Goods and Service Tax (GST): A Complete Guide

What is GST in India?

Goods and Services Tax is levied on the sale of goods and services. It was introduced by the government of India to do away with the indirect taxes that were hiking up the final price of the good or service.

The introduction of GST helped reduce the tax burden on the consumer since Goods and Service Tax is only calculated on the value added at every step of the supply chain. In this blog, we discuss how GST works. 

How Has GST Helped the Economy?

GST eliminated the cascading effect of taxes. This was a major issue with the previous tax system, where already-taxed goods and services were taxed again at the next stage in the supply chain.

With GST, only the value added at each step of the supply chain is taxed, meaning that there is no tax on tax effect and the cascading effect is completely eliminated.

It also removed the tax barriers between states, making inter-state trade easier. Online facilities were also introduced and compliance was made easier, especially for small businesses and startups.

Before GST was introduced, there were many different kinds of indirect taxes, which made it confusing and unnecessarily complicated to calculate and file taxes. All these different indirect taxes were merged into one single, easy to understand GST.

History of GST in India

GST was implemented on the 1st of July 2017, but this new tax regime had been decades in the making. The GST committee was established in 2000 and determined that there is a need for this new kind of tax in 2004. 

Before Goods and Service Tax was introduced, there were a lot of different indirect taxes that were levied at different stages of the supply chain – sales tax, entertainment tax, service tax, customs duty, excise duty, and more. 

The states and central government collected tax separately, causing the tax burden to be very high. These various indirect taxes also caused manufacturers and suppliers to have to pay tax on tax – also called the cascading effect. 

With the introduction of Goods and Service Tax, these taxes were abolished and collated under one single tax regime, reducing the tax burden and simplifying tax payments. 

New Features Under GST Regime

There were several new systems and processes introduced under the GST regime to make it easier for businesses to calculate and file taxes.

E-Way Bills

An e-way bill is an electronic document introduced under the Goods and Services Tax (GST) regime in India. It is a mandatory document that must be generated online by a registered person who is responsible for the movement of goods worth more than Rs. 50,000 within or outside a state.

The e-way bill contains:

• Details of the goods being transported (name of the supplier and recipient)
• GST identification numbers (GSTIN) of both parties
• Invoice number
• Date of invoice
• Value of the goods
• Place of delivery
• Details of mode of transport (vehicle number, transporter ID)
• Expected date and time of delivery

The purpose of the e-way bill is to ensure proper documentation and tracking of the movement of goods to prevent tax evasion and ensure compliance with the GST regulations. It also helps reduce the time and cost of transportation by providing a single document for the entire transportation process.

The e-way bill can be generated through the GST portal, and once generated, it must be carried by the person in charge of the transportation of the goods.

E-Invoicing System

E-invoicing is an electronic invoicing system that was introduced under the Goods and Services Tax (GST) regime in India. It is a system that enables the generation of electronic invoices in a standard format, which is validated by the GSTN (Goods and Services Tax Network) for its authenticity and accuracy.

Under the e-invoicing system, businesses are required to generate invoices on their internal systems (ERP, accounting software, etc.) in a specific format as prescribed by the GST council. The invoices are then uploaded to the GST portal, which validates the invoices and generates a unique invoice reference number (IRN) along with a QR code.

The e-invoicing system streamlined the invoice generation process, reduce errors, and enhance compliance with GST regulations. It also helps reduce the duplication of invoices, reducing the incidence of fake invoices, and facilitate matching input tax credit.

The e-invoicing system is applicable to taxpayers having an aggregate turnover of more than Rs. 50 crores in any financial year. The system is implemented in a phased manner, and the government has provided a timeline for its implementation based on the turnover of taxpayers.

How Does GST Work?

Before we understand how Goods and Service Tax works, let’s take a look at how tax was calculated with the old tax regime, before GST was introduced. 

1. The producer purchases raw materials at Rs 50 and adds value of Rs 50.
2.  Tax is calculated on the total price of Rs 100. 10% tax rate means that the tax on the product is Rs 10.
3. The producer sells his product to the wholesaler at Rs 110.
4. The wholesaler adds Rs 10 value to the product, bringing cost of the product to Rs 120
5. Tax is now calculated on the total price of Rs 120 – even though Rs 100 out of the Rs 120 has already been taxed at the previous stage.
6. The tax that the wholesaler will add to his product is 10% of 120, which is Rs 12
7. The retailer purchases the product at Rs 132, and adds value of Rs 10, bringing the price now to Rs 142
8. He adds tax of Rs 14.2 on this price, even though Rs 120 out of the Rs 142 has already been taxed by the wholesaler
9. Finally, the consumer has to pay Rs 156.2 for the product, out of which Rs 36.2 is the tax burden

Under the old regime, each person in the supply chain pays tax on the total price of the product at each stage, causing double taxation. 

How Did GST Change Things?

