GST - Goods And Services Tax 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 one of the biggest indirect tax reforms in the country. 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
Why is GST needed 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.
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
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 more: 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.
Frequently Asked Questions on GST
Is GST Applicable 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 aggregate turnover is above Rs. 20 lakh in a financial year, then you are a taxable person under GST law.
- Businesses operating in North Eastern and some other states need registration if their turnover exceeds Rs 10 lakh.
- If you are an NRI doing business in India then it is mandatory for you to register under GST irrespective of the turnover of your business.
[ Read more: GST Registration Process for NRI ]
What documents are required for GST registration?
The type of documents required for gst registration vary depending on the type of business. As a taxable person under GST you must obtain GST registration.
[ Read more: GST Registration Documents ]
What is 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 more: How to get GST Number ]
How do I Verify GST Number of my vendor?
Many small and medium enterprises do not opt for GST registration and therefore use fake GSTIN to avoid the compliance cost that comes with it. However, one can verify any GSTIN online to ensure that their taxes land up in the right pockets.
[ Read more: How to Verify GSTIN? ]
What are the types of Invoices 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.
[ Read more: Invoicing under GST ]
What is eWay Bill and How to generate it?
e-Way bill is a permit required for movement of goods exceeding Rs 50,000 in value. You can generate e-way bill using the government's e-way web based portal.
[ Read more: eWay Bill Rules & Regulations ]
What is Composition Scheme in 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.
[ Read more: Composition Scheme under GST ]
How earlyGST can help you?
Tax experts at earlyGST by H&R Block can help you get your Business get gst ready. We help you from GST registration, to filing and reconciliation of your GST Returns all under one roof. Know more about our GST Managed Services.