Meaning of Tax

Tax is a financial obligation which is to be paid to the government. Tax is charged on individuals, wealth or transactions. There are two major types of taxes, i.e. Direct Tax and Indirect Tax.

Duty is also a type of tax which is payable to the government on the manufacture or import/export of goods. There are two major types of duties, i.e. Excise Duty and Custom duty.

Concept of GST

GST (Goods and Services Tax) is an indirect tax which is charged when goods are sold or services are rendered. It is an indirect tax because the burden of this tax can be shifted from one person to another.

For example, a retailer purchased an article for ₹ 500 and paid ₹ 50 as GST. He sold it to a customer for ₹ 600 and collected ₹ 60 as GST from the customer.

 

Now, he keeps ₹ 50 (the tax that he had paid at the time of purchase) with him and remits the remaining ₹ 10 to the government.

Is the retailer bearing any tax burden ? The answer is: NO. Because, he got back his ₹ 50.

Who is bearing the burden of tax ? The answer is: CUSTOMER.

In the beginning, the retailer bore the burden of tax for sometime but later the burden was shifted to the customer. That’s why it is called an indirect tax.

 

Types of GST in India


There are four types of GST in India.

SGST (State Goods and Services Tax)

CGST (Central Goods and Services Tax)

IGST (Integrated Goods and Services Tax)

UTGST (Union Territory Goods and Services Tax)


INTRA-STATE TRANSACTION

If a transaction takes places within the state (intra-state transaction), then both SGST and CGST are charged. Transaction within the state means the supplier and the buyer both belong to the same state.

If a transaction takes places within the union territory, then both UTGST and CGST are charged.

 

INTER-STATE TRANSACTION

If a transaction takes place between two different states or two different union territories or one state and one union territory (intra-state transaction), then IGST is charged only.

Which state receives the tax in case of inter-state transaction ?

Ans: The state in which the goods are consumed receives the tax.

 

COMPUTATION OF TAX AND INVOICE PRICE

Invoice price means the price including tax which is payable by the buyer to the supplier.

Example 1

The marked price of an article is ₹ 500.

Tax rate = 12%.

Calculate the tax amount and the invoice price of the article.


Solution:

Marked price = ₹ 500

Tax is calculated on selling price.

However, since there is no discount, the tax is to be calculated on the marked price.

So, amount of tax = 12% of 500 = ₹ 60

Invoice price = Marked Price + Tax

                        = ₹ 500 + ₹ 60

                        = ₹ 560

Thus, a buyer has to pay ₹ 560 to the seller for the article.

 

Example 2

The marked price of an article is ₹ 500.

Discount on the article = 10%

Tax rate = 12%.

Calculate the tax amount and the invoice price of the article.


Solution:

Marked price = ₹ 500

Tax is calculated on selling price.

Selling price = Marked price – Discount

                      = ₹ 500 – 10% of ₹ 500

                      = ₹ 500 – ₹ 50

                      = ₹ 450

So, tax amount = 12% of 450 = ₹ 54

Invoice price = Selling Price + Tax

                        = ₹ 450 + ₹ 54

                        = ₹ 504

Thus, a buyer has to pay ₹ 504 to the seller for the article.

 

Example 3

Mr. A purchased an article from Mr. B by paying ₹ 600 excluding tax. Then, Mr. B raised the price of the article by 10% and sold it to C at a discount of 5%. If rate of tax is 12%, calculate the amount payable by Mr. C for the article.

Solution:

For Mr. B, the purchase price = ₹ 600

New price fixed by Mr. B       = ₹ 600 + 10% of ₹ 600

                                                = ₹ 660

Discount offered by Mr. B = 5%

So, the selling price = ₹ 660 – 5% of ₹ 660 = ₹ 627

Tax charged = 12% of ₹ 627 = ₹ 75.24

Invoice price = selling price + tax

                        = ₹ 627 + ₹ 75.24

                        = ₹ 702.24


 Example 4

A trader buys an article for ₹ 2400 in Mumbai and spends ₹ 800 on the transportation of the article. He sells the article to a customer at a profit of 20%. Calculate the amount of money he receives from the customer, tax is to be charged at the rate of 10%.

Solution:

Given, Purchase price = ₹ 2400,   Overheads = ₹ 800

So, Cost price = ₹ 2400 + ₹ 800 = ₹ 3200

Profit desired by the trader = 20%

Selling price = Cost price + Profit

                     = ₹ 3200 + 20% of ₹ 3200 = ₹ 3840

Tax   = 10% of ₹ 3840 = ₹ 384

Invoice price = Selling price + tax

                       = ₹ 3840 + ₹ 384

                        = ₹ 4224

Amount received from the customer = ₹ 4224

COMPUTATION OF SELLING PRICE WHEN INVOICE PRICE IS GIVEN

Example 5

The invoice price of an article is ₹ 560.

Tax rate = 12%.

Calculate the selling price of the article.

 

Solution:

Invoice price = ₹ 560

Tax rate = 12%

Let the selling price be x.

