GST: Full Form, Definition, Different Taxes, Examples

GST stands for Goods and Services Tax. It is an indirect tax, which is paid on most products and services sold for domestic consumption in India. Each government, be it Central or State government, wants money for administrative expenses, welfare and development schemes, salaries of employees, and other activities. Therefore, governments collect money (revenue) by levying taxes within their respective territories. In India, we have two kinds of direct taxes and indirect taxes. 

Direct taxes are levied on the income of individuals or organizations. They include income tax and corporate tax. 

Indirect taxes are paid by consumers or organizations when they buy goods or services, or both.

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GST Overview

Definition: Goods and services tax is an indirect tax that India uses on the supply of goods and services. It is a comprehensive, multistage, destination-based tax: complete because it has subsumed almost all the indirect taxes except a few state taxes.

Goods

Goods mean every kind of movable thing/property, i.e., anything which can be taken (moved) from one place to another. Goods do not include money and securities. Securities mean shares, stocks, bonds, and debentures.

Services

Services mean anything other than goods, money, and securities. Services include activities relating to the use of money, e.g., banking services, insurance services, and more.

Goods and services tax (GST) is an indirect tax levied on the supply of goods and services, i.e., on goods and rendering services. It is a nationwide tax that subsumes several indirect taxes levied by the central and state governments based on ‘One nation one tax’.

Central level taxes merged into GST are – Excise Duty, Customs Duty, Service Tax, and Central Sales Tax. State-level taxes merged into GST are – Octroi and Entry Tax, Value Added Tax (VAT), Entertainment Tax, Taxes on Lottery and Luxury Tax, etc.

Goods and Services Tax creates a semblance of the common market where every supply of goods or services or both, irrespective of where it takes place, has standard treatment and a defined standard tax rate throughout the chain.

Some Related Terms 

Some terms related to GST are:

1. Dealer: Anyone who buys goods or services for re-sale is a dealer (or trader). A dealer can be a firm or a company.
2. Intra-state sales: Sales of goods and services within the same state (or Union Territories) are called intra-state sales.
3. Inter-state sales: Sales of goods and services outside the state (or Union Territories) are called inter-state sales. 
4. Input and Output GST: GST is paid by dealers to purchase goods and services and is collected from customers on the sale of goods and services. GST paid by a dealer is called Input GST, and GST collected from a customer is called Output GST.

Types of GST

There are three taxes applicable under GST:

1. Central Goods and Services Tax (CGST). 
2. State Goods and Services Tax (SGST) or Union Territory Goods and Services Tax (UTGST). 
These taxes are levied on intra-state sales, i.e., on goods and services within the same state. However, in intra-state sales, GST is divided equally among Central and State Governments.
3. Integrated Goods and Services Tax (IGST): IGST is levied on inter-state sales, i.e., sales of goods and services outside the state. It is also levied on importing goods and services into India and exports of goods and services outside India. It is initially collected by Central Government and later equally shared by the Central and State governments. 

Note

1. In intra-state transactions (supply within the same state), the seller collects both CGST and SGST from the buyer and deposits the CGST with the central government and the SGST with the state government.
The tax collected on the intra-state movement of goods and services is shared equally by the central government and the state government.
Therefore, if the rate of GST \( = 18\% \) then the rate of central GST (CGST) \(= 9\%\) and, the rate of state GST (SGST) \(= 9\% \)
2. In inter-state movement (supply from one state to another state) of goods and services, the seller collects IGST from the buyer and deposits it with the central government.
Therefore, if the rate of GST \(= 18\%\) rate of integrated GST (IGST) \(= 18\%\)

GST Slab Rates

Taxes are computed on the cost of purchasing goods or services or both, at a particular percentage pronounced by the government. The percentage of taxes is subject to change as per government decisions from time to time. Once the tax rate is given, computation of tax is easy. It involves only simple concepts of percentage.

GST rate structure Goods and Services are divided into five blocks for collection.

