Goods and Services Tax (GST) in India

The Central government passed four sets of GST Acts in the Budget session this year. These were Central GST Act, 2017; Integrated GST Act, 2017; Union Territory GST Act, 2017 and GST (Compensation to States) Act, 2017. The Acts were approved by the Parliament after they were introduced as part of the Money Bill. Following the passage of the GST Acts, the GST Council decided the rate slabs for the Goods and Services to be taxed under the GST regime. This guide will help you build a basic understanding of GST, its role in your day to day life and its benefits.

What is GST?

GST (Goods and Services Tax) is the biggest indirect tax reform of India. GST is a single tax on the supply of goods and services. It is a destination based tax. GST has subsumed taxes like Central Excise Law, Service Tax Law, VAT, Entry Tax, Octroi, etc.

GST is expected to bring together state economies and improve overall economic growth of the nation.

GST is a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at the national level. It will replace all indirect taxes levied on goods and services by states and Central. Businesses are required to obtain a GST Identification Number in every state they are registered.

There are around 160 countries in the world that have GST in place. GST is a destination based taxed where the tax is collected by the State where goods are consumed. GST has been implemented in India from July 1, 2017 and it has adopted the Dual GST model in which both States and Central levies tax on Goods or Services or both.

  • SGST – State GST, collected by the State Govt.
  • CGST – Central GST, collected by the Central Govt.
  • IGST – Integrated GST, collected by the Central Govt.
  • UTGST – Union territory GST, collected by union territory government

Brief History of GST in India

Introduction of GST is considered to be a significant step in the reform of indirect taxation in India. Amalgamating of various Central and State taxes into a single tax would help mitigate the double taxation, cascading, a multiplicity of taxes, classification issues, taxable event, etc., and leading to a common national market.

VAT rates and regulations differ from state to state. On the other hand, GST brings in uniform tax system across all the states. Here, the taxes would be divided between the Central and State government.

What are the Different Types of GST?

In India, there are 4 components of GST. The following table explains the 4 types of GST and compares them on various parameters:

Central GST – CGST State GST – SGST Union territory GST – UTGST Integrated GST - IGST
Tax Levied By Central Government State Government Union territory Government Combined levy, collected by Central Government
Taxes that it will replace Service tax, excise duty, countervailing duty (CVD), special additional duty (SAD), Additional duties of excise(ADE), and any other indirect central levy VAT, sales tax, luxury tax, entry tax, entertainment tax, purchase tax, Octroi, taxes on lottery VAT, sales tax, luxury tax, entry tax , entertainment tax, purchase tax, Octroi, taxes on lottery Central sales tax (CST)
Applicability Supplies within a state Supplies within a state Supplies within a union territory Interstate supplies and import
Input Tax Credit Against CGST and IGST Against SGST and IGST Against UTGST and IGST Against CGST, SGST and IGST
Tax Revenue Sharing Central government State government Union territory government Shared between state and central governments
Exemption Limit Rs 20 lakh annual turnover Rs 20 lakh annual turnover Rs 20 lakh annual turnover Exemption limit not defined
Composition Scheme The dealer may use the benefit of turnover of Rs 50 lakh The dealer may use the benefit of turnover of Rs 50 lakh The dealer may use the benefit of turnover of Rs 50 lakh Composition Scheme is not available in this regard
Free Supplies CGST is applicable on free supplies SGST is applicable on free supplies UTGST is applicable on free supplies IGST is applicable on free supplies
Registration Not applicable till the turnover exceeds Rs 20 lakh Not applicable till the turnover exceeds Rs 20 lakh Not applicable till the turnover exceeds Rs 20 lakh Registration is necessarily mandatory if supply is made outside the states
[ Read: Types of GST ]

GST Explained with the Help of Example

Let’s assume that a manufacturer of shirts buys raw materials like cloth, zips, thread, buttons and other equipment that is required to stitch the pants. This raw material costs the manufacturer Rs 200. This Rs 200 includes a 10% tax of Rs 20. Once the shirt is made, the manufacturer has added his own value to the input material. As a part of this example, if one were to assume that the value added is Rs 60, then the total cost of the trouser is now Rs 260 (Rs 200 + Rs 60). With a 10% tax rate, the tax on this trouser would be Rs 26. However, since the manufacturer has already paid Rs 20 as tax while purchasing raw material, under GST, the tax incidence will now be only Rs 6 (Rs 26 – Rs 20).

