GST on Profit or Total Sales Value?

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Published Date:  12-02-2024   Author:   amitha-shet
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Introduction to Goods and Services Tax (GST)

The economic structure revolves around the composition of goods and services tax. The goods are tangible and the services are intangible. Both of them have their distinct requirements and sales tax as well. Be it the government, businesses, or consumers, they all have an impact on the GST somehow.

Businesses tend to grow when they welcome more business as this will levy more taxation. The whole process is responsible for making the economic growth of the country better. When the taxation is higher, it eventually helps in collecting more revenue.

Consumers have their bittersweet relationship with GST. For the consumers, the profit-based system perhaps wouldn’t translate into price reduction. Hence the benefits become less tangible.

Goods and services tax has brought a massive change in the overall perspective of businesses. They have seen growth, ease in the process, and automation as well. The economic welfare has become better. The GST is the backbone of any business and the more the businesses, the more the taxation hence, it ends up collecting more revenue. This will eventually be fruitful for your own country.

It’s recommended to use tools and online software to make the process easy. The more automated business you have, the higher the chances for fewer errors, and the process also expedites.

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Understanding GST Calculation Methods

The following are the different calculation methods for GST. Choosing the GST calculation approach helps you decide the accurate formula for it. There are various GST calculation methods, let’s get to know different formulas as per the different situations.

  1. Composition scheme calculations: Small and medium-sized businesses who work under the composition scheme, are subjected to the levy of a flat GST rate and that too on the total turnover.

To calculate, the formula will be:

Annual turnover x composition rate = Payable GST

  1. Addition of GST on top: One of the most basic scenarios where this method is used. It’s mostly the use of the consumers as they use this formula/method to find out the total price along with GST.

Formula:

Price excluding GST(net price) x (1+GST rate/100) = price including GST (gross price)

  1. Subtracting GST to find net price: This method is mostly used to identify the net price without the GST, knowing the gross price.

Formula:

Price including GST / (1+GST rate/100) = price excluding GST

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  1. Calculation of GST payable by registered business: The businesses tend to calculate the payable GST on the sales and the purchases they have made.

The formulas are as under:

*GST payable on sales: total sales value x GST rate / 100

*GST payable on purchase: ITC available

*Net GST payable: GST payable on sales – ITC available

These formulas are a great help in calculating the GST, net price, and gross price easily. Different situations come up with different values. All you have to do is to bring in use these formulas and calculate a specific value of GST. However, solely depending on these formulas would not always work. There should be a proper understanding of the whole situation as well.

Also Read: GST Calculator Online – Simplify Your Daily Finances And Taxes

Factors Influencing GST Calculation

The calculation of GST is a mere conflict of numbers and formulas and needs thorough research and understanding as well. However, there are a few factors that should be kept in mind while you calculate GST:

  1. Updates and notifications: It’s very important to stay up to date on whatever is happening on the GST portal. Stay updated with the recent changes. Go through the website of GST regularly so you don’t miss any updates. 
  2. Nature of supply: The nature of supply plays an essential role in identifying where to pay the GST and by whom. 
  3. Place of supply: Location plays a pivotal role. It’s where you get to know the applicability of the GST. 
  4. Rate of GST: To save yourself from overpaying the GST or underpaying it, you must go through the tax slabs for various transactions. Check where the tax stands at your transaction and then pay it.

Comparing Taxation Scenarios: Profit vs. Sales Value

Both the taxation values including profit-based taxation and sales value-based taxation have their pros and cons. These taxations are also very important in the pool of goods and services tax. While we discuss profit-based taxation, let’s get to know the advantages and disadvantages that come along with taxation on profit vs. sales value.

Advantages:

  1. Just when the tax burden is lessened, the businesses focus on increasing the profit margin. This helps in the overall productivity of the business. 
  2. It helps in different innovations. 
  3. It helps in reducing the regressive impact on the business.

Disadvantages:

  1. Sometimes it gets difficult to verify the profit of any company. It’s also time-consuming at the same time. This whole process increases the cost of compliance as well. 
  2. The public services are greatly disturbed as it becomes challenging for the government to collect revenue.
  3. Sometimes the businesses come towards a situation where there is a risk of revenue leakage.

When the GST is applied to the sales of any goods and services no matter if there is any profit margin for the business, that’s what we call sales-based taxation.

While we discussed the pros and cons of profit-based taxation, let’s get to know sales-based taxation.

Pros:

  1. The GST applied on the sales of goods and services is a simplified and easy process. It doesn’t require a lot of verification and also reduces the cost of compliance for the government and for the business as well. 
  2. The more the businesses, the more the taxes. When all the businesses contribute towards the sales of goods, they equally take part in levying the taxes as well. When they pay the taxes, it eventually helps in improving the revenue collection which indirectly is beneficial for the government. GST implications for businesses work on the phenomenon where if the business spreads, there will be more tax. 
  3. It becomes hard for the businesses to evade taxes. This system is easy to walk on. It also helps in the betterment of the compliance system.

