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.

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:

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.

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 ₹1,000 and pays 18% GST (₹180).

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

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

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: