How GST Works in Financial Market and How to Calculate it

How GST Works

How is GST Applied ?

The Goods and Service Tax (GST) refers to an indirect tax introduced by the Government of India under the Goods and Service Tax Act passed in the Parliament on 29th March, 2017. It came into effect from 1rst July, 2017. Tax is levied on processing, sales & consumption of goods and services for every value addition. It is one indirect tax system for the entire country and has liberated India from its critical structure of indirect taxation.

The impact of goods and services tax comes different across different industries. Means to say different industries from manufacturing, distributing and retailing will be affected from GST in different way. However, Small and medium business units or enterprises in India have been deeply impacted by GST since its implementation with numerous businesses facing financial shortcomings. However, there are multiple visible and tangible benefits which will take time to culminate into a positive outcome.

Every small and large organization requires a GST Identification Number to get registered under the Goods and service Tax policy. GSTIN provides your firm a real business entity with Indian government. With a few taps on your smartphone you can activate your goods and services identification number as GST now facilitates a full online module for registration. Whenever a sales transaction in any form occurs within states, an Integrated GST is charged. If sales take place outside the state (intra-state), then Central GST and State GST are levied.

You May Read: HSN codes for Goods and Service Tax in India

GST applies to the government in different forms. They are as follows –

  • State GST (SGST) is obtained by State Government.
  • Integrated GST (IGST) is obtained by the Central Government for inter-state transactions and imports.
  • Central GST (CGST) is obtained by Central Government.
  • Union Territory GST (UTGST) is obtained by the Union Territory Government.

Advantages of GST

  • Removal of geographical barriers and creating a single market open to everyone to buy, sell, import and export.
  • Common men deriving 2-way benefit, namely collection of tax at single point of transaction and elimination of the practice of paying ‘tax on tax.’
  • Reduction in overall tax amount to be paid with the removal of the cascading tax system and multiple tax points.
  • Overall production cost will diminish and profit will increase.

How GST works?

A product goes through a series of procedures before it reaches the end consumers. Previously various taxes were applicable at each step. GST has changed the entire scenario with inclusion of both taxes for central government as well as taxes for state government. Here is an illustration explaining how GST works and how the process is simplified for a GST calculator?

Stage 1: Manufacturing

Let’s take an instance of the apparel manufacturing industry and 10% GST applies to it.

Say, a manufacturer buys raw material for Rs. 1000 inclusive of the GST of Rs. 100 (10% of 1000). Then his value of Rs. 100 is added to the material during manufacturing. Thus, gross value becomes Rs. 1100.

You May Read: Documents Required For GST Registration

Hence, tax on the output comes to Rs. 110 (10% of 1100). Under the previous tax system, tax payable was Rs. 110 but as GST is applicable, a part of his tax will be cut off as upon purchasing raw materials he has paid some tax already. So, final GST to be incurred will be Rs. 10, i.e., total tax so far minus tax paid already (110-100).

Stage 2: Wholesale

Now, as apparel is transferred from the manufacturer to a wholesaler at a gross value of Rs. 1100 including a GST of Rs. 110 (10% of 1100). This is the margin gained by the wholesaler amounting to Rs. 100 and it totals to Rs. 1200 (1100+100). Hence, total tax amounts to Rs. 120 (10% of 1200). So, wholesaler gets a tax cut off for the tax already paid by him while he purchased his goods from the manufacturer. Thus, total GST amount incurred by the wholesaler amounts to Rs. 10 (120-110).

Stage 3: Retailer

This is the last stage when a retailer purchases the apparel from the wholesaler and hence gross value stands at Rs. 1200. Including the GST of Rs. 120 (10% of 1200). Here he gains a margin of Rs. 100 and add it to make the cost of the good to be Rs. 1300. Now, GST is applicable here amounting to Rs. 130 (10% of 1300). The retailer can ever have a tax cut off, and final GST applicable will be Rs. 10 (130-120).

Hence a win-win scenario arises and the value chain derives the advantage making it an easy bet for both the businessman and the consumers.

The above example well explains how GST is calculated and here’s a simple formula to eliminate the hassle for a GST calculator while paying tax.

Adding GST to the base amount

Add GST and GST Amount = (Original Cost x GST %) / 100

So, Net Price = Original Cost + Amount of GST

Removing GST from the base amount

Remove GST and then, GST Amount = Original Cost – (Original Cost x {100 / [100 + GST %]})

So, Net Price = Original Cost – Amount of GST

Leading financial institutions help you to feel comfortable about the stories you have heard about the impact of GST on working capital for businesses.  In case you have applied for working capital loan. You will soon find it out to be a rather negligible affair and whatever perception you carried all this time will prove to be mere myths.

You May Read: Penalties for Late Filing of GST Returns

The loan terms are simple to comply with. You can avail easy EMI options, flexibility in terms of tenor and interest rates. If you are still worried about implication of GST over availing a business finance, then be rest assured that it won’t hamper a thing about it. Just think about the prosperity of your business and the rest would be a cakewalk.

About Archi 57 Articles
Archana Singh is an independent finance and investment advisor since 4 years and recently added with Investment Pedia. User are welcome to put questions on her contributions.

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