Tax amount = 12% of x =  

Invoice price = selling price + tax


                        = x  +  

                        =  

 

According to the problem,

 = 560

  ⇒ x =  = ₹ 500

 

ALTERNATIVE METHOD

Let the selling price be ₹ 100.

Tax amount = 12% of ₹ 100 = ₹ 12

Invoice price = selling price + tax

                        = ₹ 100 + ₹ 12

                        = ₹ 112

 

By unitary method,

When Invoice price is ₹ 112, the selling price = ₹ 100

When Invoice price is ₹ 1, the selling price = ₹  

When Invoice price is ₹ 560, the selling price = ₹   = ₹ 500

 

Example 6

The invoice price of an article is ₹ 504.

Discount on the article = 10%

Tax rate = 12%.

Calculate the marked price of the article.

 

Solution:

Given, invoice price = ₹ 504

Discount = 10%

Tax rate = 12%

 

Let the marked price be x.

Discount = 10% of x =  

Selling price = x  –    =   

Tax = 12% of selling price

       =  

       =  

Invoice price = selling price + tax

                      =  

                      =  

According to the problem,

  =  ₹ 504

 ⇒  x  =     =  ₹ 500

 

INPUT TAX CREDIT (ITC) AND NET GST LIABILITY

Input tax: Tax paid by a trader on buying the goods/services is called input tax.

Output tax: Tax charged by a trader on selling the goods/services is called output tax.

Input Tax Credit (ITC): A trader doesn’t remit the entire amount of output tax to the government. He retains as much amount as he had paid as input tax and then remits the remaining to the government. The portion of the output tax retained by the trader is called input tax credit (ITC).

 

Net GST payable = Output tax – Input tax

 

Note: Rates of tax used in the examples are hypothetical in nature.

 

PROBLEMS ON INTRA-STATE TRANSACTION

 

Example 7

A trader purchases some goods from the local market sells the same to a customer in the local market. Following are the particulars relating to the goods sold by him:

Sl

Particulars

₹

1.

2.

Goods purchased  (excluding tax)

Profit desired by the trader

8,500

14%

Calculate the amount of money to be paid by the customer to the trader for the goods. Assume the rates of CGST and SGST to be 10% each.

Solution:      

    COMPUTATION OF AMOUNT TO BE PAID BY THE CUSTOMER

Particulars

₹

Calculation of Selling Price

Purchase price (excluding tax) for the trader

Add: Profit desired by the trader (14% of 8,500)

SELLING PRICE

 

Calculation of Invoice price

Selling price

Add: CGST @ 10%

Add: SGST @ 10%

INVOICE PRICE

 

8,500

1,190

9,690

 

 

9,690.00

969.00

969.00

11,628.00

 

So, the total amount of money to be paid by the customer = ₹ 11,628.00

 

Note:

1) In case of intra-state transaction, both CGST and SGST are charged.

2) Amount to be paid by the customer means the invoice price.

 

Example 8

A trader purchases some goods from the local market sells the same to a customer in the local market. Following are the particulars relating to the goods sold by him:

Sl

Particulars

₹

1.

2.

Goods purchased  (excluding tax)

Profit desired by the trader

12,000

10%

 

Calculate the net GST liability of the trader. Assume the rates of CGST and SGST to be 12.5% each.

 

Solution:      

  COMPUTATION OF NET GST LIABILITY OF THE TRADER

Particulars

₹

Calculation of Input Tax

Purchase price (excluding tax)

CGST paid @ 12.5%  ……………………….. (A)

SGST paid @ 12.5%     ……………………...(B)

 

Calculation of Selling Price

Purchase price (excluding tax)

Add: Profit (10% of 12,000)

SELLING PRICE

 

Calculation of Output Tax

Selling price

CGST charged @ 12.5% on ₹ 13,200 ………….(C)

SGST charged @ 12.5% on ₹ 13,200  ...……….(D)

 

12,000.00

1,500.00

1,500.00

 

 

12,000.00

1,200.00

13,200.00

 

 

13,200.00

1,650.00

1,650.00

Net CGST liability = C – A

Net SGST liability = D – B

150.00

150.00

 

Net CGST liability of the trader = ₹ 150.00

Net SGST liability of the trader = ₹ 150.00

 

Note:

1)    The trader will collect ₹ 1650 as CGST from the customer but he/she will pay only ₹ 150 to the government.

2)    The trader will collect ₹ 1650 as SGST from the customer but he/she will pay only ₹ 150 to the government.


Example 9

A trader sells some goods to a customer in the local market and following are the

particulars relating to the goods sold by him:






Calculate the net GST liability of the trader. Assume the rates of CGST and SGST to be 12% each.

Solution:       















 Net CGST payable to the Central Govt.  = ` 192

 Net SGST payable to the State Govt.  = ` 192

 

Example 10

A shopkeeper buys an article from a wholesaler for ` 7,440 including CGST and SGST at 12%  each and sells the article to a buyer for ` 9,920 including CGST and SGST at the same rate. Find the GST to be paid by the shopkeeper to the government.

Solution:   












  

 Since the rates of CGST and SGST are equal,

 CGST to be paid = SGST to be paid  = ` 480 /2 = ` 240

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