: 

Sole Proprietor or Individual 

a) PAN 

b) Address proof 

c) Aadhaar card (owner) 

d) Bank account details 

e) Photograph (Owner) 

Partnership Firms Inclusive of LLP 

a) PAN 

b) Address proof (partners and place of business) 

c) Bank account details 

d) Copy of partnership deed 

e) Registration certificate or board resolution (for LLP) 

f) Photographs of authorised signatories and partners 

g) Proof of appointing an authorised signatory 

Hindu Undivided Family (HUF) 

a) PAN (HUF) 

b) Address proof 

c) Bank account details 

d) Photograph of the owner 

e) Aadhaar card and PAN card 

Company (both Indian and foreign, public and private) 

a) PAN (company) 

b) Bank details 

c) Address proof (principal place of business) 

d) PAN and Aadhaar card (authorised signatories) 

e) PAN and address proof (directors of the company) 

f) Article of association or Memorandum of association 

g) Proof of appointment of an authorised signatory 

h) Photographs (directors and the authorised signatory) 

i) Certificate of incorporation provided by the Ministry of Corporate Affairs 

Benefits of GST 

The following are the Benefits of GST which makes the certain process easier: 

1) Digital Integration with GST 

All GST-related tasks such as enrollment, submitting returns, paying taxes, seeking refunds, and addressing notifications, must be carried out on the GST portal. Digitization of GST requirements has accelerated processes and reduced reliance on manual labor. 

2) Market Uniformity 

A major advantage of GST is the establishment of a single market throughout India. By implementing a unified tax system, businesses can navigate more easily across state borders, resulting in a boost in trade and economic prosperity. 

3) Elimination of the Cascading Effect 

It has removed the chain reaction of tax, shipping expenses, interstate tax, and a single market. The domino effect is a result of tax stacking, and its elimination has affected the price of products. The end consumers are now able to purchase goods at lower prices due to the implementation of GST. 

4) Simplified Tax Structure 

GST in India has made the tax system simpler by replacing several indirect taxes with one single tax. This has simplified businesses' tax compliance and decreased opportunities for tax evasion. 

Drawbacks of GST 

These are the drawbacks that GST system have which are being faced by the people: 

1) Penalties and Fines 

Failure to comply with GST regulations may lead to incurring penalties and fines. There is also a chance that GST registration may be cancelled. 

2) Increased Operational Costs 

Although GST makes tax collection easier, it has also led to higher operational expenses for companies because they now require new software, training, and compliance tools. 

3) Effects on the Unorganised Sector 

The informal sector, previously untaxed, is now part of the GST system. Compliance costs have risen for small businesses, often without the necessary infrastructure to handle them. 

4) Greater Tax Burden on SMEs 

SMEs are required to adhere to more stringent reporting guidelines and keep detailed records to claim ITC, resulting in a heavier tax burden under GST. 

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How to Calculate GST? 

Steps to Calculate GST are mentioned below: 

a) Identify the Applicable GST Rate: Determine the appropriate GST rate for the goods or services involved. 

b) Calculate the Transaction Value: Find the amount on which GST will be applied, considering any discounts or additional charges. 

c) Choose the Right Formula: Use the exclusive or inclusive GST formula based on whether you have the base price or final price. 

d) Compute the Total Payable Amount: Add or subtract GST from the transaction value to determine the final amount to be paid. 

Example Calculation 

Let’s say you are selling a product for ₹20,000, offering a 10% discount, and adding freight charges of ₹360. The applicable GST rate is 9%. 

Product Cost: ₹20,000 

Discount at 10%: ₹2,000 

Subtotal after Discount: ₹20,000 - ₹2,000 = ₹18,000 

Freight Charges: ₹360 

New Subtotal with Freight: ₹18,000 + ₹360 = ₹18,360 

Calculate CGST and SGST (9% each): 

CGST = SGST = (₹18,360 × 9) ÷ 100 = ₹1,652.40 

Total Cost to the Customer: 

Total Cost = ₹18,360 + ₹1,652.40 + ₹1,652.40 = ₹21,664.80 

GST Calculation Formula 

Here’s the formula for calculating the GST: 

a) GST Calculation Formula 

For GST Amount (Exclusive of GST): 

If the GST is to be added to the base price: 

GST Amount = (Original Price × GST Rate) ÷ 100 

Total Price with GST = Original Price + GST Amount 

b) For Reverse GST Calculation (Inclusive of GST): 

If the total price already includes GST: 

GST Amount = Total Price × (GST Rate ÷ (100 + GST Rate)) 

c) For CGST and SGST Calculation: 

When GST is split equally between Central GST (CGST) and State GST (SGST): 

a) CGST = (Base Price × GST Rate ÷ 2) ÷ 100 

b) SGST = (Base Price × GST Rate ÷ 2) ÷ 100 

Example:
 

Conclusion 

GST has transformed India’s taxation system by unifying the market and simplifying indirect taxes. Despite challenges like higher compliance costs and effects on small businesses, its benefits, market uniformity, elimination of cascading taxes, and a streamlined tax structure which make it a significant reform. Understanding GST is essential for businesses and consumers to navigate this new tax regime effectively. 

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