What is GST and how does it work? – With example

Meaning of Goods and Services Tax (GST) in India

GST is a consumption based tax and a comprehensive indirect tax which shall levy on the supply of goods and services in India. It is the transformation of taxes in India. Presently, taxes are levied on sales, manufacture in the form of excise duty, however, under GST regime; the taxes shall be once SUPPLY is made. The concept of supply is very large under GST regime.

Presently, Indian indirect tax structure is very vast and complex. Under indirect tax ambit, we have

• Central Excise Act, 1944
• Service Tax Act (levied by Finance Act, 1994)
• Luxury tax
• 31 state VAT laws

GST is set to subsume all these taxes and will prevail as a single indirect tax levy in the whole country. However, with GST introduction, the compliance cost is all set to get increase, and it will hit the small taxpayer the most.

Let us understand this by way of an example:

Suppose Mr A sells bikes by purchasing it from the company. Mr A is based in Delhi. He purchases the bikes from Gujarat for 3 crore on which he pays IGST 20% [applicable because purchases are made interstate], which amounts to 60 Lakh. Now suppose, he sells the bike in Delhi for 4 crore on which he pays CGST/SGST @20% [applicable because sales are made Intra state].

Now as per GST, Mr.A needs to pay taxes as follows;

CGST/SGST to be paid = 80 Lakh

Input available = 60 Lakh

Total needs to be paid by Bank = 20 Lakh.

Hence, one can see that it is very simple and chances of credit being denied are very less.

Conclusion

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