1.1.2. Formulas

● GST = Taxable Amount × GST Rate

The Goods and Services Tax (GST) is calculated by multiplying the taxable amount (the price of goods or services before tax) by the GST rate (which is a percentage). For example, if the taxable amount is ₹1,000 and the GST rate is 18%, the GST would be ₹1,000 × 0.18 = ₹180. This formula helps businesses determine how much tax they need to collect from customers.

Imagine you are buying a new phone that costs ₹20,000. If the GST rate is 18%, you would calculate how much tax to add to the price of the phone. The calculation would go like this: 20,000 × 0.18 = ₹3,600. So, the GST on the phone is ₹3,600, making the total price ₹23,600.

● Final Price = Cost Price + GST

The final price that a consumer pays for a product includes the base cost (or cost price) plus the GST added to that cost. For instance, if the cost price of an item is ₹5,000 and the GST was calculated at ₹900, the final price paid by the consumer would be ₹5,000 + ₹900 = ₹5,900.

Think of buying a book. If the book costs ₹250 and the GST applicable is ₹45, when you go to the bookstore, the shopkeeper calculates the final amount you need to pay: ₹250 (cost) + ₹45 (GST) = ₹295. That's how much you hand over to buy the book!

● Input Tax Credit (ITC): Credit received for tax paid on purchases.

Input Tax Credit (ITC) is a mechanism that allows businesses to reduce the tax they have paid on purchases (inputs) from the taxes they owe on sales (outputs). For example, if a business pays ₹500 as GST on purchases and charges ₹800 GST on sales, the business can claim an ITC of ₹500 against the ₹800 it has to pay. This means the business only pays ₹300 to the government.

Imagine you run a lemonade stand. You buy lemons and sugar for ₹200 and pay ₹36 in GST. Later, you sell your lemonade and charge your customers ₹300 and collect ₹54 in GST. With ITC, you can subtract the ₹36 you paid from the ₹54 you collected, so you only need to send ₹18 to the tax department.

● Net GST Payable = Output GST – Input GST

To find out how much GST a business needs to remit to the government, you need to calculate the net GST payable. This is done by subtracting the input GST (the GST paid on purchases) from the output GST (the GST collected on sales). If a business has collected ₹3,000 in output GST but paid ₹2,000 in input GST, the net GST payable is ₹3,000 - ₹2,000 = ₹1,000.

Let’s say you are a florist. After buying supplies, you pay ₹1,800 in GST for your flowers and supplies (input GST), and you sell your beautiful bouquets collecting ₹2,700 (output GST). To know how much you owe in GST, you calculate: ₹2,700 - ₹1,800 = ₹900. Therefore, you need to pay ₹900 in GST to the government.

Example A shopkeeper buys goods worth ₹10,000 at 18% GST and sells them for ₹15,000. ● Input GST = ₹10,000 × 18% = ₹1,800 ● Output GST = ₹15,000 × 18% = ₹2,700 ● Net GST = ₹2,700 – ₹1,800 = ₹900

In this example, we go through the steps of calculating GST for a shopkeeper. First, the shopkeeper buys inventory worth ₹10,000 with an 18% GST rate. The input GST here would be ₹10,000 multiplied by 0.18, which results in ₹1,800. Later, the shopkeeper sells this inventory for ₹15,000 and calculates the output GST as ₹15,000 multiplied by 0.18, which results in ₹2,700. To find out the net GST that the shopkeeper owes, subtract the input GST from the output GST: ₹2,700 - ₹1,800 equals ₹900.

Think of a bakery owner who buys flour and sugar for ₹10,000 and pays ₹1,800 in GST. After baking delicious cakes, the owner sells them for ₹15,000 and collects ₹2,700 in GST. The difference between what they collected from customers and what they paid for the ingredients tells them their tax obligation. They quickly realize they need to send ₹900 to tax authorities, ensuring they keep their accounts correct!

--