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An Essential Guide To Goods And Services Tax
Last Updated on: November 7th, 2024
Running a business is no easy job; from building marketing strategies to handling tax obligations, you?ll likely have a hard time. So, if you want to succeed, you must take on these challenges and overcome them with the help of tools and specialists.
As a business owner, managing taxes is one of the challenges you?ll encounter. It is especially true for limited liability companies (LLCs) and corporations because they?re state-registered, unlike sole proprietorships and partnerships.
Taxes play a crucial role in the growth and development of a country. That?s why governments require all state-registered businesses to pay their taxes at the right time. Failure to do so may result in penalties and significant legal consequences (e.g., temporary business closure)
However, did you know that not all business taxes are to be paid by you? Some taxes must be paid by the consumer when they purchase a product in the market. This type of tax is called the goods and services tax (GST).
In this article, you?ll learn everything you need about GST. Stay tuned to learn more.
What Is GST?
The goods and services tax is a type of indirect tax added to the cost of products and services distributed for local consumption. In other countries, GST is also known as value-added tax (VAT).
The GST is shouldered by the consumer at the point of sale. Once a purchase has been made, businesses will collect the GST portion of their sales and forward it to the government as a part of their tax obligation.
What Are The Countries With GST?
The first country to implement the GST system was France in 1954. They are then followed by around 160 countries, including the United States, Canada, Australia, India, Brazil, Spain, Singapore, Nigeria, Italy, and more.
These countries often have a unified tax rate applied across the country. It?s a combination of central taxes (service tax, excise tax, and sales tax) and state-level taxes (sin tax, luxury tax, and entertainment tax), acting as a single tax.
How Is GST Calculated?
Calculating GST is simple and easy. It can be manually solved using a formula or automatically solved using a GST calculator. A GST calculator is a software application that generates GST automatically once all the necessary details are included.
If you want to add GST manually, here?s what you need to do:
- Obtain the original price (GST-exclusive price) of a particular product.
- Multiply the original price by 0.1 (10%)?this is the GST. Keep in mind that the rate may vary depending on which country you live in.
- Add the GST to the original price?this is now the GST-inclusive price.
To understand the process better, here?s an example you can follow using a product that costs USD$200:
To determine the product?s GST, multiply its original cost by 0.1, which will give you USD$20. Then, add the GST to the original price, which will give you USD$220. That will be the actual cost of the product once it?s released on the market.
Below is another way of applying GST to your products. In this process, there?s no need to add the GST, as it will be included after you multiply the original cost.
- Obtain the original product cost.
- Multiply it by 1.1. It will give you the total cost of the product inclusive of GST.
For example, if you want to find the GST-inclusive price of a product valued at USD$250, all you will have to do is multiply it by 1.1. It will give you a value of USD$275, meaning the GST is USD$25.
However, be careful when obtaining the GST-exclusive price when given only with a GST-inclusive price. Most people would probably subtract 10% from the GST-inclusive price to acquire the GST-exclusive price, but this is wrong.
What you need to do is divide the GST-inclusive price by 11 and subtract the quotient from the GST-inclusive price. For example, a market value of USD$220 divided by 11 will give you USD$20 GST. It means the GST-exclusive price is USD$200.
The manual process may seem quick and easy, but it?s a lot of work, especially when selling different products. Can you imagine multiplying and adding multiple values whenever there?s a change in your product?s price? So, let the calculator handle the process instead.
What Are The Types Of GST?
In India, there are four types of GST to be followed. These include:
1. State Goods And Services Tax (SGST)
State goods and services tax is GST added to the cost of products and services sold within a particular state. It replaces other kinds of state tax imposed on products and services, such as entertainment, luxury, entry, sin, excise, and more.
Furthermore, that particular state is responsible for managing all the SGSTs under its jurisdiction.
2. Central Goods And Services Tax (CGST)
The central goods and services tax is a tax levied on the cost of products and services, but it?s managed by the central government, not the state. For example, state A can collect the CGST for every product sold within its boundaries, but it must forward it to the central government.
In addition, CGST can co-exist with SGST, but both should have equal values. For example, if a state has a 10% CGST, its SGST should also amount to 10%.
3. Union Territory Goods And Services Tax (UTGST)
This type of GST functions like SGST but governs intra-union territory transactions instead of intrastate transactions. Also, it follows the rules provided by SGST law because most of the members of the union territory don?t have a proper legislature.
4. Integrated Goods And Services Tax (IGST)
The integrated goods and services tax is a tax levied on products and services across different states. This will be shared by the participating state and central governments.
For example, a product in state A has IGST worth USD$500. That amount will be divided between the state where the product is sold and the central government.
Final Words
Goods and services tax is a tax added to the original cost of all products and services. It is then paid by the consumer once a purchase has been made. After that, it will be collected and forwarded to the government by the business that produced them.
Before applying GST, check its rate in your state because it may vary from state to state. Also, if your company operates in India, check what type/s of GST your state uses.
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