What is GST ? Please try to explain it in not less than 100 words . How is it calculated ? What are it's types? What is it's use now a days? Why it is preferred more?

What is GST ? Please try to explain it in not less than 100 words . How is it calculated ? What are it's types? What is it's use now a days? Why it is preferred more?


1 Answers

25757 Points
3 years ago

I will start with an example..

Mr. Sharma is a businessman who wants to start a business. For this he needs various raw materials which have to be imported from China and will need to be brought to Gurgaon – where he has his factory – by road through various states. Once he gets down on the process of estimating his costs he is a little troubled.

First, he needs to pay a customs duty for importing the materials on top of the shipping charges. This is fine but there are a lot of other taxes which he seems to be unable to comprehend. Also he finds out that when he has his final product ready he will have paid the Central and State Governments at least 10 different taxes not all of which are exclusive of each other. On diving deeper he finds many cases where a tax is also taxed by the government.

Petrol Prices are the perfect example. The price charged to dealers by the Oil Marketing Companies is Rs. 25.46 currently for a litre of petrol. Now Excise Duty is collected at Rs. 21.48 per litre by the Central Government and adding the dealer commission the price now is Rs. 49.22. This is not the end and Value Added Tax is now charged at 27% which takes the final price to Rs. 62.51 in Delhi. At first it may seem fair that both the Governments tax the product but it is not that innocuous. There is a tax on a tax here! The State Government charges 27% of the final amount in which Central Excise Duty has already been borne by the businessman.


Example Of GST Calculation

Let us assume that the GST is set at 20%. Suppose that the manufacturing cost of a Product A is 100 and assuming a GST of 20% the total amount is Rs. 120. The next step of taxation would be when the Product is sold to consumers, let’s say at a price of 150. So the GST will charge another 20% on just the difference of Rs. 150 and Rs. 120 i.e. only 20% on Rs. 30 which is equal to Rs. 6. So the final price is Rs. 150 + Rs. 6. Unlike the case of petrol pricing there is no tax on a tax now. This eliminates the cascading effect of taxes which is very prevalent in our economy and has been simplified to an elemental level in the example.

Since the GST will be applied at every step of value creation it will be very difficult for black money owners to participate anywhere in the value chain with the GST without accounting for all other transactions. The GST is estimated to provide an immediate boost of 0.9% – 1.4% of the GDP.


The GST replaces numerous different indirect taxes such as:

  1. Central Excise Duty
  2. Service Tax
  3. Countervailing Duty
  4. Special Countervailing Duty
  5. Value Added Tax (VAT)
  6. Central Sales Tax (CST)
  7. Octroi
  8. Entertainment Tax
  9. Entry Tax
  10. Purchase Tax
  11. Luxury Tax
  12. Advertisement taxes
  13. Taxes applicable on lotteries.

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