Terms Beginning With 'g'

Goods and services tax (GST)

What is meant by Goods and Services tax?

Goods and Services tax or GST is a tax that customers must pay upon the consumption of goods and services like clothes, food, everyday items, etc. It is an indirect tax that is levied on businesses providing these goods and services but is paid by the customers. An indirect tax is a tax that is levied on one party, but the burden of the tax ultimately falls on another party.

Businesses include the GST amount into the price of the product they are selling. Thus, the GST amount is paid by the consumers as it is passed down to them by the manufacturers.

How does GST work?

Most countries have a unified system of applying GST. However, there may be complexities attached to the application of GST. In Australia, the GST rate is 10%. Thus, a single rate applies to the entire country. A GST tax integrates various other taxes that are levied on businesses and on the goods and services purchased in an economy.

Unified GST means that the central tax and state-level taxes are merged into one. Thus, every item is taxed individually at the same rate across the entire country.

How can businesses register for GST?

Businesses must register for a GST once they fulfil certain criteria. In Australia, businesses must have an annual turnover of $75,000 or more to be able to register for GST. However, if a business has an annual turnover less than $75,000 then the owner has the choice to opt out of registering for GST.

Businesses have a period of 21 days to register once they reach the turnover limit. However, taxi drivers and ride-sharing drivers must register for a GST irrespective of their turnover. The turnover limit for non-for-profit organisations is higher at $150,000.

Businesses must register for a GST through the Australian Business Register which is the central registry of Australian business information. Businesses can also register with the ATO or the Business Portal.

How is GST implemented in Australia?

GST application may vary from country to country. Many countries have faced issues with the application of GST as it is not a straightforward tax applied in an ad-valorem manner.

When businesses make a taxable sale of more than $82.50(including GST), then the businesses must send a tax invoice to their customers. This enables the customers to avail GST credit.

There are two methods of accounting GST, these include: the cash basis or the accrual basis. Only businesses with a turnover of less than $2 million can choose which accounting method to adopt. However, other businesses must choose accrual basis.

Under the cash basis, sales or purchases are accounted in the period in which a business makes a sale or pays for a purchase. This method allows the tax to be better aligned with the cash flow. Under the accrual basis, the sales and purchases are accounted in the period during which invoices are made for customers or are received against a purchase.

What is GST credit or input credit?

Buyers can claim GST credit for the goods and services bought by them for their business. This is also called an input credit. Customers are eligible for a GST credit only if they have a business in operation. It allows them to reduce on dual GST application as the products they purchase as inputs from other businesses would be taxed as final goods later.

The purchase against which GST credit is granted must be solely used for business and not for making input-taxed supplies. The credit can only be availed if the price of the input includes GST. A corresponding tax invoice must be available with the buyer against which credit would be given. Another important prerequisite is that the supplier of the product must have registered for GST.

It is important to note that GST credit is given only for those products which are to be used as inputs. Thus, if a customer were to purchase few goods for private use and the rest as inputs for his business, then credit can only be availed for the latter.

GST credit can only be applied to those purchases against which GST is levied. For instance, credit can not be given against the wages paid to employees as there is no GST on wages.

What are the advantages of GST?

  1. Avoiding double taxation: GST helps avoid the cascading effect of taxes which refers to the multiple levels of taxation that a good might go through. With GST goods can be taxed once and for all.
  2. Choice for small businesses: Small business have an option on whether to opt for GST or not. This gives them more leverage in conducting business and the tax burden on them is reduced.
  3. Less deadweight loss: Most taxes add less revenue to the government that the amount of money they pull out of the system. However, under the GST reform, which was modelled on the VAT system, taxation is done on spending rather than income. Thus, it is less inefficient and less distortionary.
  4. Reduced state taxes: This was the main intent which led to the adoption of GST in Australia. GST allows the eradication of various state level charges, the burden of which fell on the sellers. It also reduces tax avoidance which occurs in the cash economy.

What are the disadvantages of GST?

Once a business is registered for GST, they must complete a business activity statement (BAS) every quarter. BAS is a form that requires data on all the sales, expenses as well as the GST collected and spent by the business. Thus, implementing GST with the proper formula and calculating the right amount might be a lengthy process.

In addition to this, GST requires business to have digital system integrated in their functioning. Thus, applying GST means having full fledged digital account of all transactions in the business. This is especially important for businesses that are small and would have to make the shift to GST in the near future.

