Goods and Service Tax (GST)- Definition, Rate Slabs and Calculation

GST has replaced India’s older multi-tax regime, improving tax collection rates and has helped boost public spending on infrastructure and welfare programmes. Here’s how you can boost your GST compliance.

For years we had a multi-taxed system in India, which levied different taxes on the same product. However, with the introduction of Good and Services Tax (GST) since July 2017, taxation got much simpler. It replaced the dozens of centre and state-levied taxes such as Value Added Tax (VAT), service tax, sales tax, entertainment tax, excise duty, custom duty etc.

In this article, we’ve tried to explain the concept of GST in detail and how it will affect the taxing of various products.

What is the GST?

The Goods and Services Tax (GST) is a comprehensive tax levied on manufacture, sales, and consumption of any product or service at the national level. It will mostly substitute all indirect taxes levied on these goods and services earlier by respective state and central governments of India.

GST is paid by the manufacturer, seller and consumer to the government at various stages. The idea behind implementing the new Goods and services tax structure was to eliminate the previous tax structure, where various indirect taxes were levied on goods and services at every stage of production, which elevated the final price of the product. Let’s understand this with the help of an example.

A manufacturer buys raw materials for making a notebook worth Rs. 100, inclusive of 10% GST. He then adds a value of Rs. 10 to the product during the process of manufacturing, which escalates the gross value of the notebook to Rs. 110. Now, the total tax amount on the manufactured notebook is Rs. 11 (10% of Rs. 110).

During the old taxation system, the manufacturer would be required to pay Rs. 11 as taxes on a single notebook. However, under the GST, he can set off the amount of tax he had already paid while purchasing the raw materials.

Therefore, the actual GST amount that he’ll have to pay to the government will be Rs. 1 (total tax amount minus the tax he has already paid), i.e. Rs. (11-10).

Now, the wholesaler adds his margin of Rs. 10, taking the total cost of the notebook to Rs. 120 and the total tax levied on it to Rs. 12 (10% of Rs. 120). Like the manufacturer, the wholesaler too can set off the GST that he had already paid while purchasing the goods from the manufacturer. Thus, the final GST amount owed by the wholesaler would be Rs. 1(12-11).

At the final step, the retailer adds his profit of Rs. 10, taking the total cost of notebook for the buyer to Rs. 130. The Goods and services tax applicable here will be Rs. 13(10% of Rs. 130), but since the retailer has already paid a major chunk of tax to the wholesaler, he can set it off. Thus, the final GST due to be paid by the retailer is Rs. 1 (13-12).

In the end, since the retailer will sell the product at Rs. 130, the GST paid by the customer for acquiring the notebook will be Rs. 13 (10% of Rs. 130).

GST rate slabs

The Goods and Services Tax rates levied on different products and services are divided into four slabs – 5%, 12%, 18%, and 28%. All the items are taxed at one of these pre-decided rates, on the basis of their demand and supply in the market. Here is a list of some common items and the GST rate levied on them:

  • 5% GST Slab – Household eateries such as edible oil, sugar, spices, tea, and coffee are included under this slab. Also, various services like restaurants, railways and public airways charge 5% GST for their services.
  • 12% GST slab – All processed foods, computers and its parts are included in this slab.
  • 18% GST slab – Daily necessities like hair oil, toothpaste, soaps, capital goods and industrial intermediaries are covered in this slab
  • 28% GST slab – All luxury items such as cars, consumer durables like air-conditioners and refrigerators, cigarettes and aerated drinks, high-end two-wheelers etc are included in this slab

How to calculate GST?

The process of calculating the Goods and Services Tax amount seems complex due to it multistage nature, different rate slabs and the subtypes of GST. However, to make the process simpler and easier, there are various GST calculator available online that can help you to calculate your owed GST amount conveniently.

As per the Central Goods and Services Act of 2017, if your business’s turnover exceeds Rs. 40 lakh annually (Rs. 20 lakh for some special states), it is mandatory for you to complete your GST registration process and file GST returns.

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