What Is the Goods and Services Tax (GST)?
The goods and services tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption. Consumers pay the GST while businesses remitting these payments to the government act as intermediaries.
Critics often argue that GST disproportionately affects people in lower and middle-income brackets, categorizing it as a regressive tax that exacerbates income inequality. Consequently, to mitigate these concerns, many countries have introduced GST exemptions or reduced rates on essential goods like food and healthcare. Others have set up GST credits or rebates to support lower-income households.
It’s crucial not to confuse GST with the generation-skipping trust (GST), which has distinct fiscal implications.
Key Takeaways
- Universal Taxation: GST applies to goods and services sold domestically for consumption.
- Consumer Responsibility: Paid by consumers but remitted by businesses.
- Nationwide Single Rate: Often taxed uniformly across a nation.
- Simplified System: Preferred by governments for reducing tax complexities and avoidance.
- Concerns of Regressiveness: Critics highlight a disproportionate effect on lower-income earners.
Deep Dive into the Goods and Services Tax (GST)
The goods and services tax (GST) is an indirect federal sales tax on specific goods and services. Businesses add GST to the product price, which consumers pay at purchase. The business collects the GST and forwards it to the government. Many countries refer to this concept as Value-Added Tax (VAT).
Countries with a unified GST platform merge multiple central and state-level taxes into a single rate, simplifying the tax burden and administration. France pioneered GST in 1954, now adopted by around 140 countries, including Canada, Vietnam, Australia, Singapore, and India.
Dual Goods and Services Tax Structures
Some countries, like Canada and Brazil, have dual GST structures. Unlike unified GST systems, dual systems add a local sales tax to the federal GST. For example, Canada collects a federal tax of 5%, and provinces may levy additional taxes varying from 8% to 10%. Recently, several provinces combined GST and PST into a Harmonized Sales Tax (HST).
Critiques of the GST
GST is dubbed as a regressive tax because it takes a larger income proportion from lower-income households. This happens as GST is levied uniformly on consumables without regard to income level, thereby burdening lower-income consumers more heavily.
Case in Point: India’s Adoption of the GST
India launched a dual GST system in 2017 to eliminate the cascading effect of double taxation. Pre-GST, multiple taxes at different stages across manufacturing led to higher consumer costs. The GST replaced this with a streamlined system:
- Raw materials: GST paid on initial procurement.
- Manufacturer’s value addition: Tax after accounting for previously paid GST.
- Wholesaler’s markup: GST levied on added margins.
- Retail sale: Final GST calculated on end-price, factoring in all previous credits.
India’s GST rates are categorized for transparency:
- 0%: Essential foods and items.
- 0.25%: Semi-polished stones.
- 5%: Household necessities.
- 12%: Computers and processed foods.
- 18%: Common consumables.
- 28%: Luxury goods.
Goods and Services Tax vs. Generation-Skipping Transfer Tax
It’s critical to distinguish between GST and the generation-skipping transfer tax (GSTT). While GST is a consumption tax on goods and services, GSTT is applied federally on inheritance transfers to beneficiaries substantially younger than the donor.
Who Pays GST?
Generally, consumers or buyers of goods and services pay the GST, with exemptions in certain sectors like agriculture and healthcare.
Calculating GST
GST computation is straightforward: Multiply the product/service price by the GST rate. For instance, if the GST is 5%, a $1.00 item costs $1.05.
Benefits of the GST
The GST simplifies tax by consolidating multiple levies into one and is effective against tax evasion and corruption.
Are VAT and GST the Same?
Both VAT and GST are similar as they apply to goods and services sales. However, key differences lie in their application stages and geographic prevalence. VAT is typically European and collected at multiple transaction stages, while GST is global, applied at final sale.
The Bottom Line
The GST stands as a widespread tax system improving simplicity and reducing tax evasion. Nonetheless, its general application has raised regressive tax concerns, prompting some countries to consider adjustments aiding low-income households.
Related Terms: Value-Added Tax (VAT), Indirect Tax, Regressive Tax, Double Taxation, Generation-Skipping Trust (GSTT).
References
- Ernst & Young. “Worldwide VAT, GST and Sales Tax Guide 2022: France”, Download Download This Tax Guide, Page 595.
- Ernst & Young. “Worldwide VAT, GST and Sales Tax Guide 2022”, Download Download This Tax Guide, Page Preface.
- Ernst & Young. “Worldwide VAT, GST and Sales Tax Guide 2022: Brazil”, Download Download This Tax Guide, Pages 238-241.
- Ernst & Young. “Worldwide VAT, GST and Sales Tax Guide 2022: Canada”, Download Download This Tax Guide, Pages 296-298.
- Government of Canada. “General Information for GST/HST Registrants”.
- Prince Edward Island, Canada. “Backgrounder: Harmonized Sales Tax (HST)”.
- Motherboard. “GST may be a regressive tax, but part of a progressive system: Shawn Huang & WP’s Louis Chua clash over GST”.
- Financial Review. “The GST can be progressive: here’s how”.
- Ernst & Young. “Worldwide VAT, GST and Sales Tax Guide 2022: India”, Download Download This Tax Guide, Page 748.
- Government of India: Press Information Bureau. “Frequently Asked Questions (FAQs) on Goods and Services Tax (GST).”
- Ernst & Young. “Worldwide VAT, GST and Sales Tax Guide 2022: India”, Download Download This Tax Guide, Pages 752-753.
