Financial Planning Maths Notes
GST stands for Goods and Service Tax. Excise Duty, Custom Duty, VAT, Entertainment tax, Central sales tax. Service tax, Octroi, etc. were the different types of taxes. All these taxes are subsumed (incorporated) under GST.
GST is in effect from 1st July 2017.
Some terms of GST:
CGST and SGST are the two components of GST
- CGST : Central Goods and Service Tax. This is to be paid to the central government.
- SGST: State Goods and Service Tax. This is to be paid to the state government.
- GSTIN: Goods and Service Tax Identification Number. GSTIN is mandatory for the dealer whose annual turn over in the previous financial year exceeded ₹ 20 lakh.
GSTIN has 15 alphanumeric. This includes 10 digit PAN of the dealer.
- HSN code: Full form is Harmonized System of Nomenclature. All goods are classified by giving numerical code – HSN code.
- SAC: Full form is Service Accounting Code.
The rate of GST for Goods and service item are different varying from 0% to 28 %.
[Note: At present, electricity, petrol, diesel, etc. are not under purview of GST.]
(A) Study the Sample of Tax Invoice of goods purchase:
You will get an idea regarding computation of CGST and SGST.
Observe the given bill and fill in the boxes with appropriate number:
- CGST at the rate of 2.5 % is ₹ 5.00 and SGST at the rate of 2.5 % is ₹ 5.00.
- It means that the rate of GST on Pedhe is (2.5 + 2.5) % = 5 %, and hence the total GST is 10.
- The rate of GST on chocolate is 28 %, and hence the total GST is ₹ 22.40
- The rate of GST on ice cream is 18 %, and hence the total cost of ice cream is ₹ 236.00
- On butter, CGST rate is 6 % and SGST rate is also 6 %. So GST rate on butter is 12 %
- The rate of CGST and SGST are the same. The rate of GST = The rate of CGST + The rate of SGST.
(B) Study the following Tax Invoice of services provided:
GST in trading chain :
Trading chain (Within state)
Let’s learn through an example how GST is charged and paid to the government at every stage of trading.
Illustration: Suppose manufacturer of a watch sold one watch for ₹ 200. (including profit) to the wholesaler. Wholesaler sold that watch for ₹ 300 to the retailer. Retailer sold it to the customer for ₹ 400. Rate of GST charged at every stage is 12 %. Then how each trader pays GST and takes his input tax credit (ITC) at every stage of transaction is shown in the following flow chart. Observe and study it.
Explanation: Here, three financial transactions took place till the watch from manufacturer reaches the customer. How the taxes are charged, collected and paid to the central government and state government at each stage is shown below. The statement of taxes paid is given in the table thereafter.
Trading between GSTIN holders is known as Business to Business, in short B2B.
Trading between GSTIN holder and consumer is known as Business to Consumer, in short B2C. This is the last link in the trading chain.
GST is levied and collected at every stage of trading from manufacturer to consumer.
Input Tax Credit (ITC)
When a trader pays GST at the time of purchase, it is called ‘Input tax’.
When the trader collects GST at the time of sale, it is called ‘Output tax’.
Input Tax Credit = Output tax – Input tax
GST payable by the trader = Output tax – ITC
While paying taxes to the government, each trader in the trading chain subtracts the tax paid at the time of purchase from the tax collected at the time of sale and pays the remaining tax.
Suppose in the month of July the output tax of a trader is equal to the input tax, then what is his payable GST?
⇒ The trader’s payable GST is nil.
He has paid the input tax.
Output tax is the same as input tax
∴ the tax payable by the trader
= output tax – input tax = 0
Suppose in the month of July output tax of a trader is less than the input tax, then how to compute his GST?
⇒ When the output tax is less than the input tax, the trader will keep the output tax with him and the difference which is less will be carried forward for the next month.
For More Information Composition Scheme
The person whose annual turnover in the previous financial year is less than 1.5 crore can opt for composition scheme under GST rules. GST rates applicable to composition dealers are as follows.
GST rate for Composition Scheme
Some rules for composition dealers:
- Composition dealers cannot collect tax from the customers, hence they cannot issue tax invoice. They have to give ‘bill of supply’.
- Composition dealers should file the return quarterly (i.e. every 3 months.)
- Composition dealers cannot sell goods outside the state (Inter-state sale is not allowed). But they can purchase goods from other states.
