GST was implemented in India on 1st July 2017. One of the biggest tax reforms in the country since independence subsumed most of the indirect state and central taxes into one tax. From eliminating the cascading effect of taxation to regulating the unorganized sector, GST is helping the country in several ways. But while you might have heard about GST or might even be paying it if you own a business, do you know how GST works?

Let us have a look-

What are GST Rates?

There is a 4-tier GST structure for all the goods and services. The GST is calculated based on this structure. The 4 tax structures are 5%, 12%, 18%, and 28%. There are also some goods and services that are exempt from paying any GST. There is a separate GST rate of 3% on precious metals like gold and silver.

What is Input Tax Credit?

Now that you know how GST is calculated, the next important thing is an input tax credit. With the input tax credit, service providers and manufacturers while paying output tax can offset the amount they have already paid on the inputs.

For instance, if a manufacturer's output tax is Rs. 5,000 and he already paid input tax of Rs. 3,000 while making the purchase, his GST liability will only be Rs. 2,000 (Rs. 5,000-Rs. 3,000). However, the invoices should match to take benefit of this credit facility.

What are the GST Components?

To understand the GST process in detail, you should also know its components. GST has three parts-
  • IGST or Integrated GST
  • CGST or Central GST
  • SGST or State GST
When the centre levies the GST, it is considered as CGST. When a state levies it, it is known as SGST. Both taxes apply to transactions within a state. In the case of inter-state transactions, IGST is applicable, and the centre collects the same.

GST on Imports and Exports

The GST working also varies on import and export of goods or services. When goods are imported, IGST is applicable as they are considered as inter-state transactions. Apart from the applicable IGST, additional customs duties should also be paid on import of goods. No tax is payable when goods or services are exported. But even exporters can take advantage of the input tax credit.

While you can easily use a GST calculator for calculating GST, it is essential to understand what goes behind the calculation. Try to know more about the points discussed above, and it shouldn't be difficult for you to understand the working of GST.


The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.

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