Now, let’s see how GST works at the second stage, which is for the wholesaler. Now, the wholesaler would buy the shirts at Rs 260 and would keep a margin on it to make a profit. Assuming that the margin is kept at Rs 40, the cost of the clothing item now becomes Rs 300. Applying the same 10% principle, the tax would amount to Rs 30. But, out of this Rs 30, Rs 26 are already accounted for from stage one. So the effective tax incidence for the wholesaler would be Rs 4 (Rs 30 – Rs 26).

The final stage is that of the retailer. Now that the retailer has bought the shirts at Rs 300, he would also keep a profit margin. Say the margin that the retailer decides on is Rs 20. The total cost now becomes Rs 320. Using the 10% rule, the tax would be Rs 32. However, with Rs 30 already accounted for in the earlier two stages, the tax incidence would be Rs 2 (Rs 32 – Rs 30). To sum up, the total GST for the entire chain, from manufacturer to retailer is Rs (20 + 6 + 4 + 2 = 32). The suppliers of inputs would be able to claim no tax credit, given the fact that they have themselves not purchased any item.

Impact of GST on Indian Economy

GST offers several benefits to our economy. Here are some key advantages:

  • Create unified common national market for India, giving a boost to Foreign investment and “Make in India” campaign
  • Boost export and manufacturing activity and leading to substantive economic growth
  • Help in poverty eradication by generating more employment
  • Uniform SGST and IGST rates to reduce the incentive for tax evasion

Impact of GST on Consumers

GST is also beneficial for consumers. Here is how it impacts the Indian consumers:

  • Simpler Tax system
  • Reduction in prices of goods & services due to elimination of cascading
  • Uniform prices throughout the country
  • Transparency in taxation system
  • Increase in employment opportunities

Impact of GST on Traders

GST is also has some positive impact on traders. Let’s see how it affects the traders:

  • Reduction in multiplicity of taxes
  • Mitigation of cascading/ double taxation through input tax credit
  • More efficient neutralisation of taxes especially for exports
  • Development of common national market
  • Simpler tax regime
  • Fewer rates and exemptions
  • Distinction between Goods & Services no longer required

Does GST Apply to me?

Indirect tax laws in India have been heavily revamped with the onset of GST. Therefore it is important for you to understand if you come under the purview of GST. If you are involved in any business except agriculture and your annual turnover is above the prescribed exemption threshold, then you are a taxable person under GST law.

GST Identification Number

Under GST, every registered taxable person is assigned a unique identification number for every state he is registered in. This number is known as GSTIN which is a state-wise PAN-based 15 digit number.

[ Read: What is GSTIN? ]

Invoicing under GST

In order to assess the levy of GST, the GST Act has prescribed a comprehensive format for invoicing. There are two types of invoices under GST regime, namely tax invoice and bill of supply.

Input Tax Credit under GST

A major tax reform introduced by GST Act is the elimination of cascading effect of taxes which was prevalent in the previous indirect tax system in India. With the help of input tax credit, taxpayers are saved from paying tax on tax.

GST Return Filing Due Dates

Every registered business under GST needs to file multiple returns in a year. A business needs to get separate registration in each state where it operates and file separate returns. Businesses need to file returns every month on the GST Common Portal.

Composition Scheme under GST

Businesses which opt to file taxes under GST composition scheme need to file separate set of returns. This scheme makes compliance easier for small businesses. Businesses with turnover less than Rs 75 lakh can opt to file under this scheme.

Offences and Penalties under GST

The GST Act lists down a number of actions which are considered as offence under the law. It also prescribes a number of penalties for all the 21 offences mentioned under the Act.

Accounts to be maintained under GST

To ensure compliance and avoid tax evasion, GST law makes it mandatory for businesses to maintain several accounts in true and correct manner.

Reverse Charge under GST

In general, the GST law puts the onus of paying taxes on the supplier of goods and services. However, in some cases, the receiver of goods and services becomes liable to pay GST. This phenomenon is called reverse charge under the GST law.

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