Table of Contents
What is GST?
The full form of GST is Goods and Services Tax. It is an indirect tax levied on the supply of goods and services across India. This comprehensive tax system is designed as a multi-stage, destination-oriented tax applied at each point of value addition in the supply chain. By replacing multiple indirect taxes—such as excise duty, Value Added Tax (VAT), and service tax—GST simplifies the taxation framework into a single domestic indirect tax law applicable throughout the country.
Under the GST regime, both goods and services are governed by a unified taxation structure, enhancing compliance and transparency. The implementation of GST aims to streamline the tax process, ensuring efficient tax collection at every stage of the sale.
The Goods and Services Tax Act was passed by Parliament on March 29, 2017, and came into effect on July 1, 2017. This pivotal reform marked a significant shift in India’s tax landscape, intending to reduce the tax burden on businesses and consumers while promoting a unified market across states.
Meaning of GST: Multi-Stage, Value Addition, and Destination-Based Tax
GST is designed to simplify tax collection by applying tax at multiple stages, only on added value, and at the point of consumption. Below, we’ll walk through these features to show how GST works across the supply chain, ensuring a fair and efficient tax process.
1. Multi-Stage Taxation
In the definition of GST framework, tax is applied at each stage of the product’s journey through the supply chain, from production to final sale. Key stages include:
- Raw Material Purchase: The procurement of raw materials required for manufacturing.
- Manufacturing: The process of creating the finished product from raw materials.
- Warehousing: Storing finished goods before they are distributed.
- Wholesale: Selling large quantities to retailers or distributors.
- Retail Sale: The final sale to the consumer.
GST is imposed at each of these stages, making it a “multi-stage” tax.
2. Value Addition Taxation
GST is applied to the added value at each stage, ensuring that only the incremental value is taxed. For example:
- Manufacturing: When a biscuit manufacturer buys raw materials like flour and sugar, they mix and bake them, adding value.
- Warehousing: The product is packed and labeled, increasing its worth.
- Retailing: Finally, the product is packaged for consumer sale and marketed, further adding value.
Each value addition results in GST being applied to the increased worth, ensuring only the incremental value is taxed at each step.
3. Destination-Based Taxation
GST is levied at the point of consumption, not origin. For instance:
- If a product is manufactured in Maharashtra and sold in Karnataka, the GST collected goes to Karnataka as the destination state, not Maharashtra.
This approach ensures the tax revenue benefits the state where the goods are consumed, promoting a fair distribution of tax revenue across states.
Example of GST
To understand the meaning of GST with an example, and how it works, let’s look at a simple example of the supply chain of a product, such as a piece of furniture.
Step-by-Step Example of GST Application:
- Manufacturer: A furniture manufacturer buys wood, fabric, and nails worth ₹1,000. Suppose the GST rate is 18%. The manufacturer pays ₹180 as GST, resulting in a total cost of ₹1,180.
- Wholesaler: The manufacturer sells the finished furniture to a wholesaler at ₹2,000 plus 18% GST (₹360). Since the manufacturer already paid ₹180 in GST on inputs, they can claim it as Input Tax Credit (ITC). They remit only ₹180 (₹360 – ₹180) to the government.
- Retailer: The wholesaler sells the furniture to a retailer at ₹3,000 plus 18% GST (₹540). After adjusting the ITC of ₹360 (from the manufacturer), the wholesaler pays ₹180 (₹540 – ₹360) in GST.
- Consumer: Finally, the retailer sells the furniture to the consumer at ₹4,000 plus 18% GST (₹720). The retailer uses their ITC of ₹540 and remits ₹180 (₹720 – ₹540) as GST.
In this example, GST is collected at each stage based on value addition, with input tax credits passed along the supply chain. This system ensures tax efficiency and transparency, reducing the overall tax burden for each participant in the process.
How Goods and Services Tax (GST) Works?
Now that you know GST operates as a multi-stage tax levied at various points in the production and distribution process, it’s essential to understand how it works in practical scenarios. Below, we’ll break down the roles of different participants in the supply chain and the application of GST in both intra-state and inter-state transactions.
