How GST Works
The Goods and Services Tax (GST) is a tax that applies to almost everything we buy or sell in India. It’s designed to make the tax system simpler and more transparent. Here’s how it works:
1. Tax at Every Stage
GST is applied at each step when a product is made, distributed, and sold. However, unlike previous taxes, GST is only charged on the added value at each step, not on the entire cost. This prevents “tax on tax.”
Example:
- Manufacturer: Makes a product and adds GST to the selling price.
- Distributor: Buys the product, pays GST, and gets credit for the GST already paid by the manufacturer.
- Retailer: Buys from the distributor, pays GST, and gets credit for the GST paid earlier.
- Consumer: Buys the product and pays the final GST, which includes all the previous stages.
2. Input Tax Credit (ITC)
One of the key features of GST is that businesses can reduce the tax they pay on sales by the tax they’ve already paid on purchases. This is called the Input Tax Credit (ITC).
How ITC Works:
- A business buys raw materials and pays GST to the supplier.
- It can then use this GST as a credit when paying tax on its sales.
- This means the business only pays tax on the added value, not the total value.
3. Tax Based on Where Goods are Used
GST is collected by the state where the goods or services are used, not where they are made. This is why it’s called a “destination-based tax.”
Types of GST:
- Central GST (CGST): Collected by the central government on sales within a state.
- State GST (SGST)/ Union Territory GST (UTGST) : Collected by the state / union territory government on sales within a state.
- Integrated GST (IGST): Collected by the central government on sales between different states.
4. Different GST Rates
GST has different rates depending on the type of product or service:
- 0% (No GST): Essential items like fresh vegetables.
- 5%: Basic goods like packaged foods.
- 12%: Standard goods like processed foods.
- 18%: Most goods and services.
- 28%: Luxury items like high-end electronics.
- Special Rates: Unique rates for specific categories.
5. Reverse Charge Mechanism (RCM)
In some cases, the buyer, not the seller, has to pay the GST directly to the government. This is known as the Reverse Charge Mechanism.
- When It Applies: For certain goods and services, or if the seller isn’t registered under GST.
Conclusion
GST has simplified India’s tax system by bringing multiple taxes under one roof and making it easier for businesses to operate. Understanding how GST works—like knowing when and how to pay it—helps businesses stay on the right side of the law and benefit from the tax system.
