What is GST? A Simple Explanation for Everyone in India

Hello there! Are you curious about what GST means and how it affects you as an Indian citizen? Well, you've come to the right place!

Goods and Services Tax (GST) is a significant tax reform in India that aims to simplify the tax system and make it more transparent. But what exactly is GST, and how does it affect us?

In this blog post, we'll break down the basics of GST in a way that's easy to understand, even for a kid! So, let's dive right in and learn more about this important topic.

What is GST?

GST stands for Goods and Services Tax. It's a tax that's levied on the supply of goods and services in India. In other words, whenever you buy something, you pay a little extra in taxes. This tax is then used by the government to fund various public services and infrastructure projects.

Imagine you're at your favorite ice cream shop. You buy a big cone with two scoops of chocolate ice cream. The shopkeeper gives you the ice cream and asks for money. But did you know that a part of the money you pay goes to the government? This is a type of tax.

Now, imagine if there were different types of taxes for different things. One tax for the ice cream, another for your shoes, and yet another for the movie ticket you bought last weekend. That would be quite confusing, right?

This is where GST comes in. GST is a single tax that is applied to all goods and services. So, whether you're buying ice cream, shoes, or a movie ticket, the tax is the same. This makes it easier for the government to collect taxes and for businesses to pay them.

Why was GST introduced?

GST was introduced to simplify the tax system in India. Before GST, there were many different taxes that people had to pay, like VAT, service tax, and excise duty.

For example, a business that makes shoes had to pay many different taxes. This made the shoes more expensive for you to buy.

This made it difficult for businesses to keep track of their taxes and for consumers to understand how much they were paying in taxes. GST was introduced to make things simpler and more transparent.

With GST, there is just one tax. This makes things simpler and cheaper. The business that makes shoes only has to pay one tax, which means they can sell the shoes at a lower price.

How does GST work?

GST is a destination-based tax, which means that the tax is collected at the point of consumption. In other words, the state where the goods or services are consumed is entitled to the tax revenue. 

GST is levied at every stage of the supply chain, from manufacturing to the final sale, but the consumer pays only the final tax amount. The unique feature of GST is the input tax credit mechanism, which allows businesses to claim a credit for the tax they have paid on their inputs, thus avoiding double taxation.

When a business sells a product or service, it charges GST on the sale price. GST is divided into three types: Central GST (CGST), State GST (SGST), and Integrated GST (IGST). 

The GST rate is 18%, which is divided into two parts: 9% CGST (Central GST) and 9% SGST (State GST). The CGST goes to the central government, while the SGST goes to the state government. IGST is charged when the goods or services are being transported between states.

For example, let's say you buy a book for ₹100. The business will charge 18% GST on the sale price, which comes out to ₹18. So, you'll pay a total of ₹118 for the book (₹100 + ₹18 GST). The ₹18 GST is then divided between the central and state governments.

Here's another example in form of infographic.

Who has to pay GST?

A taxable person is a person who is registered under the GST Act or is liable to be registered under the Act. A person is liable to be registered under the GST Act if their aggregate turnover in a financial year exceeds the threshold limit of Rs. 20 lakhs (Rs. 10 lakhs for some special categories of states).

Therefore, any person who is registered under the GST Act or is liable to be registered under the Act and makes a taxable supply of goods or services is required to pay GST to the government.

It is important to note that GST is a consumption-based tax, and the liability to pay GST is on the supplier of goods or services. However, the burden of the tax is ultimately borne by the consumer.

What are the benefits of GST?

GST has many benefits for both businesses and consumers. 

1. Simplified tax structure: GST simplifies the tax system by subsuming multiple indirect taxes into a single tax. This makes it easier for businesses to comply with tax laws and reduces the compliance cost.

2. Transparent tax system: GST makes the tax system more transparent by eliminating the cascading effect of taxes. This means that the final price of goods and services includes only the actual tax paid, making it easier for consumers to understand the tax component.

3. Reduced tax burden: GST reduces the overall tax burden on businesses and consumers by eliminating the hidden taxes that were built into the prices of goods and services.

4. Improved logistics and supply chain efficiency: GST eliminates the need for businesses to maintain multiple stock points across states, thus improving logistics and supply chain efficiency.

5. Boost to the economy: GST is expected to boost the economy by creating a single, unified market across the country. This will encourage competition, leading to better quality goods and services and lower prices for consumers.

If you are still confused about GST, then check out this video for a visual guide on GST.

Conclusion:

GST is a simple and comprehensive tax that's levied on the supply of goods and services in India. It's designed to simplify the tax system and make it easier for businesses to comply with tax laws. 

As a consumer, you pay GST on the products and services you buy, but it's worth it because it leads to lower prices and a more transparent tax system. We hope this blog post has helped you understand what GST is and how it works!