1. Manufacturer’s Perspective
A manufacturer must pay GST on the raw materials they purchase and the value they add to the product.
For example, if a manufacturer purchases raw materials costing ₹100 and pays 5% GST, the total cost becomes ₹105. Upon adding ₹50 in value to the product, he sells it for ₹155. The GST on ₹155 is ₹7.75, but he can claim an input tax credit of ₹5 for the GST paid on raw materials. Therefore, the net GST liability of the manufacturer is ₹2.75 (₹7.75 – ₹5).
2. Service Provider’s Role
A service provider is liable to pay GST on the purchased products and the value they contribute.
For instance, if a service provider buys a product for ₹200 and pays 5% GST, the product cost becomes ₹210. After adding ₹100 in value, he charges ₹310 for the service. The GST liability of ₹310 is ₹15.5, and with an input tax credit of ₹10 (the GST paid on the product), the net GST liability is ₹5.5 (₹15.5 – ₹10).
3. Retailer’s Involvement
A retailer must pay GST on the products acquired from distributors and the margin they add.
If a retailer buys a product for ₹250 and pays 5% GST, the total cost is ₹262.5. Adding a margin of ₹25, the retailer sells the product for ₹287.5. The GST liability on this sale is ₹14.37, and with an input tax credit of ₹12.5 (the GST paid on the product), the net GST liability is ₹1.87 (₹14.37 – ₹12.5).
4. Consumer’s Perspective
As the final contributor to the GST system, a consumer pays GST on the purchased product. If a consumer buys a product for ₹300 and pays 5% GST, the total cost becomes ₹315. The consumer cannot claim any input tax credit since they are the end user, thus bearing the entire GST burden of ₹15.
GST for Transactions Within a State
For transactions within a state, GST comprises two components: CGST (Central GST) and SGST (State GST), both applied to the same taxable value of the product or service. The GST Council decides the rates for CGST and SGST.
For example, if a product sells for ₹1,000 with an 18% GST rate, the total GST amount will be ₹180, split equally into CGST and SGST, i.e., ₹90 each. The seller collects ₹1,080 from the buyer, pays ₹90 to the Central Government, and ₹90 to the State Government. The seller can also claim input tax credit for the GST paid on purchases made within the state.
GST for Inter-State Transactions
Inter-state transactions utilize Integrated GST (IGST), which combines CGST and SGST and is levied by the Central Government on goods and services supplied across state lines.
IGST ensures that taxes paid on inter-state supplies are credited to the importing state while the exporting state collects the tax.
For instance, when goods are sold from Maharashtra to Gujarat, IGST is applied, and the credit is transferred to Gujarat, where the goods are received and consumed.
What are the Types of GST?
India’s Goods and Services Tax (GST) framework comprises four main types: Central GST (CGST), State GST (SGST), Integrated GST (IGST), and Union Territory GST (UTGST). Each type serves a specific purpose in the taxation system.
1. Central GST (CGST) and State GST (SGST)
Central GST (CGST) is levied by the central government on transactions occurring within a single state. In contrast, State GST (SGST) is imposed by state governments on the same intra-state transactions. Typically, the rates of CGST and SGST are equal, making the total GST rate a combination of both. This dual structure ensures that both the central and state governments receive their share of revenue from goods and services sold within a state.
2. Integrated GST (IGST)
Integrated GST (IGST) is crucial for inter-state transactions. It is collected by the central government and applies not only to sales across state lines but also to imports and exports of goods and services. The IGST rate is equivalent to the total GST rate applicable to the product or service. This integration of CGST and SGST into IGST facilitates a seamless tax credit mechanism, allowing businesses to claim input tax credit (ITC) for taxes paid at each stage of the supply chain, regardless of whether the transaction is intra-state or inter-state.
