No one is likely to question the fact that small and medium-sized businesses are a crucial cog in the machinery that is the Indian economy. It is also true that owning and running a business is hard work.
As a business owner, you are in charge of core physical aspects like manufacturing, branding, and customer service aside from equally crucial matters of taxation that impact your entire business.
Complicated as it may be, businesses that meet a threshold in terms of turnover have to, by law, pay taxes to the government. As such, small and medium-sized business owners require a working knowledge of GST’s meaning; it is a Goods and Services Tax, a nationwide integrated indirect taxation system.
The following article aims to break down the various aspects of GST and guide you to what GST means.
What is GST?
GST has been applicable in India since July 1, 2017, under the concept of one indirect tax regime for the entire nation. GST is a nation-level, multi-stage tax system imposed on the manufacturing, sale, and consumption of goods and services.
GST applies to anyone involved in the manufacturing or services industry, trade, and e-commerce. Its introduction has undone the cascading tax effect or tax on tax. With the implementation of GST, several national and state-based tax schemes were replaced, including but not limited to value-added tax, service tax, excise duty, etc.
Specifically, GST in India is a destination-based tax. GST is collected where the goods or services are consumed rather than the place of production. For example, if an item is manufactured in Maharashtra but sold in Tamil Nadu, GST will be levied and collected in Tamil Nadu.
Based on this principle, exports from India do not incur taxes. Meanwhile, imports into India incur taxes under GST.
It is important to note here that some items do not incur tax under GST, such as food items like vegetables and eggs, specific drugs and medical products, printed books, etc.
Benefits of GST
There are several advantages to the introduction of GST, such as:
- Simplification of the indirect tax system to one uniform scheme
- Simplified compliance requirements
- Efficiency in paperwork and easing of logistics
- Helping regulate the unorganized sector
Types of GST
India has adopted a dual GST system, wherein the central government and state governments levy GST concurrently. They share a common tax base.
CGST: Levied by the Central government on any intra-state transaction of goods and services.
SGST: Levied by the state or union territory government for goods manufactured and sold within the same state, i.e., intra-state transactions of goods and services.
CGST and SGST are concurrently levied. Central and state governments share the total GST revenue in a predetermined proportion. The only condition is that the tax rate should not exceed a percentage as determined by the GST Act.
IGST: Levied by the central government in case of inter-state transactions, i.e., if the supplier and place of consumption are in two different states. The IGST is subsequently divided between the center and state governments.
Under the scheme, ‘small’ taxpayers can pay GST at a fixed rate of turnover. It enables businesses of up to a pre-specified size to comply with tax-related obligations, minus the complicated formalities.
Goods suppliers with a turnover of less than Rs. 1.5 crore and service providers with a turnover less than Rs. 50 lakh can opt for the scheme, provided they supply intrastate only.
Manufacturers of tobacco and pan masala, among others, are excluded from this scheme. Businesses that supply goods via e-commerce operators also cannot opt for the same. Businesses that opt for the scheme will have to comply with some conditions, such as:
- They cannot claim Input Tax Credit.
- They cannot supply goods exempted under GST.
- Those with different businesses under the same PAN will either have to register all such businesses under the scheme or opt-out altogether.
Input Tax Credit
Dealers are liable to pay the government taxes on the sale of finished goods (output).
Under GST, one can reduce overall taxes to be paid to the government by claiming the input tax credit.
Here, input tax credit refers to the tax the dealer has already paid as part of the cost to procure raw or semi-finished materials (inputs) for his manufacturing process. One cannot claim the input tax credit for goods and services used in a personal capacity. One can only claim the input tax credit for taxes that were paid on purchases made for the business enterprise.
An E-Way Bill, or Electronic Way Bill, is required paperwork to transport goods exceeding a value of Rs. 50,000. The requisite paperwork, generated on the E-Way Bill Portal, comes with a unique number available to the dealer supplying the goods, the person who will receive the consignment, and the individual transporting the same.
The Act calls to penalize those without proper paperwork. These e-way bills are valid for a specific period only, i.e., one day, up to 100 kilometers. For every 100 kilometers that follow, it is an additional day.
Under GST, all manufactured goods and services are under different tax slabs. It is the GST Council that determines what goods attract what tax rate and the slabs themselves. The council meets at regular intervals for the same. There are four main tax slabs: 5%, 12%, 18%, and 28% under the GST regime, with essential goods and services placed under the lowest tax bracket. Some goods are also zero-rated, meaning they do not attract any GST.
Since GST is a new tax system, it is not without its flaws. However, the government has been responsive to feedback from businesses and continues to make efforts to ease the process. Entrepreneurs just starting a small or medium business cannot afford professional chartered accountants to help them with taxation.
Even so, there are several other reliable resources available to business owners to help with the issue. Business owners can choose from many paid and free updated accounting software available in the market that has simplified filing taxes.