1. Essential items including (unpacked) food- \(0\%\)
Examples: Essential items are Jute, fresh meat, eggs, milk, buttermilk, curd, natural honey, fresh fruits, and vegetables.
2. Common use items -\(5\%\)
Examples: Common use items are basic household essentials such as edible oil, sugar, spices, tea, coffee, and life-saving medicines.
3. Standard rate -\(12\%\)
Examples: Ghee, Nuts, Fruits, Pouches, purses, and handbags.
4. Maximum goods and all services standard rate -\(18\%\)
Examples: Washing Machine, Camera, Shampoo, Outdoor Catering, IT services, and Telecom services.
5. Luxury and sin (tobacco) items -\(28\%\)
Examples: Sunscreen, Motorcycles, Pan Masala, Cinema, and Food/Drinks/Stay at AC Five Star Hotels.

Objectives and Advantages of GST

1. Ease of doing business: GST harmonizes tax administration between the Central and States, improving the ease of doing business. 
2. Reduce tax evasion: GST has an e-compliance mechanism. Every taxpayer registered under GST must file tax return electronically for every transaction (purchase and sale) and match input GST credit against output GST and pay net GST, reducing tax evasion. 
3. The tax system is becoming more transparent, regular, and obvious.

GST Tax Calculation 

Goods and services tax can be calculated using the following formula

\({\rm{GST}}\,{\rm{Amount}} = \frac{{\left( {{\rm{Original}}\,{\rm{cost}}\,{\rm{of}}\,{\rm{an}}\,{\rm{article}} \times {\rm{GST}}\% } \right)}}{{100}}\)
\({\rm{Net}}\,{\rm{price}}\,{\rm{of}}\,{\rm{an}}\,{\rm{article}} = {\rm{Original}}\,{\rm{cost}}\,{\rm{of}}\,{\rm{an}}\,{\rm{article}} + {\rm{GST}}\,{\rm{Amount}}\)

Example: A dealer in Bhopal (M.P.), say \(X,\) supplies goods and services worth \(₹8,000\) to \(Y\) a person in Indore (M.P.). If the rate of GST is \(28\%\); find: 

1. Central GST
2. State GST
3. Integrated GST

It is a case of intra-state supply as the goods and services are supplied within the same state (M.P.), so the tax will be shared equally by the central government as CGST and by the state government as SGST. 

Since the GST rate is \(28\%\), therefore CGST rate is \(14\%\) and the SGST rate is also \(14\%\). 

1. Central GST (CGST) \( = 14\% \) of \(₹8000 = \frac{{14}}{{100}} \times 8000 = ₹1120\)
2. State GST (SGST) \( = 14\% \) of \(₹8000 = \frac{{14}}{{100}} \times 8000 = ₹1120\)
3. Integrated GST (IGST) \(=\) Nil

Input Tax Credit (ITC) 

An input tax credit means that while paying tax on the sale (output) of goods and services, you can avail of the tax already paid on the purchase (input) of the goods/services and pay only the balance amount as tax. 

1. Input tax includes CGST/SGST/IGST paid on input goods, input services, etc. 
2. Only a registered person is entitled to take credit of the input tax charged on the supply of goods/services. 
3. The credit of tax paid on every input used to supply taxable goods or services, or both are allowed under goods and services tax.
4. The input tax credit is not available to purchase petroleum products, liquor, petrol, diesel, motor spirit, etc.
5. In exports of goods/services, GST is not payable, but still, the input tax credit is applicable. Such transactions are called zero-rated transactions. Input-tax credit can be availed only on goods/services for business purposes.
Note: Input-tax credit can be availed only on goods/services for business purposes

Goods and Services Tax e-way Bill

An e-Way Bill is an Electronic bill for the movement of goods to be produced on the e-Way Bill Portal. A GST registered person will not be able to transport goods in a vehicle where the value exceeds \(₹50,000\) (Single Invoice/bill/delivery challan) without an e-way bill that is created on ewaybillgst.gov.in.
Otherwise, an e-way bill can also be produced or cancelled through SMS, Android App, and site-to-site can be integrated through API.
When an e way bill is generated, a unique e-way Bill Number (EBN) is allotted. It is made available to the supplier, recipient, and transporter.

Goods and Services Tax Online Payment

GST payments can be made either online or offline. A business person must evaluate the tax that needs to be paid in cash or online after excluding the input tax credit on goods.
Then, it must generate a GST challan either before or after logging into the GST portal or while filing the GST return. The person can pay GST online by using net banking, credit/debit card.