3. Union Territory GST (UTGST)
Union Territory GST (UTGST) is the tax collected on intra-Union Territory transactions. It functions similarly to SGST but is specific to union territories without a legislative assembly, such as Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli, Daman and Diu, and Chandigarh. Notably, UTGST does not apply to Delhi and Puducherry, as these union territories have their own legislatures.
Read More About: What is CGST, SGST, IGST and UTGST
History of GST in India: A Comprehensive Timeline
The journey of the Goods and Services Tax (GST) in India spans over a decade of efforts, discussions, and legislative actions. Here’s a detailed timeline of key milestones that defined the GST in India:
- 2000: Prime Minister Atal Bihari Vajpayee sets up a committee to draft the GST law, marking the inception of the GST concept in India.
- 2004: A task force led by Vijay Kelkar recommends the introduction of GST to improve the indirect tax system.
- 2006: The Finance Minister announces the goal to implement GST by April 1, 2010, in his Budget speech.
- 2007: A decision is made to phase out the Central Sales Tax (CST) as a preparatory step, with CST rates reduced from 4% to 3%.
- 2008: The Empowered Committee (EC) finalizes a dual GST structure, proposing separate taxation powers for the Centre and states.
- 2010: Due to technical and structural challenges, GST’s rollout is postponed. A project is initiated to computerize commercial taxes.
- 2011: The Constitution Amendment Bill is introduced to enable GST, but the Lok Sabha dissolves before its passage.
- 2012: The Standing Committee discusses the GST Bill, but it stalls due to concerns regarding Clause 279B.
- 2013: The Standing Committee presents a report supporting GST but identifies necessary changes.
- 2014: The Finance Minister reintroduces the GST Bill to Parliament.
- 2015: The Lok Sabha passes the GST Bill, though it faces delays in the Rajya Sabha.
- 2016:
- The Goods and Services Tax Network (GSTN) goes live, establishing a technology infrastructure to support GST.
- Parliament passes the revised Constitution Amendment Bill, receiving the President’s approval.
- 2017:
- The GST Council finalizes tax rates, GST rules, and compliance guidelines.
- The Cabinet approves four supplementary GST bills, which pass in both the Lok Sabha and the Rajya Sabha.
- July 1, 2017: GST officially launches across India, replacing multiple indirect taxes with a unified “One Nation, One Tax” system.
Key Principles of Goods and Services Tax (GST)
Now that you have an idea of what is goods and service tax, let’s discuss its principles:
1. Destination-Based Taxation Model
This concept implies that the tax revenue goes to the state where the goods are consumed, not produced, to ensure fair distribution of tax revenue among states and eliminate the cascading effect of taxation. Earlier, the state collected the tax revenue where the goods or services were manufactured or sold.
2. Value Added Tax (VAT) in GST
VAT in Goods and Services Tax (GST) means the tax is imposed only on the value added at each stage of the supply chain. This ensures that the tax is not charged on the same value more than once and that the final customer bears the tax obligation.
3. Input Tax Credit (ITC) Mechanism
It lets taxpayers claim credit for the tax paid on inputs employed in producing or supplying goods/services. This reduces tax costs, prevents tax cascading, and ensures efficient taxation. For example, manufacturers offset taxes paid on raw materials against taxes collected on finished goods.
To claim ITC, businesses must fulfil certain conditions, including registration under GST, possession of valid tax invoices, and utilisation of eligible inputs for business purposes.
4. Uniformity in Tax Rates
The Goods And Service Tax has brought uniformity in the tax rates across the country by replacing the multiple indirect taxes imposed by the central and state governments. The online GST verification process is simple. It has four standardised tax slabs: 5%, 12%, 18%, and 28%. Goods and services are classified under these tax brackets based on their nature, necessity, and luxury.
5. Transparency and Fairness in Taxation
GST has made the tax system more visible and accountable. The taxpayers can easily track the tax paid at each stage of the supply chain and claim the input tax credit. It has also reduced the scope for tax evasion. GST has also ensured tax equity.
Related Read: An In-depth Look at Input Tax Credit under GST
What are GST Rates and Slabs?
