Goods and Service Tax (GST)

What is Goods and Service Tax (GST)?

Goods and Service Tax (GST): The Goods and Services Tax (GST) is a type of tax added to the price of most things you buy, like goods and services used within a country. Businesses collect this tax from you when you make a purchase, but then they send it to the government.

Some people criticize GST because they think it hits low and middle-income earners harder, making it unfair. They worry it could widen the gap between rich and poor and cause more social and economic problems. To tackle this, some countries exempt certain essential items like food and healthcare from GST or lower the tax rates on them. Others give tax credits or refunds to help lower-income households cope with the impact of GST.

It’s important not to mix up the Goods and Services Tax (GST) with something else called the generation-skipping trust, which is completely different.

Making Sense of the Goods and Services Tax (GST)

The Goods and Services Tax (GST) is a type of tax added to the price of certain goods and services by businesses. When you buy something, you pay the price that includes GST, and the business collects this GST and gives it to the government. In some places, GST is also known as Value-Added Tax (VAT).

Many countries use a unified GST system, which means they have one tax rate that applies to everything sold within the country. This system combines different taxes from both the central government (like sales tax and service tax) and state governments (like entertainment tax and luxury tax) into a single tax. Basically, most things are taxed at the same rate across the whole country.

Dual Goods and Services Tax Systems

Only a small number of countries, such as Canada and Brazil, use a dual GST system. Unlike a unified GST system where the federal government collects the tax and distributes it to the states, in a dual system, there’s both a federal GST and a local sales tax added. For instance, in Canada, the federal government imposes a 5% tax, while some provinces also have their own sales tax, which can vary from 8% to 10%.

More recently, certain provinces in Canada have merged the GST and provincial sales tax into a single tax called the Harmonized Sales Tax (HST). Prince Edward Island was the first to do this in 2013, followed by other provinces like New Brunswick, Newfoundland and Labrador, Nova Scotia, and Ontario.

Challenges with the Goods and Services Tax (GST)

GST is seen as a regressive tax, which means it takes a bigger part of income from lower-income families compared to wealthier ones. This happens because GST is charged at the same rate on everything you buy, no matter how much you earn.

People with lower incomes often spend most of their money on things like food and basic items, which are taxed under GST. This means they end up paying a larger part of their income in taxes. Some countries are thinking about changing this by making higher-income people pay a bigger share of GST.

Illustration: India’s Implementation of the GST

India introduced a dual GST system in 2017, marking a major change in its tax structure. The main goal was to stop double taxation, where taxes pile up as goods move from makers to consumers.

For example, let’s say a notebook maker buys materials for Rs. 10, including a 10% tax. That’s Rs. 1 in tax for Rs. 9 worth of materials. After adding value during manufacturing, the notebook’s total value becomes Rs. 15, and the 10% tax on that is Rs. 1.50. With GST, the tax paid earlier can be subtracted from this, making the effective tax rate Rs. 0.50.

When the notebook is sold to a wholesaler for Rs. 15, and then to a retailer for Rs. 17.50, taxes are added at each step. But with GST, taxes paid earlier can be subtracted from these, reducing the total tax.

India now has different tax rates for different items:

• 0% tax on certain items like food and books
• 0.25% on cut and semi-polished stones
• 5% on household basics like sugar and tea
• 12% on things like computers
• 18% on items like toothpaste
• 28% on luxury goods like fridges and cars.

Before GST, taxes were charged on the value of goods and added at every stage, making things more expensive for consumers. GST aimed to lower this and reduce inflation in the long term.

Comparison: Goods and Services Tax (GST) vs Generation-Skipping Transfer Tax (GSTT)

It’s important not to mix up GST with GSTT because they’re totally different. GST is a tax added to goods or services you buy, similar to VAT. On the other hand, GSTT is a federal tax of 40% on transferring inheritance from one person to someone at least 37½ years younger. This tax stops rich people from avoiding estate taxes by giving their money to younger family members like grandchildren.

Conclusion

In summary, the Goods and Services Tax (GST) is a tax applied to most items sold within a country. Consumers pay for it, and businesses then pass it on to the government. Some places exempt certain items from GST or lower the rates for essential goods, or offer credits to help lower-income families. Governments like GST because it’s simple and helps prevent tax avoidance. In some countries like Canada and Brazil, there’s both a federal and local sales tax. However, some people criticize GST for being unfair to those with lower incomes.

Frequently Asked Questions (FAQ’s)