Commercial Arithmetic: Taxes and Applications

Goods and Services Tax (GST): Introduction and Calculation

In India, the taxation system has evolved significantly to simplify and unify the structure of indirect taxes. Before the introduction of GST, consumers and businesses faced multiple taxes such as Value Added Tax (VAT), Excise Duty, Service Tax, etc. The implementation of Goods and Services Tax (GST) was a major reform aimed at consolidating these various taxes into a single, comprehensive tax.

GST is a consumption-based tax levied on the supply of goods and services across India. It is a multi-stage tax, meaning it is applied at each stage of the supply chain (from manufacturing to final consumption), with provisions for input tax credit (ITC) to avoid double taxation. GST is destination-based, meaning the tax is collected at the point of consumption, not at the point of origin.

The core principle of GST is encapsulated in the phrase "One Nation, One Tax", striving for a seamless national market.

Types of GST

The type of GST levied depends on whether the supply of goods or services is within a single state (intra-state) or between different states/Union Territories or internationally (inter-state):

• Central Goods and Services Tax (CGST): This tax is levied by the Central Government on intra-state supplies of goods and services. The revenue from CGST goes to the Central Government.
• State Goods and Services Tax (SGST): This tax is levied by the respective State Government on intra-state supplies of goods and services within that state. The revenue from SGST goes to the State Government. For Union Territories without a legislature (like Chandigarh, Lakshadweep), the tax is levied as Union Territory Goods and Services Tax (UTGST) instead of SGST. The rates of CGST and SGST/UTGST are typically equal for a given transaction.
• Integrated Goods and Services Tax (IGST): This tax is levied by the Central Government on inter-state supplies of goods and services (e.g., from Maharashtra to Karnataka) and on imports into India. IGST is essentially the sum of the CGST and SGST rates applicable to that specific good or service. The revenue collected as IGST is later apportioned between the Central and State Governments based on recommendations from the GST Council.

In summary:

• Intra-state transaction: CGST + SGST (or UTGST) are levied. Both are calculated on the same taxable value.
• Inter-state transaction or Import: Only IGST is levied.

Calculating GST

GST is always calculated as a percentage of the taxable value of the goods or services. The taxable value is generally the price of the goods or services before adding any tax.

Let the taxable value of a good or service be $V$, and the applicable total GST rate be R%.

The total amount of GST charged is calculated as R% of the taxable value V:

If the transaction is intra-state, and the total GST rate is R%, then this rate is split equally between CGST and SGST. The CGST rate is R/2%, and the SGST rate is R/2%.

Note that the total GST amount is indeed CGST Amount + SGST Amount = $\frac{R/2}{100} V + \frac{R/2}{100} V = \frac{R}{100} V$.

If the transaction is inter-state, then only IGST is charged at the full rate R%.

The Final Price paid by the consumer or buyer is the sum of the taxable value and the total GST amount levied on the transaction.

Substituting the formula for Total GST Amount (iii):

Factor out V:

This formula is useful for directly calculating the final price if the taxable value and GST rate are known, or for finding the taxable value if the final price and GST rate are known.

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Comparison of GST with Sales Tax and Value Added Tax

To understand the significance of Goods and Services Tax (GST), it's helpful to compare it with the indirect tax systems that existed in India previously, primarily Sales Tax and Value Added Tax (VAT). While VAT was an improvement over the traditional Sales Tax system, it still had limitations that GST aimed to overcome.

Issues with Previous Tax Systems (Before GST)

The pre-GST indirect tax structure suffered from several drawbacks:

• Cascading Effect of Taxes (Tax on Tax): This was a major issue. For example, excise duty (levied by the Centre on manufacturing) was applied first. Then, VAT (levied by the State on sales) was calculated on the value that already included the excise duty. Similarly, other taxes might be levied without a proper mechanism to claim credit for the taxes paid on inputs. This meant that taxes were levied on previously taxed values at different stages of the supply chain, increasing the final price for the consumer beyond the actual value addition.
• Fragmented Input Tax Credit (ITC): Although VAT introduced the concept of ITC, it was limited. Businesses could typically only claim credit for VAT paid on purchases against VAT payable on sales *within the same state*. They could not easily claim credit for Central taxes (like Excise Duty or Service Tax) against State taxes (like VAT), or vice versa. Also, Central Sales Tax (CST), levied on inter-state sales, was generally not creditable against VAT or other taxes, becoming an additional cost for businesses and hindering inter-state trade.
• Multiple Taxes and Complexity: Businesses had to deal with numerous Central and State-level indirect taxes, each with its own rules, procedures, and compliance requirements. This led to significant complexity and administrative burden.
• Lack of National Market: The variations in VAT rates across states, along with the non-creditable CST on inter-state sales, created tax barriers that fragmented the Indian market, making it difficult to achieve seamless movement of goods and services across states.

How GST Addresses These Issues

GST was designed to mitigate these problems, primarily through a comprehensive and seamless Input Tax Credit (ITC) mechanism and by subsuming most of the earlier indirect taxes.

Under GST, a business pays GST on the goods and services it procures (Input Tax). When it sells goods or services, it collects GST from the buyer (Output Tax). The core principle is that the business can use the Input Tax paid as a credit to reduce its Output Tax liability. The business only needs to deposit the difference (Net Tax Payable) with the government.

Since GST applies to the entire supply chain and subsumes a wide range of earlier taxes (including Excise Duty, Service Tax, VAT, CST, etc.), the ITC chain is largely unbroken. This allows businesses to claim credit for GST paid at various stages, effectively eliminating the cascading effect of taxes. Tax is levied only on the value added at each stage.

The uniformity of GST rates and the crediting mechanism across states (enabled through IGST) help in creating a unified national market, simplifying inter-state transactions and reducing compliance burden for businesses.

Comparison Table: Sales Tax, VAT, and GST

Here is a comparative overview of the key features of the old Sales Tax system, VAT, and GST:

In essence, GST is a consumption tax that aims to tax only the value added at each stage of the supply chain, ultimately borne by the final consumer. The ITC mechanism is the core feature that distinguishes it significantly from the older systems and helps in achieving tax efficiency and reducing prices by preventing the cascading effect.

Solving Problems involving Taxes in Commercial Transactions

Problems involving taxes, particularly GST, are common in quantitative aptitude. These problems typically involve calculating the amount of tax on a given value, finding the price before or after tax, or integrating tax calculations with concepts of profit, loss, and discount.

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