GST rates are divided into four main slabs: 5%, 12%, 18%, and 28%. There are also some special rates, such as 0%, 0.25%, 3%, and cess, for certain items. The GST Council periodically revises the GST Rates based on various factors, such as revenue collection, economic growth, inflation, and industry demands.
The following table shows examples of goods and services falling under each tax bracket:
| GST Rate in India | Goods | Services |
| 0% | Milk, eggs, fresh vegetables, salt, unbranded food grains, etc. | Education, health, public transport, etc. |
| 5% | Sugar, tea, edible oils, domestic LPG, footwear (< ₹500), apparel (< ₹1000), etc. | Railways, air travel, restaurants (without AC or liquor licence), etc. |
| 12% | Textiles, garments, butter, cheese, ghee, etc. | Non-AC hotels, business class air travel, state-run lotteries, etc. |
| 18% | Mobile phones, Biscuits, cakes, pastries, footwear (> ₹500), apparel (> ₹1000), steel, cement, etc. | AC hotels, restaurants (with an AC or liquor licence), IT services, telecom services, etc. |
| 28% | Luxury cars, motorcycles, aerated drinks, tobacco products, cinema tickets, etc. | Five-star hotels, online gaming and club betting, amusement parks, etc. |
Advantages and Disadvantages of GST
Advantages of GST
1. Removal of cascading effect
It has eliminated the cascading effect of tax, logistics cost, inter-state tax, and a unified market. The cascading effect is an impact of tax on tax, and its removal has impacted the cost of goods. Goods have become cheaper for the end consumers after the introduction of GST.
2. Simplification of taxes
It has replaced 17 indirect taxes which has automatically eliminated the compliance cost for the businesses.
3. Digitisation under GST
All activities related to GST, such as registration, return filing, tax payment, application for refund, and response to notice, are required to be done online through the GST portal. Digitisation of GST compliances has accelerated the processes and reduced manual work
4. Uniformity in the market
The past fragmented market across state lines has been unified with a huge decline in the cost of the goods.
Disadvantages of GST
1. Increased Costs
Businesses may incur additional expenses from purchasing and maintaining GST-compliant software.
2. Higher Tax Liability for SMEs
Under GST for online businesses, small and medium-sized enterprises (SMEs) may face a higher tax burden.
3. Penalties and Fines
Non-compliance with GST regulations can result in penalties and fines. The possibility of GST registration cancellation is also there.
4. Impact on the Unorganised Sector
The unorganised sector may experience challenges while adapting to the new tax structure.
Related Read: GST on Cars in India: GST Rates for New, Used and Electric Cars
Who is Eligible for GST?
All the businesses supplying goods whose turnover exceeds ₹40 lakh in a financial year are required to register as normal taxable persons. However, the threshold limit is ₹10 lakh if you have a business in the northeastern states, J&K, Himachal Pradesh, and Uttarakhand.
The turnover limit is ₹20 lakh, and in the case of special category states, ₹10 lakh for the service providers.
Also, here is the list of certain businesses for which GST registration is mandatory, irrespective of their turnover:
- Casual taxable person / Input Service Distributor (ISD)
- Non-resident taxable person
- Inter-state supplier of goods and services
- Supplier of goods through an e-commerce portal
- Any service provider
- Liable to pay tax under the reverse charge mechanism
- TDS/TCS deductor
- Online data access or retrieval service provider
How to Register for GST?
If you are looking for what is the GST Registration Process, here is your answer:
Registration Process
- Go to the GST portal and tap ‘Services’ > ‘Registration’ > ‘New Registration.’
- Select the type of taxpayer, state/UT, district, legal name, PAN, email, and mobile number. Then click on ‘Proceed.’
- Verify the OTP sent to the email and mobile number. You will get a temporary reference number (TRN).
- Log in with the TRN and fill in the details in the application form, such as business details, promoter details, authorised signatory details, principal place of business, additional place of business, goods and services details, bank account details, etc.
- Upload the required documents as per the type of business.
