The Goods and Services Tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption. It is a comprehensive, multi-stage, destination-based tax: comprehensive because it has subsumed almost all the indirect taxes except a few state taxes, multi-stage as it is imposed at every step in the production process, but is meant to be refunded to all parties in the various stages of production other than the final consumer, and destination-based because it is collected from point of consumption and not point of origin like previous taxes.
GST is designed to replace a slew of indirect taxes with a federated tax and is therefore expected to reshape the country’s $2.4 trillion economy, but its implementation has received mixed reactions. The main goal of GST is to eliminate the cascading effect of taxes on the production and distribution prices of goods and services. The cascading effect occurs when a tax is imposed on a tax, leading to an increase in the price of goods and services.
Under GST, goods and services are taxed at the following rates: 0%, 5%, 12%, 18%, and 28%. There is also a special rate for precious metals and a cess on certain luxury and demerit goods. The introduction of GST has brought about a significant change in how businesses operate, impacting accounting, invoicing, and pricing strategies.
The GST system in India is a dual system which means that both the State and the Central governments will levy tax on goods and services. It comprises of:
- CGST (Central Goods and Services Tax) which is collected by the Central government on an intra-state sale (e.g., transaction happening within Maharashtra)
- SGST (State Goods and Services Tax) which is collected by the state government on an intra-state sale (e.g., transaction happening within Maharashtra)
- IGST (Integrated Goods and Services Tax) which is collected by the Central government for inter-state sale (e.g., Maharashtra to Tamil Nadu)
In summary, GST aims to make India a unified common market with a comprehensive tax on goods and services.
