Goods and Services Tax (GST)

Key takeaways
* GST is a value-added, indirect tax on goods and services consumed domestically.
* Consumers pay GST at point of sale; businesses collect and remit it to the government.
* Many countries use a single, nationwide GST rate; some use dual systems (federal + local).
* GST simplifies multiple indirect taxes and reduces tax cascading, but it can be regressive without exemptions or credits.

What is GST?

Goods and Services Tax (GST) is a value-added tax applied to most goods and services sold for domestic consumption. The seller adds GST to the sale price; the buyer pays the full price, and the seller remits the tax to the government. GST is sometimes referred to as VAT (value-added tax) in various jurisdictions.

Why governments use GST
* Simplifies the tax system by consolidating multiple indirect taxes (sales tax, excise, service taxes, etc.).
* Reduces tax cascading (tax on tax) through the input tax credit mechanism: businesses offset taxes paid on inputs against taxes collected on outputs.
* Makes collection more efficient and can reduce opportunities for tax evasion.

Unified versus dual GST structures
* Unified GST: A single tax rate administered nationally and applied across the country. It replaces several central and state-level indirect taxes.
* Dual GST: Some countries (e.g., Canada, Brazil) use a dual structure in which a federal GST is applied in addition to provincial or local sales taxes. In some regions, federal and provincial taxes are combined into a single harmonized rate (HST).

How GST prevents cascading: a simple example
1. Manufacturer buys raw materials for 10 (including 10% tax = 1).
2. Manufacturer adds value of 5 and sells the finished good for 15. Tax on sale = 1.50. Manufacturer claims credit for the 1 already paid, so net tax remitted = 0.50.
3. Wholesaler sells at a markup and claims input credit for tax already paid; only the incremental value is taxed at each stage.
This input tax credit system means only the value added at each stage is effectively taxed, avoiding the cumulative “tax on tax” that can occur without GST.

Who pays GST and how it’s calculated
* GST is ultimately borne by the end consumer.
* Calculation: price × GST rate. Example: a $1 item with a 5% GST costs $1.05.

Typical policy responses to regressivity
Because GST is levied on consumption, it can take a larger share of income from lower-income households (regressive effect). Common policy tools to reduce regressivity include:
* Exemptions or zero rates for essentials (food, healthcare, basic education).
* Reduced rates for specific goods and services.
* Targeted credits, rebates, or cash transfers to lower-income households.

Example: India’s GST reform
In 2017 India introduced a multi-rate GST to replace a complex system of cascading taxes. Rates were arranged by product category to balance revenue and equity:
* 0%: certain foods, books, newspapers, and some services
* 0.25%: specific goods like cut/semi-polished stones
* 5%: basic necessities (sugar, spices, tea)
* 12%: items like computers and processed foods
* 18%: many consumer goods (toiletries, industrial intermediaries)
* 28%: luxury goods and sin items (cars, cigarettes)
The reform aimed to reduce inflationary pressure from cascading taxes and simplify compliance.

GST vs. VAT and other similarly named taxes
* GST and VAT are functionally similar as indirect value-added taxes; the terms are often used interchangeably depending on the country.
* Differences are usually terminological or procedural (how rates are structured, exemptions, and which levels of government administer the tax).

GST vs. generation-skipping transfer tax (GSTT)
GST (Goods and Services Tax) should not be confused with the generation-skipping transfer tax (GSTT), a distinct U.S. federal tax on certain intergenerational transfers of wealth.

Benefits and drawbacks
Benefits:
* Simplifies indirect taxation and administration.
* Reduces tax cascading and may improve business compliance.
* Creates a uniform tax base across goods and services.

Drawbacks:
* Can be regressive unless mitigated by exemptions, lower rates on essentials, or compensatory transfers.
* Implementation and compliance require robust administrative systems.

Summary
GST is a widely adopted value-added tax designed to tax consumption efficiently and prevent cascading taxes. While it simplifies the indirect tax landscape and improves revenue collection, policymakers must address its potential regressive impact through exemptions, rate design, or targeted relief measures.