- Verify your request using a digital signature certificate (DSC) or an Aadhaar-based e-signature or EVC.
- You will receive an acknowledgement number (ARN) when you successfully apply.
- The GST officer will assess the application and approve the GST registration within three working days. If any discrepancy is found, the officer will issue a notice, and the applicant must respond within seven working days.
- Once the GST registration is approved, the applicant will receive a GSTIN (GST identification number), a unique 15-digit number based on the PAN and state code.
Read More: How to Register for GST Online?
Documents Required:
- Applicant’s or business entity’s PAN card
- Applicant’s or authorised signatory’s Aadhaar card
- Proof of business registration or incorporation certificate
- Identity and address proof of top management with a photograph
- Bank account statement or cancelled cheque
- Proof of principal place of business, such as electricity bill, rent agreement, property tax receipt, etc.
- Digital signature certificate (DSC), Aadhaar-based e-signature, or EVC
- Letter of authorisation or board resolution for authorised signatory
Read More About: What are the documents required for GST registration?
What is the GST Registration Fee?
The government does not impose a fee for GST registration. However, if you get your registration processes done by a third party, such as a Chartered Accountant, they may charge a fee for their services, which may vary depending on the size and type of your business.
Tax Laws Before GST
In the indirect tax regime before GST, the indirect taxes were levied by the states and the centre.
Each state collected Value Added Tax (VAT) for the sale of goods within the same state. For the inter-state sale of goods, CST (Central State Tax) was levied by the centre. And, on the sale of services, service tax is applicable.
Here’s the list of indirect taxes applicable before GST
- Central Sales Tax
- State VAT
- Service Tax
- Luxury Tax
- Entertainment Tax
- Entry Tax
- Taxes on advertisements
- Taxes on lotteries, betting, and gambling
How Has GST Helped in Price Reduction?
Let’s understand how the introduction of GST reduced costs for end consumers through an example.
A manufacturer produces goods (10% tax rate applicable) worth ₹1,000 and sends it to a warehouse for labelling & packaging. The warehouse adds ₹250 to the existing value of the goods. Then, sell it to the retailer. The retailer adds its advertisement cost of ₹300.
Here’s how the value of the goods & tax on it changes, and the final effect on the price under old tax laws.
| Particulars | Cost | Tax @ 10% | Total cost |
| Manufacturer | ₹1,000 | ₹100 | Rs. 1,100 |
| Warehouse adds ₹250 for labelling & packaging | ₹1,350 | ₹135 | ₹1,485 |
| Advertisement cost of ₹300 added by the retailer | ₹1,785 | ₹178 | ₹1,963 |
| Total | ₹1,550 | ₹413 | ₹1,963 |
The tax liability was passed on to every next stage, and the final price effect comes on the end consumer. This condition is known as the cascading effect.
Here are the tax calculations under GST.
| Particulars | Cost | Tax @ 10%. | Tax liability to be deposited to the government | Invoice total |
| Manufacturer | ₹1,000 | ₹100 | ₹100 | ₹1,100 |
| Warehouse adds ₹250 for labelling & packaging | ₹1,250 | ₹125 | ₹25 | ₹1,375 |
| Advertisement cost of ₹300 added by the retailer | ₹1,550 | ₹155 | ₹30 | ₹1,705 |
| Total | ₹1,550 | – | – | ₹1,705 |
Under GST, taxes claimed in the previous stages can be adjusted to the later-stage tax liability while filing GST returns. This is called an input tax credit.
The effect of input tax credit reduces the final value of the goods from ₹1,963 to ₹1,705. And, the tax burden on the end consumer is reduced.
What Are the New Compliances Under GST?
The GST regime in India is constantly evolving. In addition to filing this return online, the government has introduced many new systems that make tax compliance easier. Businesses need to stay updated on evolving GST systems to ensure compliance and avoid penalties.
1. E-way Bills
It is an electronic document containing the details of the goods being transported. It is mandatory for inter-state movement of goods worth more than ₹50,000 and intra-state movement of goods in some states. This system was launched on 1st April 2018 for inter-state movement and was gradually implemented for intra-state movement by June 2018.