GST on Transportation Charges

GST on transportation of goods and travellers via road, rail and air include multiple rates ranging from \(0\%\) to \(18\%\). GST on transport services for passengers has mostly not led to much change in the ticket prices of the journey by rail/road or air. Even more importantly, input tax credit (ITC) is not necessarily applicable if GST on transport has been charged.

Solved Examples

Q.1. A dealer in Calcutta buys some goods worth \(₹6,000\). If the rate of GST is \(18\%\), find how much the dealer will pay for the goods purchased.
Ans: It is a case of an Intra-state transaction: 
For the dealer, cost of goods and GST rate \(= 18\%\)  
Now, CGST \( = 9\% \) of \( ₹ 6000 = \frac{9}{{100}} \times 6000 = ₹540\)
SGST \( = 9\% \) of \( ₹ 6000 = \frac{9}{{100}} \times 6000 = ₹540\) and IGST\(=₹00\)
∴ The dealer will pay \( = 6,000 + 540 + 540 = ₹7080.\)

Q.2. Given below are the cost of some financial services in the same city, taxable under GST. Cost of services: \(₹500, ₹300, ₹400\) and \(₹600\). If the rate of GST is \(12\%\), find the amount of GST on these services.
Ans: It is a case of an Intra-state transaction
The total cost of services \( = ₹500 + ₹300 + ₹400 + ₹600 = ₹1800\)
CGST \( = 6\% \) of \(₹1800 = \frac{6}{{100}} \times ₹1800 = ₹108\)
SGST \( = 6\% \) of \(₹1800 = \frac{6}{{100}} \times ₹1800 = ₹108\) and \( = ₹00\)
Therefore, the required amount of GST \(₹108 +₹ 108 + ₹00 = ₹216\)

Q.3. Manufacturer \(A\) sells a refrigerator to a dealer \(B\) for \(₹12500\). The dealer \(B\) sells it to a consumer at a profit of  \(₹1500.\) If the sales are intra-state and the rate of GST is \(12\%\), find the amount of tax (under GST) paid by the dealer \(B\) to the Central Government. 
Ans: As the sales are intra-state and GST is \(12\%\), GST comprises \(6\%\) as CGST and \(6\%\) as SGST. Manufacturer \(A\) sells the washing machine to dealer \(B\) for \(₹12500\), amount of GST collected by manufacturer \(A\) from dealer \(B\) (or paid by dealer \(B\) to \(A\))
CGST \( = 6\%\) of \(₹12500 = ₹\left( {\frac{6}{{100}} \times 12500} \right) = ₹750\)
SGST \( = 6\%\) of \(₹12500 = ₹\left( {\frac{6}{{100}} \times 12500} \right) = ₹750\)
Amount of input GST of dealer \(B:\) input CGST \(=₹750\) input SGST \(=₹750\).
Manufacturer \(A\) will pay \(=₹750\) as CGST and \(=₹750\) as SGST.

Since the dealer \(B\) sells the washing machine to a consumer at a profit of \(₹1500\), the selling price of machine by dealer \(B\) (or cost price of the machine to the consumer)
\( = ₹12500 + ₹1500 = ₹14000\)
The amount of GST collected by dealer \(B\) (or paid by the consumer):
CGST \( = 6\%\) of \(₹14000 = ₹\left( {\frac{6}{{100}} \times 14000} \right) = ₹840\)
SGST \( = 6\%\) of \(₹14000 = ₹\left( {\frac{6}{{100}} \times 14000} \right) = ₹840\)
Amount of tax (under GST) collected by dealer \(B:\)
Output CGST \(₹840\), output SGST \(₹840\).

Amount of tax (under GST) paid by dealer \(B\) to the Central Government.
\(=\) CGST paid by dealer \(B\) to the Central Government.
\(=\) Output CGST \(–\) input CGST
\(=₹840-₹750=₹90\)
Hence, the amount of tax (under GST) paid by dealer \(B\) to the Central Government is \(₹90.\)

Q.4. A product is sold from Kanpur (U.P.) to Banaras (U.P.) for \(₹12,000\) and then from Banaras to Ranchi (Jharkhand) at a profit of  \(₹4000\). If the rate of GST is \(18\%\), find the net GST payable at Banaras.
Ans: When the product is sold from Kanpur to Banaras (It is an intra-state transaction)
For the dealer in Kanpur S.P \(=₹12,000\)
CGST \( = 9\% \) of \(₹12000 = \frac{9}{{100}} \times ₹12000 = ₹1080\)
SGST \( = 9\% \) of \(₹12000 = \frac{9}{{100}} \times ₹12000 = ₹1080\)

