What is Goods and Services Tax, and how to calculate GST?
GST is an acronym for Goods and Services Tax, which is value added tax system of Indirect Taxation levied on both Goods and Services sold for domestic consumption. Most of the people say it as Goods and Service Tax by forgetting to use plural for Service in the phase. So, correctly to call it is Goods and Services Tax.
In the GST Tax Mechanism, the total Tax is ultimately levied on the end consumer, and it is also called as Last-Point Retail Tax. At every stage, tax is calculated on Net Sales of Goods and/or Services, i.e. Tax on Sales will be set off against the Tax on Purchases of Goods and/or Services.
Calculation of Tax Payable to the Government by the GST Registered Tax Payers.
In this illustration AccountsGuy is the local vendor of the Fountain Pens. Now let us understand how the GST on net sale of the Gaia High Luxury Omas Fountain Pen is calculated.
Purchase of the Gaia High Luxury Omas Fountain Pen
|
Purchase cost of the Gaia High Luxury Omas Fountain Pen |
$ 28,813.55 |
|
Add: Tax @ 18% (28,813.55 x 18%) |
$ 5,186.44 |
|
Total Purchase Value of the Pen |
$ 34,000.00 |
AccountsGuy purchased the product to sell it by paying $ 34,000/- including GST tax amount of $ 5186.44, of which can be set off against the sale of the product with margin.
Sale of the Gaia High Luxury Omas Fountain Pen
|
Purchase cost of the Gaia High Luxury Omas Fountain Pen |
$ 28,813.55 |
|
Profit of the Product 20% (28813.55 * 20%) |
$ 5,762.71 |
|
$ 34,576.26 |
|
|
Add: Tax @ 18% on ( 34,576.26 x 18%) |
$ 6,223.73 |
|
Total Sale Value of the Pen |
$ 40,800.00 |
Now he has sold the pen with a margin of 20% on cost of the Pen. Now we can calculate the GST to be payable to the government as follows.
Calculation of Net Tax Payable to the Government
Method 1:
Tax on Sales – Tax on Purchases = Net Tax Payable
$ 5,762.71 – $ 6,223.73 = $ 1,037.29
Method 2
Profit of the Product x Rate of Tax = Net Tax Payable
$5,762.71 x 18% = 1,037.29
Therefore, the tax liability added at every stage of the profit accumulated on cost the product, hence it is also called as value-added tax. In some Countries it is implemented as Value Added Tax (VAT) yet there are some difference between the VAT and GST.
So, GST is Indirect Tax System where tax is collected from the citizens of the respective countries indirectly by levying on goods or services utilized by them. And the ultimate Tax Payer for government is the Consumer.
