
Goods and Services Tax (GST)
The goods and services tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption. A country with a unified GST platform merges central taxes (e.g., sales tax, excise duty tax, and service tax) with state-level taxes (e.g., entertainment tax, entry tax, transfer tax, sin tax, and luxury tax) and collects them as one single tax. India has, since launching the GST on July 1, 2017, implemented the following tax rates: A 0% tax rate applied to certain foods, books, newspapers, homespun cotton cloth, and hotel services. A rate of 0.25% applied to cut and semi-polished stones. A 5% tax on household necessities such as sugar, spices, tea, and coffee. A 12% tax on computers and processed food. An 18% tax on hair oil, toothpaste, soap, and industrial intermediaries. The final bracket, taxing goods at 28%, applies to luxury products, including refrigerators, ceramic tiles, cigarettes, cars, and motorcycles. The previous system with no GST implies that tax is paid on the value of goods and margin at every stage of the production process. Under a GST system, the previous tax paid can be applied against this additional tax to bring the effective tax rate to Rs. 1.50 – Rs. 1.00 = Rs. 0.50. Compared to a unified GST economy where tax is collected by the federal government and then distributed to the states, in a dual system, the federal GST is applied in addition to the state sales tax.

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What Is the Goods and Services Tax (GST)?
The goods and services tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption. The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services.




Understanding the Goods and Services Tax (GST)
The goods and services tax (GST) is an indirect federal sales tax that is applied to the cost of certain goods and services. The business adds the GST to the price of the product, and a customer who buys the product pays the sales price inclusive of the GST. The GST portion is collected by the business or seller and forwarded to the government. It is also referred to as Value-Added Tax (VAT) in some countries.
How the Goods and Services Tax (GST) System Works
Most countries with a GST have a single unified GST system, which means that a single tax rate is applied throughout the country. A country with a unified GST platform merges central taxes (e.g., sales tax, excise duty tax, and service tax) with state-level taxes (e.g., entertainment tax, entry tax, transfer tax, sin tax, and luxury tax) and collects them as one single tax. These countries tax virtually everything at a single rate.
Dual Goods and Services Tax (GST) Structures
Only a handful of countries, such as Canada and Brazil, have a dual GST structure. Compared to a unified GST economy where tax is collected by the federal government and then distributed to the states, in a dual system, the federal GST is applied in addition to the state sales tax. In Canada, for example, the federal government levies a 5% tax and some provinces/states also levy a provincial state tax (PST), which varies from 7% to 10%. In this case, a consumer's receipt will clearly have the GST and PST rate that was applied to their purchase value.
More recently, the GST and PST have been combined in some provinces into a single tax known as the Harmonized Sales Tax (HST). Prince Edward Island was the first to adopt the HST in 2013, combining its federal and provincial sales taxes into a single tax. Since then, several other provinces have followed suit, including New Brunswick, Newfoundland and Labrador, Nova Scotia, and Ontario.
Which Countries Collect the Goods and Services Tax (GST)?
France was the first country to implement the GST in 1954; since then, an estimated 160 countries have adopted this tax system in some form or another. Some of the countries with a GST include Canada, Vietnam, Australia, Singapore, United Kingdom, Monaco, Spain, Italy, Nigeria, Brazil, South Korea, and India.
India's Adoption of the Goods and Services Tax (GST)
India established a dual GST structure in 2017, which was the biggest reform in the country's tax structure in decades. The main objective of incorporating the GST was to eliminate tax on tax, or double taxation, which cascades from the manufacturing level to the consumption level.
For example, a manufacturer that makes notebooks obtains the raw materials for, say, Rs. 10, which includes a 10% tax. This means that they pay Rs. 1 in tax for Rs. 9 worth of materials. In the process of manufacturing the notebook, the manufacturer adds value to the original materials of Rs. 5, for a total value of Rs. 10 + Rs. 5 = Rs. 15. The 10% tax due on the finished good will be Rs. 1.50. Under a GST system, the previous tax paid can be applied against this additional tax to bring the effective tax rate to Rs. 1.50 – Rs. 1.00 = Rs. 0.50.
In turn, the wholesaler purchases the notebook for Rs. 15 and sells it to the retailer at a Rs. 2.50 markup value for Rs. 17.50. The 10% tax on the gross value of the good will be Rs. 1.75, which the wholesaler can apply against the tax on the original cost price from the manufacturer (i.e., Rs. 15). The wholesaler's effective tax rate will, thus, be Rs. 1.75 – Rs. 1.50 = Rs. 0.25.
Similarly, if the retailer's margin is Rs. 1.50, his effective tax rate will be (10% x Rs. 19) – Rs. 1.75 = Rs. 0.15. Total tax that cascades from manufacturer to retailer will be Rs. 1 + Rs. 0.50 + Rs. 0.25 + Rs. 0.15 = Rs. 1.90.
India has, since launching the GST on July 1, 2017, implemented the following tax rates:
The previous system with no GST implies that tax is paid on the value of goods and margin at every stage of the production process. This would translate to a higher amount of total taxes paid, which is carried down to the end consumer in the form of higher costs for goods and services. The implementation of the GST system in India is, therefore, a measure that is used to reduce inflation in the long run, as prices for goods will be lower.
Related terms:
Cascade Tax
A cascade tax is a system that imposes sales taxes on products at each successive stage in their progress from raw material to consumer purchase. read more
Consumer Spending
Consumer spending is the amount of money spent on consumption goods in an economy. read more
Consumption Tax
A consumption tax is a tax on the purchase of a good or service; or a system taxing people on how much they consume rather than what they add to the economy (income tax). read more
Double Taxation
Double taxation refers to income taxes paid twice on the same income source. It occurs when income is taxed at both the corporate and personal level, or by two nations. read more
Harmonized Sales Tax (HST)
The harmonized sales tax is a hybrid of the Canadian goods and services tax and provincial sales tax applied to goods and services. read more
Indirect Tax
An indirect tax is passed off to the consumer as part of the purchase price of a good or service. read more
Inflation
Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy. read more
Markup
The term markup refers to the difference between the market price of a broker's investment and the price of the investment when sold to a customer. read more
Profit Margin
Profit margin gauges the degree to which a company or a business activity makes money. It represents what percentage of sales has turned into profits. read more