GST stands for Goods and Services Tax which came into effect on 1st July 2017. This is indirect taxation, which an end consumer usually pays.
GST replaced many other indirect taxes such as excise duty, VAT, service tax, entry tax and luxury tax.
In brief, this tax is levied on the supply of goods and services. It is calculated on the value added to any goods. Goods and Services Tax in India is a comprehensive, destination-based and multi-stage tax added on every value addition.
Let's take a complete look into what these various terms mean, thereby understanding what GST is all about.
- Comprehensive - GST covers every aspect of sale and purchase. It replaced various other taxes. It is called comprehensive because it encompasses every aspect of commercial life.
- Destination-based - GST is levied in a state where the product is sold rather than the state where it was manufactured. For example, if these goods were produced in West Bengal and sold in Andhra Pradesh, the GST will be levied and collected in Andhra Pradesh.
- Multi-stage - In the production of any goods or services, there are usually plenty of stages. These stages include the procurement of raw materials, production or manufacture, warehousing, selling to wholesalers, retailers and finally, the end consumers. At every stage, GST is levied. This makes it a multi-valued tax.
- Value addition - Let's take an example of textile production. First, raw materials such as cotton or silk are taken and made into cloth. This increases the value of the raw materials. Then the fabric is designed into clothes which further enhances their value. After the dresses are made, they are branded and sold to retailers who advertise and market them, thereby increasing their value. GST is levied on each of these stages where value is added to the product.
With this understanding of what is GST tax, you can go on to understand different types of GST.