Cons:

  1. Even if there is a small business that isn’t growing quite well, that business is also supposed to pay the GST on the total sales of goods. 
  2. Many businesses tend to opt for short-term sales instead of long-term sales. It’s mainly because the burden of the tax remains the same regardless of the profit margin.

Also Read: Demystifying GST Calculations: A Comprehensive Guide For Sales And Purchases

Addressing Common Misconceptions about GST Calculation

There are various misconceptions regarding the calculation of GST. Since there is a huge Impact of GST on financial statements, it’s important to let go of these misconceptions.

These are:

  1. Everything gets taxed under GST: This is a myth as there is a great variety of goods that are made exempt from paying any GST. Goods that are related to health and medicines, books, medical devices, and certain food items are all exempted from paying any GST hence, it’s not true that every good has to pay GST. 
  2. GST is added on top of existing prices: GST plays a great role in replacing cascading taxes which are applied before. It might look like it’s an additional cost but, sometimes the tax burden decreases for a lot of different goods and services. It also leads to price reductions in certain cases. 
  3. The GST rate is always 18%: This is another myth as there are certain tax slabs of GST. Each slab has its restrictions to be paid. For example; high-end and luxurious goods are levied to pay 28% of GST only. However, 18%,12%,5%,3%, and 0% have their categories where they pay the GST according to the tax slab. 
  4. Only registered businesses pay GST: Not only registered businesses but consumers also pay taxes. GST is levied on the unregistered businesses as well. 
  5. You have to pay GST twice if you have paid through credit cards: One last myth says that GST has to be paid twice if the payment is made through a credit card. It’s false. GST Has to be paid once on the transaction. Doesn’t matter if you have paid via cash or card, it will apply for once with the same rate of tax.

Also Read: Impact of GST calculation Errors: How to avoid mistakes

Conclusion

The situation of whether to apply GST on total sales or profit is still a huge debate. GST has brought various changes in making the administration of businesses better. The overall impact of GST can be seen through the changes it has brought over time.

It will also help make a broad tax base. It’s also helpful in tax collection efficiently. While these are the pros, there are certain cons as well including the burden it puts on the smaller businesses.

Another situation where the GST will be applied to the profit has its pros and cons. The pros include the encouragement it endorses on the value creation and investment as well. The con is that it increases administrative discrepancies.

It’s also recommended to stay up to date. Regular visits to the official GST website can help you stay updated with any recent changes. Staying up to date with the GST portal and the website will help you notify of any recent changes. For the sake of your business, keep checking their website every day.

FAQs:

  • What are the benefits of GST in India?

GST has been beneficial for the state of India in subsequent ways. These are:

  1. It has made it quite accessible for every citizen since all of the procedures have shifted online. 
  2. It has helped in improving the logistics.
  3. It has helped in cross-checking that no one is paying tax twice. 
  4. It has eased the transportation of goods.
  5. It has helped in increasing higher thresholds for registration.
  6. It has made the overall process systematic and has regulated it as well.
  • What are the opportunities for GST in India?

There are several opportunities for GST in India such as it helps in eradicating the multiplicity of taxation, helps in reducing transaction costs, and wastages that are claimed unnecessary. It also helps in reducing the cascading effect. Apart from this, it helps in reducing the average tax burden and the chances of corruption as well. 

  • How is the GST calculated?

The GST tax rate has to be multiplied by the price of the goods and services. 

  • What is the biggest advantage of GST?

While GST has brought massive changes in the taxation system, there are a few undeniable advantages. GST has brought easy-to-access online payment methods, it has greatly lowered the cascading effect of tax, compliance numbers have been recorded in a decreased amount, and has greatly affected the logistics as well. Overall, GST has brought a huge change in economic growth as well. 

  • What is the GST audit?

GST audit is also known as reconciliation of payments and tax liability. The GST audit makes sure about the compliance and that too as per the laws set by GST. It also educated the taxpayers to enforce compliance in terms of laws and procedures.

  • Which goods have the highest GST?

The goods which have the highest GST are: 

  1. Luxury goods
  2. Cigars
  3. Air conditioner parts 
  4. Aircraft
  5. Pumps used in fueling
  6. Cheroots
  • How is the refund calculated under GST?

The formula for calculating a refund under GST is:

(Turnover of rated supply of goods and services) x net price / adjusted total turnover – tax payable on the inverted goods or the supply. 

  • Is the GST invoice mandatory?

Either a person is supplying goods or services or if he’s supplying both, he has to issue an invoice. The category of the invoice record will depend on the type of registered person who is making the supply. 

  • Which country has the highest GST?

India is considered as number one country when it comes to calculating the highest GST among all the countries in the world. 

  • Which tax brings in the most revenue?

The individual income tax is considered to be the category of tax that brings in the most revenue as a whole. This category of tax was considered the only source of revenue back in 2021. 

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Amitha Shet

Amitha is a creative enthusiast, which gets her into educating the world about things she comprehends. Finance, business, and digital transformation are the topics that she is profoundly interested in so that she can make things simpler for the audience. She is currently a content strategist for a fintech company. She holds a Bachelor of Engineering in Civil Engineering, although finance is a niche that piques her interest to not just educate but to invest and gain experience.

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