What is an Absolute Advantage? Absolute advantage is one of the key macroeconomic terms, which is based on the principles of Capitalism and is often utilised in international trade-related decisions. Absolute advantage refers to the competence of a company, region or country to produce goods or services in an efficient manner compared to any other economic entity. The efficiency in production can be achieved by: Production of the same quantity of good or services as produced by other entity by utilising fewer amount of resources Production of a higher quantity of good or services as produced by other entity by using the same amount of resources What is the Significance of Absolute Advantage? Different countries or businesses possess a different set of ability owing to their location, soil composition, weather, infrastructure, or human resource skills. When applied in the right direction, various factors may pan out to offer more cost-effectiveness and hence build absolute advantage of the entity in comparison to others.  The absolute advantage remains one of the critical determinants for the choice of the goods or services to be produced. Absolute advantage in a particular area often translates into profitability in the area. The profit margin increases by the achievement of cost efficiency, allowing the entity to ensure higher profitability over the competitors.  For example, let us assume that the US can produce ten high-quality aircrafts utilising a specific amount of resources. China, on the other hand, can build 6 similar quality aircrafts using the same amount of resources. Thus, in the production of an aircraft, the US holds Absolute Advantage Let’s say the US has the ability to manufacture a certain amount of steel using 10 tonnes of iron ore. China, on the other hand, can produce the same quantity of steel using 8 tonnes of iron ore.Here, China here holds Absolute Advantage in the production of steel.  How Countries Build Absolute Advantage? While natural conditions, which include climatic factors, geometry, topography, cannot be altered for achieving absolute advantage, the countries use the underlying factors strategically in their favour. Furthermore, factors of production are focused at by many companies or nations for building absolute advantages.  Some of the strategies for building absolute advantage includes: Development of Technological Competencies- The implementation of innovative or latest technological innovations allows the entities to lower their production cost, facilitating absolute advantage.  Enhancing Skills of Human Resources- The improvement in the cost-efficiency, along with the quality of the products, is targeted through imparting varying skill development programs. Many countries subsidize or aid the apprentice or labour training for enhancing the absolute advantage in trade.  Improving Infrastructure- The infrastructure enhancement in the form of road, telecommunications, ports, etc. can be useful in enhancing the cost-effectiveness across different industries.  What Do We Understand by Comparative Advantage Vs Absolute Advantage? Evaluating the comparative advantage introduces the concept of opportunity cost, which is the deciding factor to determine the production of particular goods or services. Opportunity cost refers to the potential benefits associated with the next best possible alternative which is missed out when one option is chosen over another.  The Absolute advantage simply considers the capability of a business or region to deliver goods or services in the most efficient manner. The Comparative Advantage, however, also takes into account the benefits that are forgone if an entity decides for production of a particular product or services.  Comparative advantage, based on the notion of mutual benefits, is often used in international trade deals. The Comparative advantage has been the major factor driving the outsourcing of services in search of cheap labour.  Understanding through an Example For instance, country A can produce ten televisions with the same amount of resources with which it can make 7 laptops. The opportunity cost per television is 7/10 or 0.7 laptops. Meanwhile, the opportunity cost per laptop is 10/7 or 1.42 television.  It highlights that country A is forsaking the production of 0.7 laptops if it is deciding to manufacture one television. On the other hand, it is missing out the opportunity to manufacture 1.42 televisions for every single laptop manufactured.  Now, say Country B’s opportunity cost for producing a television is 0.5 laptop, and that of producing laptop is 2 televisions. Then, country B will have a comparative advantage in making televisions, and country A will have comparative advantage in producing laptops. It has to be noted that despite country A having absolute advantages in both the products, it would be mutually beneficial for both the countries if country B produces television while country A produces laptops. Do You Know About Absolute Advantage Theory by Adam Smith? The concept of Absolute Advantage was indicated by Adam Smith in his book called ‘Wealth of Nations’ which focusses on International trade theory. Adam Smith, in his book attacked on the previous mercantilism theory, which mainly stressed for economies to maintain trade surplus in order to command power.  The Absolute Advantage theory considered that the countries possess different ability with respect to the production of varying goods or services. It argued that it is not necessary that a state may hold an absolute advantage in the production of all goods, and here the relevance of trade comes into play.  It advocates that countries should produce those goods over which they hold a competitive advantage. It would allow the countries to make the same amount of goods using few resources or in less time. The theory propagates the relevance of trade for economic sustainability.  What Are the Limitations of the Absolute Advantage Theory? The assumptions used in the Absolute Advantage Theory by Adam Smith may limit the application in real bilateral trade. The limitations of the theory by Adam Smith include: Smith assumed that the productive capabilities of a country could not be transferred between the two countries. However, in practical terms, the competitive scenario aids the nations to acquire new capabilities and acquire new resources, especially in the technological and human resource skill aspects.  The two-country trade which was used as a basis for the theory does not consider the trade barriers levied. The present scenario, however, is strikingly dominated by trade wars between economies. Nations impose huge tariffs, import duties and other type of barriers to promote local manufacturers.  Absolute Advantage theory assumes that the trade between the two nations will take place only if each of the two economies holds an absolute advantage in one of the commodities traded. However, in general, countries despite not holding absolute advantage are engrossed in international trade, boosting their economic setup.

Difference between actual and an expected return. For example, if a stock increased by 7% because of some update, but the average market only increased by 3% and the stock has a beta of 1, then the abnormal return was 4% (7% - 3% = 4%)

Ability-to-Pay Taxation The neoteric trending concept in which the tax is levied as per the taxpayer’s economic ability to pay. It is based on the concept that a person who earns more should pay more taxes and the one earning less should pay less.  

Calculating the cost of a product or an enterprise based on the direct and the indirect costs (overheads) involved. Multiple methods of absorption costing include Direct labour cost percentage rate, Direct material cost percentage rate, Labour hour rate , Prime cost percentage rate and Machine hour rate.    

Load More
We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it. OK