- Composition dealers cannot avail the benefits of ITC.
- On the signboard of the shop, he should mention ‘Composition taxable person’.
- On the Bill of supply it is mandatory to print ‘Composition taxable person not eligible to collect tax on supplies in bold letters.
Types of taxes under GST:
- CGST – SGST (UTGST): Tax levied for trading Within state (Intra state).
- Composition Scheme: For those GSTIN holders whose annual turnover is between 20 lakh to 1.5 crore. They pay CGST and SGST with special rates.
- IGST: Tax levied by central government for Inter state trading.
IGST – Integrated GST (For Inter-state trade)
When the trading of goods and services takes place between two (or more than two) states, the GST is levied only by the Central Government, and is termed as IGST.
We should develop a habit of savings and investing
regularly for the future and old age requirements.
There are different ways of investments.
For investments, deep study and experience are both essential.
The various ways of investments: Mutual funds, Shares, Debentures, Bonds, Fixed Deposit, Recurring Deposit, Provident Fund, Insurance, Immovable property, Jewellery, etc.
To establish a company, desiring persons come together and form a company. Persons who form a company are called Promoters and the company is called Limited Company.
Share: A share is the smallest unit of the capital.
The value of a share is printed on company’s certificate with other details is called a share certificate.
Shareholder: A person who owns the share is called a shareholder. The shareholder is a part owner of the company in proportion of the number of shares he/she holds.
Stock exchange: The place where buying and selling of shares take place is called the stock exchange.
It is also known as share market or stock market, equity market or capital market. Companies should be listed in the stock market for trading.
Face Value (FV): The value printed on the share certificate is called the face value of the share. It is also called Nominal value or Printed value or Par value.
Market Value (MV): The price at which the shares are sold or purchased in the stock market is called the market value of the share.
Note: In live share market, the market value changes frequently.
Dividend: The part of annual profit of a company which is distributed per share among shareholders is called the dividend.
For the shareholder the dividend income is taxfree.
Comparison of FV and MV:
- If MV > FV, then the share is at premium.
- If MV = FV, then the share is at par.
- If MV < FV, then the share is at a discount.
Rate of Return (ROR):
Rate of Return on investment is considered in percentage.
Smita invested ₹ 12,000 and purchased shares of FV ₹ 10 at a premium of ₹ 2. Find the number of shares she purchased. Complete the given activity to get the answer.
FV ₹ 10, Premium = ₹ 2
∴ MV = FV + premium = ₹ 10 + ₹ 2 = ₹ 12
Number of Shares
Smita Purchased 1000 shares.
Brokerage and Taxes on Share Trading:
Brokerage: We buy or sell the shares through the registered members or organization (agency) of the stock market.
These members are called Share Brokers.
Share brokers charge some amount for undertaking the service of buying and selling of shares.
The amount they charge is called Brokerage.
Brokerage is paid on the market value of the share.
At the time of buying shares:
Buying price of 1 share = MV + Brokerage
At the time of seffing shares:
Selling price per share = MV – Brokerage
[Note : In the contract note of sale – purchase of shares, price of one share is shown with brokerage and taxes. ]
GST on Brokerage Services:
Share brokers provide services for purchase and sale of shares for their clients.
These services are charged under GST.
The rate of GST is 18 % on brokerage.
[Note: For tue safety of inveStors, there are other nominal. charges besides GST qn brokerage. These are Security Transaction Tax (STT). SEBI charge, stamp duty, etc. ]
We will consider only GST on brokerage.
Many investors, with common objectives, give their money to the professional experts.
The professional experts invest in shares and also invest in various other schemes. As a result, investment is diversified which reduces the risk factor and total dividend or profit is divided equally among the investors.
Mutual Fund is a professionally managed investment scheme, usually run by an AMC (Asset Management Company). They invest the money given by investors in different schemes, e.g. equity fund (in shares), debt fund (in debentures, bonds, etc.) or balanced fund as per the Investor’s choice.
When we invest in mutual fund, we get units.
The market value of a unit is called NAV (Net Asset Value).
NAV of one unit x Number of units Total fund value.
[Note: NAV of a unit changes frequently. One can redeem the units, as per NAy, when needed.]
Systematic Investment Plan (SIP):
One could invest small amounts at regular intervals in Mutual Funds.
This way of investment is called SIP.
This develops discipline of savings.
Investment in mutual fund through SIP for a long term is beneficial.