The e-way bill system has several benefits for traders, manufacturers, and transporters, such as ease of generation, tracking, and verification of e-way bills, elimination of physical documents, and faster movement of goods. It has also helped tax authorities with time reduction at check-posts at the time of verification and a decrease in tax evasion.
2. E-invoicing
E-invoicing generates and validates invoices electronically through a common portal. It will apply to businesses with an annual turnover of over ₹50 crore from 1 April 2021. E-invoicing involves obtaining a unique invoice reference number (IRN) from the Invoice Registration Portal (IRP) for each invoice and uploading the details to the IRP. The IRP then validates the invoice and returns a digitally signed invoice with a QR code.
It integrates with GST portal and e-way bill portal and reduces data entry errors and interoperability of invoices.
3. HSN Code Requirements
The Harmonized System of Nomenclature (HSN) code is a six-digit code that classifies goods and services for taxation purposes. The Service Accounting Code (SAC) is a similar code for services. From 1 April 2021, businesses must mention the SAC/HSN code on their invoices. The requirement varies for different entities based on their turnover.
For entities with a turnover of up to ₹5 crore, mentioning the first two digits of the SAC/HSN code is sufficient. For those with a turnover of over ₹5 crore, mentioning the first four digits of the SAC/HSN code is required. Additionally, businesses need to report the changes in the SAC/HSN code in their GSTR-1 form, which is a monthly or quarterly statement of outward supplies.
Related Read: GST Exemption: List of Goods and Services Exempt Under GST
Frequently Asked Questions (FAQs)
1. Define GST in Simple Terms
Simple definition of GST: GST, or Goods and Services Tax, is a single tax system in India that applies to the supply of goods and services. It was introduced to simplify the tax structure and make it easier for businesses and consumers.
2. Why do we need GST?
The main objective of utilising GST is to eliminate tax on tax, or double taxation, which cascades from the manufacturing level to the consumption level.
3. What type of tax is GST?
The goods and services tax (GST) is an indirect, value-added tax levied on most goods and services sold for domestic consumption in India.
4. How is GST charged?
Under the GST regime, tax is levied at every point of sale. So in the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.
5. What are the 3 types of GST?
The 3 types of GST are CGST (Central Goods and Services Tax), SGST (State Goods and Services Tax), IGST (Integrated Goods and Services Tax)
6. Can I apply for GST myself?
Yes, you can register yourself for GST online through the government website (gst.gov.in.).
7. Where does GST money go?
GST paid by individuals goes to the central and state governments and acts as a vital source of revenue to operate the country.
8. How is GST calculated?
To calculate GST, apply the applicable tax rate to the taxable value of the supply. The taxable value is the transaction value of the supply minus any discounts or abatements.
9. What are Dual Goods and Services Tax Structures?
Dual GST is a system where both the central and state governments levy GST on a common tax base. The central GST (CGST) and state GST (SGST) are charged on intra-state supplies, while the integrated GST (IGST) is charged on inter-state supplies. The IGST is apportioned between the centre and the states.
10. What are the Goods Exempted from GST?
Some goods exempted from GST are fresh fruits and vegetables, milk, eggs, meat, fish, bread, salt, jaggery, and cereals.
11. What is the limit imposed on GST?
The limit imposed on GST is the threshold turnover for registration. A person engaged in an exclusive supply of goods and whose aggregate turnover in the financial year does not exceed ₹40 lakhs is not required to register under GST. However, this limit is ₹20 lakhs for special category states and ₹10 lakhs for hilly states and Jammu and Kashmir.
12. Is it necessary for all traders to register under the GST?
No, not all traders need to register under GST. Only those traders whose aggregate turnover exceeds the threshold limit, or who are engaged in inter-state supplies, who are required to pay tax under reverse charge, or who are liable to deduct tax at source, or who are involved in e-commerce, or who are supplying certain notified goods or services, are required to register under GST.
