How do we define GST? GST is a comprehensive indirect tax charged on the supply of goods and services in India. It has replaced many previous taxes, such as excise, VAT, and service tax. This article will explain all about GST, its components, rate structure, registration process, what are GST rules and more.
Table of Contents
What Is GST?
GST stands for Goods and Services Tax. It is an indirect tax set on the supply of goods and services.
Goods and Services Tax (GST) is an improved system over the previous Value Added Tax (VAT) in India. It applies a single tax rate on both goods and services. Unlike VAT, GST is a multi-stage, destination-oriented tax. It replaced several previous indirect taxes, such as VAT, excise duty, and service tax, levied by the central and state governments. This streamlined tax administration across the entire nation.
The Goods and Services Tax (GST) Act was passed in Parliament on March 29, 2017, and became effective on July 1, 2017.
The key purpose of implementing the Goods and Services Tax was to simplify the tax structure and create a uniform and integrated tax system to reduce the tax burden on businesses and consumers.
GST is categorised into CGST, SGST, IGST, and UTGST.
What are the Types of GST?
India’s GST system has four types of GST: Central GST (CGST), State GST (SGST), Integrated GST (IGST), and Union Territory GST (UTGST)
Here’s a breakdown of four types of GST:
1. Central GST (CGST) and State GST (SGST)
Wondering what is CGST? It is the tax collected by the central government on intra-state transactions. SGST plays a vital role in revenue generation for individual states. The rates of CGST and SGST are usually equal, and the total GST rate is the sum of both.
Now that you know what is SGST and CGST, let’s move to the next.
2. Integrated GST (IGST)
Knowing what is IGST is important for parties involved in sale-purchase transactions. IGST is the tax collected by the central government on inter-state transactions. It also applies to imports and exports of goods and services. The rate of IGST is equal to the total GST rate applicable to the product or service.
The integration of CGST, SGST and IGST within the GST framework creates a seamless tax credit mechanism allowing businesses to claim ITC of taxes paid at each stage of the supply chain, irrespective of the nature of supply.
3. Union Territories GST (UTGST)
What is UTGST? It is the tax the union territories collect on intra-UT transactions. It is similar to SGST, except for union territories without a legislature, such as Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli, Daman and Diu, and Chandigarh. However, it does not apply to Delhi and Puducherry, as these UTs have a private legislature.
Read More About: What is CGST, SGST, IGST and UTGST
Key Principles of 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 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
How GST Works?
Now that you know GST operates as a multi-stage tax levied at various points in the production and distribution process, ensuring taxation at each stage of the supply chain, it’s time to find out how GST works.
Let us understand how GST works in India:
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 amounting to ₹100 and pays GST of 5%, the cost of the raw materials becomes ₹105. Then, he adds the value of ₹50 to the product and sells it for ₹155. The manufacturer has to pay a GST of 5% on ₹160, which is ₹8. However, he can claim an input tax credit of ₹5 for GST on the raw materials. Therefore, the net GST liability of the manufacturer is ₹3 (₹8 – ₹5).
2. Service Provider’s Role
A service provider is liable to pay GST on the purchased product and the value they contribute. For instance, if a service provider buys a product worth ₹200 and pays 5% GST, the product cost becomes ₹210. Adding ₹100 in value, he charges ₹320 for the service. While the GST liability of ₹320 amounts to ₹16, the service provider can claim an input tax credit of ₹10 (the GST paid on the product). Thus, the net GST liability is ₹6 (₹16 – ₹10).
3. Retailer’s Involvement
A retailer is liable to pay GST on the products acquired from distributors and the margin they add to the product. For instance, if a retailer buys a product worth ₹250 and pays 5% GST, the cost becomes ₹262.5. Adding a margin of ₹25, the retailer sells the product for ₹282.5. While the GST liability of ₹282.5 is ₹14 the retailer can claim an input tax credit of ₹12.5 (the GST paid on the product). Thus, the net GST liability is ₹1.5 (₹14 – ₹12.5).
4. Consumer’s Perspective
A consumer is the final contributor to the GST system and has to pay GST on the purchased product. For example, if a consumer buys a product worth ₹300 and pays GST of 5%, the cost becomes ₹315. The consumer cannot claim any input tax credit, as the consumer is the product’s end user. Therefore, the consumer bears the entire GST burden of ₹15.
GST for transactions Within a State
GST for transactions within a state involves two components: CGST (Central GST) and SGST (State GST). Both are applied to the same taxable value of the product or service. The rate of CGST and SGST is decided by the GST Council, a body comprising representatives from the Central and State Governments.
For example, if a product is sold within a state for ₹1000 and the GST rate is 18%, the GST amount will be ₹180. This will be divided equally between CGST and SGST, i.e., ₹90 each. The seller will collect ₹1080 from the buyer and pay ₹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 involve the implementation of Integrated GST (IGST). IGST is the addition of CGST and SGST and is levied by the Central Government. It is applied to the value of the product or service supplied across states.
IGST ensures that taxes paid on inter-state supplies are credited to the importing state, with the exporting state collecting the tax. For instance, when goods are sold from Maharashtra to Gujarat, IGST is levied and the credit is transferred to Gujarat, where the goods are received and consumed.
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 | 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, mobile phones, etc. | Non-AC hotels, business class air travel, state-run lotteries, etc. |
| 18% | 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, race 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.
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.
History of GST (Goods and Services Tax)
The concept of GST dates back to 1954 when France became the first country to implement it. Over 160 countries worldwide have followed suit, adopting GST or similar value-added tax (VAT) systems. Some countries that adopted GST before India include Germany, Brazil, Canada, and Japan.
India initiated the implementation of GST in 2000, when Prime Minister Atal Bihari Vajpayee set up an empowered committee to design the GST model. In 2004, a task force led by Vijay L. Kelkar recommended the introduction of a destination-based GST to replace the existing multiple taxes levied by the central and state governments.
The GST was proposed to be introduced in 2010 but faced several challenges and delays due to political and technical issues. The Constitution Amendment Bill to implement GST was introduced in 2011 but lapsed due to the dissolution of the 15th Lok Sabha. The bill was reintroduced and passed by both houses of Parliament in 2016, and it received the president’s approval in 2017. The GST was finally implemented on July 1, 2017, after the GST Council, comprising representatives of the central and state governments, finalised the GST rates, rules, and regulations.
GST replaced taxes such as excise duty, service tax, value-added tax (VAT), and central sales tax (CST). It brought uniformity, eliminated tax cascading, and simplified compliance. The principle of One Nation, One Tax forms the foundation of the GST system. It has transformed India’s tax structure, fostering efficiency and transparency.
Frequently Asked Questions (FAQs)
1. 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.
2. 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.
3. 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.
4. 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)
5. Can I apply for GST myself?
Yes, you can register yourself for GST online through the government website (gst.gov.in.).
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
12. Are there consequences of not paying GST?
A person who fails to pay GST or makes a short payment erroneous payment or excess claim of input tax credit is liable to pay interest and penalty. The interest rate is 18% per annum and the penalty is 10% of the tax amount or ₹10,000, whichever is higher. In case of fraud or deliberate evasion, the penalty is 100% of the tax amount.
