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Super Simplified: What exactly is GST in India?

If we had to define GST (Goods and Services Tax) formally, we’d say that “GST is an indirect tax that is levied on Goods and Services.” But you’re not here to read what hundreds of sites tell you, right? We totally get you and that’s why we’re going to present a super-simplified explanation of GST that even 2-year-old kid can understand (no, we’re not kidding).

So, what exactly is GST?

Let’s time-travel a bit. Before GST was introduced in India, there were so many indirect taxes levied by Central as well as State governments that even Albert Einstein would have lost the count.

Let’s understand GST with a simple example.

Suppose there’s a company named ABC and they manufacture shoes. Now when ABC buys raw material and machines, worth Rs 100 (including taxes). ABC adds the value of Rs 50 (process + manpower + machines + margin) in making of one pair of shoes. So the total value becomes Rs 150. If the state has a VAT (Value Added Tax) rate of 10%, the value of the tax would be 15. However, in case of GST, the 10% tax is only levied on the added value. It means that the 10% tax will not be applied to Rs 100. It will be applied to the Rs 50 added afterward. So, the value of the tax becomes Rs 5.

Now ABC sells this to a wholesaler named DEF. DEF purchases the pair at Rs 150 and adds on value of Rs 20. So, that’s 170 Rupees in total. In the non-GST structure, the tax (assuming 10%) would be Rs 17. However, it will be Rs 2 (10% on 20) in the GST structure.

GHI, a retailer, purchases this at 170 and adds Rs 30 as value. This takes the total to Rs 200. Again, the tax is levied on the Rs 30 and it will be Rs 3, instead of Rs 20 in the VAT structure.

So, the total GST here would be 10 + 5 + 2 + 3 = Rs 20.

In the non-GST structure, this number would be much higher, thanks to the taxation on taxation. This cascading effect is taken out of the equation by the introduction of GST. As a result of this, we’ve seen prices of many commodities fall.

We hope that the GST picture seems a bit more clear to you now. Please share your thoughts if required to understand more.

Comment ( 1 )

  1. Nice article worth reading

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