2.5. Goods and Services Tax (GST)

● GST is a tax levied on the supply of goods and services.

Goods and Services Tax, commonly known as GST, is a single tax that is imposed on the supply of goods and services. Unlike previous tax systems, which had multiple taxes applied at various stages, GST aims to simplify the taxation system by combining different taxes into one. When a company sells a product or service, it must add GST to the price, making it clear how much tax is being paid by the consumer.

Think of GST like a ticket fee that you pay when entering an amusement park. Just as you pay a single fee to enjoy all the rides and services in the park, GST is a single tax that covers all the goods and services you purchase.

● Calculated on the Transaction Value (M.P. or Listed Price).

GST is calculated based on the transaction value of the goods or services sold. The transaction value is often the marked price (M.P.) or the listed price at which the goods or services are offered. This means that before any discounts or offers are applied, the GST is calculated on the original price.

Imagine you want to buy a new smartphone that costs $600. If the GST rate is 10$600 price tag. So, the GST would be $60, making the total amount you pay$660.

● GST Amount = Rate of GST×Price100.

To find out how much GST you need to pay, you can use the formula: GST Amount = (Rate of GST x Price) / 100. This formula helps you determine the precise amount of tax that is added to the selling price based on the GST rate set by the government.

If you wanted to calculate the GST for a book priced at $20 with a GST rate of 5$1. This means you'd pay $1 in GST for the book, making your total spending$21.

● Price Including GST = Price + GST.

Once you have calculated the GST amount, you can find the total price that the consumer will pay. This includes the original price plus the calculated GST. The formula is simple: Total Price Including GST = Price + GST.

Continuing with the book example, if the book costs $20 and the GST is$1, the total price you would pay at checkout would be $20 +$1 = $21.

● Input GST: Tax paid on purchases; ● Output GST: Tax collected on sales.

In a business context, 'Input GST' refers to the GST that a business pays when it purchases goods or services needed to run its operations. Conversely, 'Output GST' is the GST that a business collects from its customers when selling goods or services. Understanding the distinction between these two types of GST is crucial for businesses to manage their tax liabilities effectively.

If a baker buys flour (Input GST) to make cakes and then sells the cakes to customers (Output GST), the difference between the tax they pay on their ingredients and the tax they charge to customers helps them reconcile their tax payments.

● Net GST Payable = Output GST – Input GST.

The Net GST payable is calculated by subtracting the Input GST from the Output GST. This tells the business how much tax they owe to the government after accounting for the taxes they have already paid on their purchases. If Output GST is greater than Input GST, the business must pay the difference to the tax authorities.

If the baker collected $50 in Output GST from cake sales but paid$30 in Input GST on flour, their Net GST payable would be $50 -$30 = $20. This means the baker needs to pay$20 in GST to the government.

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