The introduction of GST changed one very important thing – it is not the entire cost of the product that is taxed at each stage, but only the value added at each stage.  

1. The Producer adds value of Rs 50 to the raw materials that he had purchased for Rs 50, bringing the price of the product before tax to Rs 100
2. If we assume GST rate is 10% for this particular product, the GST on the value added by Producer would be 10% of Rs 50, which is Rs 5
3. The Producer sells the product to the Wholesaler for Rs 105 (100+5)
4. The Wholesaler adds his value of Rs 10, and taxes that value at Rs 1, bringing the price at this stage to Rs 116 (115+1).
5. The Wholesaler sells the product to the Retailer at Rs 116
6. The Retailer adds value of Rs 10, and taxes that value at Rs 1, and the final price of the product is now Rs 127 (116+10+1)
7. The consumer has to now pay Rs 127 for the product, out of which tax is only Rs 7

This is the GST model of taxation. 

Types of GST

There are four major types of Goods and Service Tax in our country. 

• CGST – Central Goods and Services Tax is charged on goods and services sold within one state, and goes to the central government. 
• SGST – State Goods and Services Tax charged on goods and services sold within one state and goes to the state government. 
• IGST – Integrated Goods and Services Tax is charged on goods and services sold between states. 
• UTGST – Union Territory Goods and Services Tax is charged on goods and services sold in Union Territories. 

GST Rates

There are also different rates of Goods and Service Tax for different types of products. 

Who Needs GST?

GST has had a positive impact on all stakeholders, especially consumers, as it has reduced the overall cost of goods and services. As businesses pay lower taxes, they are able to pass on the savings to the consumers. This has led to an increase in consumer spending, which in turn has led to an increase in economic growth.

Businesses have also benefited from the introduction of GST, as the single tax system has reduced the paperwork and compliance burden on them. This has allowed them to focus more on their core operations, resulting in a more efficient and streamlined business.

The government too has benefited from the introduction of GST, as the revenue collection from taxes has increased significantly. This has enabled the government to invest more in public welfare and infrastructure, which has benefitted the overall economy.

How is Goods and Service Tax Paid?

Before we understand how GST is paid by businesses, let’s look at an important concept. 

Input Tax Credit

Input Tax Credit (ITC) is one of the core reasons why GST has been so beneficial across the supply chain. 

To understand ITC, let’s use an example. 

Geet buys fabric (raw material) worth Rs 400 from her supplier and pays tax worth Rs 100. 

The Rs 100 that Geet paid as tax on the purchase of raw materials is called input tax. 

Geet converts the fabric (raw material) into shirts (product), thus adding her value of Rs 300, bringing the total value of her product to Rs 800 (Rs 400 + Rs 100 + Rs 300). 

Geet then sells her shirts to her customers for Rs 950, after adding tax of Rs 150. 

The tax that Geet collects from her customers is called output tax – which in this case is Rs 150. 

Geet paid Rs 100 as tax and is now collecting Rs 150 as tax from her customers. 

Let’s tally the total amount of tax paid by all parties in this scenario.

At the end of every month, both Geet’s supplier and Geet will pay their taxes to the government. Under this model, the government would be collecting both 100 and 150 – causing double taxation. 

Remember, a part of the Rs 150 that Geet’s customers paid has already been paid by Geet to her supplier! 

The rule of ITC states that Geet can claim credit for the amount of tax that she already paid on input.

In this case, it is Rs 100.

She can deduct Rs 100 from Rs 150, and will be liable to pay only Rs 50 as GST to the government.

Who Can Claim ITC?

Input Tax Credit can be claimed by the business as long as the raw materials that were purchased were used for the furtherance of business. This means that they have to be used in creating the goods or services that the business sells. 

These can be 

1. Raw Materials
2. Services
3. Capital Goods

Payment of GST 

Goods and Service Tax can be paid online as well as offline. 

Regardless of the method of payment, businesses must first calculate the amount of tax to be paid after deducting appropriate input taxes as per the Input Tax Credit policy. 

After the final tax liability is calculated, a GST challan must be generated. There are two ways to do this: 

• Before GST login

You can generate a Goods and Service Tax challan directly without having to login. 

Go to this link: https://services.gst.gov.in/services/quicklinks/payments

Or follow these steps: https://www.gst.gov.in/ > Services > Payments > Create Challan

Fill out all the fields and download your challan. 

• After GST login

You can also choose to generate the challan after logging into the portal. 

After logging into the portal, you will find the option to create a challan on your dashboard. Fill out all the fields and download your challan.

Goods and Service Tax must be paid before 20 days from the end of the month, and your GST challan expires in 15 days. 

GST Login and Registration

Any business that earns a total income of Rs 20 lakhs or more in a financial year is liable to pay Goods and Service Tax and has to register with the GST portal. Upon registration, each business will receive a unique GSTIN which has to be entered into the GST challan every time GST is paid.

Related Read: GST On Clothes, Textiles and Apparel Products

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