When the product is sold from Banaras to Ranchi (It is an inter-state transaction)
For the dealer in Banaras 
Input-tax credit (ITC) \( = ₹1080 + ₹1080 = ₹2160\)
C.P \(=₹12,000\) Profit \(₹4000\)
S.P \(₹12000+₹4000=₹16000\)
IGST \(18\%\) of \(₹16000 = \frac{{18}}{{100}} \times ₹16000 = ₹2880\)
Therefore, net GST payable at Banaras \(=\) Output GST \(–\) Input-tax credit
\( = ₹2880 – ₹2160 = ₹720\)
Hence, net GST payable at Banaras \(₹720\)

Q.5. A is a dealer in Bhopal (M.P.). He supplies goods and services worth \(₹8000\) to B in Agra (UP). If the rate of GST is \(28\%;\) find the tax levied under 
a) Central GST (CGST) 
b) State GST (SGST) 
c) Integrated GST (IGST) 
Ans: It is a case of the inter-state transaction as the goods/services are supplied from one state to another. 
a) Central GST (CGST) \(=\)Nil 
b) State GST (SGST) \(=\)Nil
c) Integrated GST (IGST) \( = 28\%\) of \(₹8,000 = \frac{{28}}{{100}} \times ₹8,000 = ₹2,240\)
Therefore, Integrated GST (IGST) \(=₹2,240\)

Summary

In this article, we learned about GST Tax (Goods and Services), GST Related Terms, GST Types, GST Slab Rates, Objectives and advantages of GST, GST tax Calculation, Input Tax Credit (ITC).

The learning outcome of this article is how GST removed disparity of taxes in different states and to bring about uniformity in rates of taxation on goods and services throughout the country and how to calculate the GST in different situations. 

FAQs

Q.1. What are the \(3\) types of GST?
Ans: There are three taxes applicable under GST
1. Central Goods and Services Tax (CGST)
2. State Goods and Services Tax (SGST) or Union Territory Goods and Services Tax (UTGST). 
3. Integrated Goods and Services Tax (IGST)

Q.2. What is the meaning of goods and services tax?
Ans: Before \({1^{{\rm{st}}}}\) July \(2017,\) we had several indirect taxes such as VAT, excise, service tax, etc. From \({1^{{\rm{st}}}}\) July \(2017\) onwards, the government of India has abolished all such indirect taxes and introduced a new (indirect) tax called goods and services tax (GST).
1. GST is a consumption (for using goods/services) based on tax levied when one buys/transfers goods or services. 
2. GST is to be levied at every point of sale/transfer of goods or services or both. 
3. GST has replaced all former indirect taxes levied by central and state governments.
4. GST is applicable throughout India except in the state of Jammu and Kashmir.

Q.3. What is a tax on goods and services called?
Ans: Goods and services tax (GST), also known as indirect taxes, are consumption taxes levied on any value added to a product.

Q.4. How is goods and services tax calculated?
Ans: Goods and services tax can be calculated using the following formula
GST Amount \( = \frac{{{\rm{Original}}\,{\rm{cost}}\,{\rm{of}}\,{\rm{an}}\,{\rm{article}} \times {\rm{GST}}\% }}{{100}}\)
\({\rm{Net}}\,{\rm{price}}\,{\rm{of}}\,{\rm{an}}\,{\rm{article}} = {\rm{Original}}\,{\rm{cost}}\,{\rm{of}}\,{\rm{an}}\,{\rm{article}} + {\rm{GST}}\,{\rm{Amount}}{\rm{.}}\)

Q.5. What is the difference between CGST and IGST?
Ans: CGST and IGST are part of GST, Goods, and Service Tax. CGST expands as Central Goods and Service Tax, and IGST is the short form of Integrated Goods and Service Tax. Under IGST, the taxes for goods and services from one state to another are collected.
CGST is collected along with SGST can be collected separately. But IGST is collected from one point and later divided equally between the Central and respective State Governments.

We hope this detailed article on “GST” proved to be helpful. If you have any doubts or queries on this topic, feel to ask us in the comment section and we will assist you at the earliest.