# GST (Goods and Services Tax)

> GST is a value-added tax applied at each stage of the supply chain on the sale of goods and services.

- **URL**: https://dodopayments.com/glossary/gst

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GST is a value-added tax applied at each stage of the supply chain on the sale of goods and services.

It is collected at every stage of production and distribution but allows businesses to claim input tax credits on GST paid for their purchases. This reduces the overall tax burden by preventing double taxation. Consumers ultimately bear the tax, as it is included in the final sale price.

The main goal of GST is to simplify taxation, eliminate multiple indirect taxes, and create a uniform tax structure. It also minimizes tax cascading (tax on tax), making goods and services more affordable.

**How Does GST Work?**

GST is a multi-stage tax that is applied at every step of the supply chain. Here's a breakdown of how it works:

1. **Multi-Stage Taxation**

GST is levied at every stage of the production and distribution process. For example:

- Manufacturer pays GST on raw materials.

- The wholesaler pays GST on the purchase of finished goods from the manufacturer.

- The retailer pays GST on the purchase of goods from the wholesaler.

- Consumer pays GST on the purchase of goods from the retailer.

2. **Input Tax Credit (ITC)**

One of the most significant features of GST is the Input Tax Credit mechanism. Businesses can claim a credit for the GST they've paid on their purchases, which reduces their overall tax liability. This ensures that tax is only levied on the value added at each stage of the supply chain.

Example

- If a manufacturer buys raw materials for INR 1,000 and pays 18% GST (INR 180).

- The manufacturer adds value to the raw materials and sells the finished product for INR 1,500, charging 18% GST (INR 270).

- The manufacturer can claim an input tax credit of INR 180 (GST paid on raw materials) and only pays INR 90 (INR 270 - INR 180) to the government.

3. **Destination-Based Tax**

This GST is collected at the point of consumption.

For example, if goods are produced in State A but consumed in State B, the GST revenue goes to State B.

**Types of GST**

In India, GST is divided into three components:

- **CGST (Central GST):** Collected by the central government on intra-state sales.

- **SGST (State GST):** Collected by the state government on intra-state sales.

## Learn More

- [Navigating Indian GST for SaaS](https://dodopayments.com/blogs/navigating-indian-gst-saas)
- [Global VAT and GST guide for AI SaaS](https://dodopayments.com/blogs/global-vat-gst-ai-saas)
- [Tax compliance essentials for solopreneurs](https://dodopayments.com/blogs/solopreneurs-tax-compliance)