GST: Meaning, Advantages, Components and Tax Rates

Tax process before GST

GST stands for Goods and Services Tax. Earlier, there were several different taxes levied on goods and services. The Government of India has replaced all other (indirect) taxes with a single tax i.e. GST. It was passed by the Parliament in July and is a comprehensive tax that is levied on every value addition.

In other words, GST is an indirect tax levied by the government on the supply of goods and services. This tax law is not limited to any particular state and prevails in the entire country.


Tax process before GST
However, after the implementation of GST, tax will be levied at every point of sale. Central and State GST will be charged in case of intra-state sales.

 

Understanding GST


GST can be defined as a multi-stage, comprehensive and a destination-based tax that is levied on every value addition.

Multi-Stage


An item goes through various intermediaries before reaching the final customer - from the producer to the wholesaler, then to the agent or the retailer.
 
  • Goods are purchased by the manufacturer or producer
  • Goods are produced by the manufacturer or the producer
  • Finished goods are then stored in a warehouse
  • These goods are sold to the wholesaler
  • The wholesaler sells these goods to the retailer or (an agent)
  • The retailer sells these goods to the final consumer
  GST stages GST is levied on each of the above-mentioned stages and therefore, it becomes a multi-stage tax.
 

Comprehensive

GST is a comprehensive tax as it includes all types of goods and services and takes into the consideration the concept of value addition.
 

Value Addition

  GST
Let us understand the concept of value addition by taking the example of a single unit of shirt.

The producer of this shirt will first procure the raw materials required to make the shirt like thread, buttons, cloth pieces, etc.

The shirt will now be produced either with the help of an artisan or with machines and the value of this shirt will hence increase.

Once the shirt is ready, it will be shipped from the producer to the warehouse where a large number of clothes are stored. Here, shirts will be not only be labeled and packed in smaller quantities for sale but also protected from the external environment (heat, dust, storm, etc.). These shirts will then be sold to the retailer. The value of the shirt increases since more value was added.

Once these shirts reach the retailer, they are individually packed and aggressive marketing is done to attract more customers. This is another addition of value.

These shirts are then purchased by customers.

As we can see, value was added to these shirts at different stages. According to GST, the monetary value of each of these ‘added values’ should be added until the product/service reaches the final consumer.
 

Destination-based

Let us refer to the previous example to understand this concept. Let’s assume that these goods were produced in Karnataka and sold to a customer in Maharashtra. Since GST is levied at the point of consumption, here, the entire tax collection will go to Maharashtra and not Karnataka.  


Advantages of GST


GST has the following advantages:

  • Eliminates the cascading tax effect
  • Simple online registration process
  • Lesser compliances
  • Increased efficiency in logistics
  • Assists in regulating the unorganized sector
  • Defined treatment of e-commerce
  • Composition scheme for small businesses
 

Components of Goods and Services Tax

There are three components of GST and they are as follows:

CGST stands for Central Goods and Services Tax. It is collected by the Central Government on an intra-state sale i.e. tax collected on transactions taking place in a single state.

SGST stands for State Goods and Services Tax. It is collected by the State Government on an intra-state sale tax collected transactions on taking place in a single state.

IGST stands for Integrated Goods and Services Tax. It is collected by the Central Government for inter-state sale i.e. tax collected on transactions pertaining in two different states.
 

Goods and Services Tax Rate


Tax rates are divided in slabs under Goods and Services Tax and are as follows:

  • 5% tax rate

It is applied on household necessities like sugar, edible oil, coffee, tea, life-saving drugs, Indian sweets, coal, etc. all fall under this category. However, milk is exempted from GST because it is a basic necessity.


  • 12% tax rate

It is applied on items such as processed foods and computers.


  • 18% tax rate

It is applied on industrial intermediaries and capital goods.


  • 28% tax rate

It is applied on luxury or high-end products and services like cars, cigarettes, consumer durables, etc.

 

How can I file all my GST Returns in less than 10 minutes?


By using Merrchant. It’s simple, easy and most importantly reliable.  

Merrchant has the following features:

Direct tax filing

You can directly file taxes through the portal.
 

Accurate

We have a 100% accuracy rate.
 

Gain knowledge

Learn more about GST and other taxes.
 

Notifications and alerts

We make sure that our customers never miss a due date by sending regular notifications and alerts.
 

Secure

Merrchant is extremely secure and reliable.  

Boost your business with Merrchant.
Shristi Patni

Shristi Patni is a finance and lifestyle expert and currently works at Merrchant.

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