What Is the Goods and Services Tax (GST)?

What Is the Goods and Services Tax (GST)?

Let me explain the Goods and Services Tax, or GST, directly to you. It's a value-added tax, or VAT, applied to most goods and services sold for domestic consumption. You, as the consumer, pay this tax, but the businesses selling those goods and services are the ones who remit it to the government.

Critics often highlight that the GST can disproportionately affect people in lower and middle income brackets, making it a regressive tax. They argue it worsens income inequality and social disparities. To counter this, some countries exempt essential items like food and healthcare from GST or apply reduced rates. Others provide credits or rebates to ease the burden on lower-income households.

Don't confuse this with the generation-skipping trust, also called GST, which involves a different tax known as GSTT.

Key Takeaways

Here's what you need to know about GST: It's a tax on domestically sold goods and services for consumption. The tax is built into the final price you pay at the point of sale, and the seller passes it to the government. Typically, it's a single rate applied nationwide. Governments favor it because it streamlines the tax system and cuts down on avoidance. However, critics say it hits lower-income earners harder than those with higher incomes.

Understanding the Goods and Services Tax (GST)

I'm going to break down GST for you. It's an indirect federal sales tax added to the cost of specific goods and services. The business includes the GST in the product's price, so when you buy it, you're paying the sales price plus GST. The seller collects that GST portion and sends it to the government. In some places, it's called Value-Added Tax, or VAT.

Most countries with GST use a single unified system, applying one tax rate across the entire nation. This merges central taxes like sales tax, excise duty, and service tax with state-level ones such as entertainment tax, entry tax, transfer tax, sin tax, and luxury tax, collecting them all as one tax. Everything gets taxed at that single rate.

Fast Fact

France implemented GST first in 1954, and since then, around 140 countries have adopted some version of it. Countries with GST include Canada, Vietnam, Australia, Singapore, the United Kingdom, Spain, Italy, Nigeria, Brazil, and India.

Dual Goods and Services Tax Structures

Only a few countries, like Canada and Brazil, have a dual GST structure. Unlike a unified system where the federal government collects and distributes the tax to states, a dual system adds a federal GST on top of a local sales tax. In Canada, for instance, the federal government charges 5%, and some provinces add a provincial sales tax of 8% to 10%. Your receipt would show both GST and PST applied to your purchase.

Recently, some Canadian provinces combined GST and PST into the Harmonized Sales Tax, or HST. Prince Edward Island started this in 2013 by merging federal and provincial taxes into one. Others like New Brunswick, Newfoundland and Labrador, Nova Scotia, and Ontario have done the same.

Critiques of the GST

GST is often seen as regressive, taking a larger share of income from lower-income households than from higher ones. It's applied uniformly to consumption, not to income or wealth. Lower-income families spend more of their money on GST-taxed essentials like food and household goods, so it burdens them more disproportionately.

Because of this, some countries are considering adjustments to make GST more progressive, such as taking a higher percentage from higher-income earners.

Example: India's Adoption of the GST

India introduced a dual GST in 2017, marking the biggest tax reform in decades. The goal was to end tax-on-tax, or double taxation, which builds up from manufacturing to consumption.

Take a manufacturer making notebooks. They buy raw materials for Rs. 10, including 10% tax, so Rs. 1 tax on Rs. 9 materials. They add Rs. 5 value, making the total Rs. 15. The 10% tax on the finished good is Rs. 1.50, but they offset the previous Rs. 1, leaving an effective tax of Rs. 0.50.

The wholesaler buys for Rs. 15, adds Rs. 2.50 markup, sells for Rs. 17.50. The 10% tax is Rs. 1.75, offset by Rs. 1.50, so effective Rs. 0.25. The retailer adds Rs. 1.50 margin, sells for Rs. 19, with effective tax of Rs. 0.15 after offset. Total tax from start to finish: Rs. 1.90.

Since July 1, 2017, India's GST rates are: 0% on certain foods, books, newspapers, homespun cotton cloth, and hotel services; 0.25% on cut and semi-polished stones; 5% on necessities like sugar, spices, tea, coffee; 12% on computers and processed food; 18% on hair oil, toothpaste, soap, industrial items; 28% on luxuries like refrigerators, tiles, cigarettes, cars, motorcycles.

Before GST, taxes piled up at every production stage, leading to higher costs passed to you, the consumer. GST reduces this and aims to lower inflation over time.

Goods and Services Tax vs. Generation-Skipping Transfer Tax

GST isn't the same as the generation-skipping transfer tax, or GSTT—they're unrelated. GST is a VAT on purchases of goods or services. GSTT is a 40% federal tax on inheritances transferred to beneficiaries at least 37½ years younger than the donor, preventing wealthy people from dodging estate taxes by skipping generations.

Who Has to Pay GST?

Generally, you, the consumer or buyer, pay GST on goods or services. Some items, like agricultural or healthcare products, might be exempt depending on the country.

How Is GST Calculated?

Calculate GST by multiplying the price of the good or service by the GST rate. For example, with 5% GST, a $1.00 candy bar costs $1.05.

What Are the Benefits of the GST?

GST simplifies taxation by consolidating multiple taxes into one system. It also reduces tax avoidance by businesses and cuts corruption.

Are VAT and GST the Same?

VAT and GST are similar indirect taxes on sales of goods and services, collected by businesses and passed to the government. But differences exist: VAT is common in Europe and collected at each production stage, while GST is global and collected only at the final sale to the consumer. VAT often covers more items, and rates vary by goods, services, and country.

The Bottom Line

In summary, GST is a tax on most goods and services for domestic consumption in many countries. You pay it, and businesses remit it to the government. Some places exempt essentials or offer rebates for lower-income households. It's often a single national rate, simplifying taxes and reducing avoidance. Dual systems, like in Canada and Brazil, add local taxes. Critics note it's regressive, burdening lower incomes more.