How GST Works: A Step-by-Step Breakdown for Beginners

GST (Goods and Services Tax) is a comprehensive, multi-stage, destination-based indirect tax that is levied on the supply of goods and services. It is designed to replace a variety of other indirect taxes like VAT, service tax, excise duty, and others, with a single, unified tax.

GST is implemented in many countries, including India, Australia, Canada, and others, with slight variations in the structure and rates. For instance, in India, GST was introduced on July 1, 2017, under the principle of "One Nation, One Tax."

Key Features of GST:

1. Comprehensive Tax:

   • It subsumes multiple indirect taxes into one.
   • It is applicable across the supply chain, from production to the final sale.

2. Multi-Stage Tax:

   • GST is collected at every stage of value addition, from raw materials to manufacturing, wholesale, and retail.

3. Destination-Based Tax:

   • The tax is ultimately collected by the state where the goods or services are consumed, not where they are produced.

4. Input Tax Credit (ITC):

   • Businesses can claim credit for the taxes paid on their purchases, reducing their GST liability.

5. Uniform Rates:

   • Ensures consistency and avoids cascading effects of taxes (tax-on-tax).

How GST Works:

1. Tax Structure:

• GST operates with different slabs or rates (e.g., 5%, 12%, 18%, 28% in India).
• It is categorized into:
  • CGST (Central GST): Collected by the central government.
  • SGST (State GST): Collected by state governments.
  • IGST (Integrated GST): Applied on inter-state supplies and collected by the central government.

2. Value Addition & ITC:

• At each stage of the supply chain, GST is levied on the value added to the product.
• Businesses can deduct the GST they paid on inputs from the GST they collect on outputs, thus paying only the "net GST."

Example of ITC in Action:

• Manufacturer: Buys raw material for $100 and pays 10% GST ($10). Sells finished goods for $200 with 10% GST ($20). Manufacturer remits $10 to the government ($20 - $10 ITC).
• Retailer: Buys from the manufacturer for $200 and pays $20 GST. Sells to customers for $300 with 10% GST ($30). Retailer remits $10 to the government ($30 - $20 ITC).

3. Filing Returns:

• Businesses must file periodic GST returns to report sales, purchases, and taxes paid/collected. This ensures compliance and enables the reconciliation of taxes across the supply chain.

Advantages of GST:

1. Simplification of Taxes: Combines multiple taxes into one.
2. Reduction in Cascading Effect: Avoids tax-on-tax issues.
3. Transparency: Ensures easier compliance and visibility in the tax system.
4. Boost to Economy: Encourages formalization of businesses and enhances ease of doing business.

Challenges of GST:

1. Complexity for Small Businesses: Compliance and filing can be burdensome.
2. Rate Disputes: Determining appropriate rates for goods/services can be challenging.
3. Technology Dependence: Requires robust IT systems for seamless operation.