GST stands for Goods and Services Tax, which is a tax on the sales of goods and services in India. With its origin, it has replaced many other indirect taxes such as VAT, CST, central excise duty, service tax, and so on.

Let’s understand this new way of taxation in detail and its implications on businesses, corporates, and individuals in India.

What is GST?

GST is levied on any sale of goods and services in the country. Unlike previous indirect taxes, this tax is collected at the point of consumption and not at the point of origin. To summarise, GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.

The law governing GST was passed in the parliament on the 29th of March 2017 and it was implemented across the country on the 1st of July 2017.

Multi-stage taxation

A product goes through multiple stages before it is consumed by the end-user. These stages are similar to those of a supply chain.

For instance, the supply chain of a product involves the following stages:

  • Purchase of raw materials
  • Manufacturing of a product,
  • Selling the product to a wholesaler and then to a retailer
  • Sale to the end consumer

GST is levied on each stage mentioned above, which makes it a multi-stage tax.

Destination-based tax

GST is levied at the point of consumption of goods or services. For instance, if a product is manufactured in West Bengal and is sold to an end consumer in Karnataka, then GST will be levied and collected by the Government of Karnataka and not West Bengal.

The Journey of GST in India

The journey of GST was started in the year 2000 when a committee was formed to draft the GST law by our former Prime Minister, Atal Bihari Vajpayee. It took 17 years for the government to evolve the law and then, the GST bill was passed by the Parliament in the year 2017. The Act finally came into effect on the 1st of July 2017.

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

Difference between GST Tax and Old Tax Structure

Goods & Services Tax (GST) Value Added Tax (VAT)
GST is applied on the supply of goods and services VAT was only levied on the sale of goods
GST rates of goods & services are the same across all the states in India Different tax rates were applied in different states
The centre and the state collects SGST and CGST on every sale transaction respectively VAT was collected by the state in which the sale transaction took place and used by the state government
All the indirect taxes that were levied on state and central level were discontinued after the introduction of GST. Only one tax is levied on goods & services across the country. However, there are some exceptions like petroleum, natural gas, motor spirit and high-speed diesel Different taxes like VAT, luxury tax, entertainment tax, various cesses, sales tax, were charged on the state level. Several taxes at the central level made the entire system complex

What are the 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.

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 INR 1,000 and sends it to a warehouse for labelling & packaging. The warehouse adds INR 250 to the existing value of the goods. Then, sell it to the retailer. The retailer adds its advertisement cost of Rs 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 INR 1,000 INR 100 INR 1,100
Warehouse adds Rs 250 for labelling & packaging INR 1,350 INR 135 INR 1,485
Advertisement cost of Rs 300 added by the retailer INR 1,785 INR 178 INR 1,963
Total INR 1,550 INR 413 INR 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 INR 1,000 INR 100 INR 100 INR 1,100
Warehouse adds Rs 250 for labelling & packaging INR 1,250 INR 125 INR 25 INR 1,375
Advertisement cost of Rs 300 added by the retailer INR 1,550 INR 155 INR 30 INR 1,705
Total INR 1,550 INR 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 INR 1,963 to INR 1,705. And, the tax burden on the end consumer is reduced.

Advantages of GST

Here are the 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. 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

Who is eligible for GST?

All the businesses supplying goods whose turnover exceeds INR 40 lakh in a financial year are required to register as a normal taxable person. However, the threshold limit is INR 10 lakh if you have a business in the north-eastern states, J&K, Himachal Pradesh, and Uttarakhand.

The turnover limit is INR 20 lakh, and in the case of special category states, INR 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

Registration of GST

GST Registration is a process by which a taxpayer gets himself registered under GST. Once a business is successfully registered, a unique registration number is assigned to them known as the Goods and Services Tax Identification Number (GSTIN). This is a 15-digit number assigned by the central government after the taxpayers obtain registration.

Please note – If you are operating from more than one state, then you will have to take separate registration for each state you are operating from.

GST identification number

Business owners that register under GST are provided with a unique 15 digit identification number called GSTIN. This number is critical for businesses that want to avail benefits of the GST regime. For example, if the GST you pay is more than the GST liability, you are eligible for a refund through GSTIN. Furthermore, this also helps in easy authentication, verification, and avoiding fraud.

GST certificate

A GST registration certificate is a document for proof of being registered under the GST rules in India. Any business in the country whose turnover exceeds the threshold limit for GST registration is required to get registered under GST. There are also certain businesses that need to mandatorily register themselves under GST like casual taxable individuals, non-resident taxable individuals, etc.

Filing GST returns

All businesses that are required to be registered under GST have to file monthly, quarterly and/or annual GST returns. The type of returns that need to be filed varies from business to business.

A GST return is typically a document that includes purchases, sales, tax paid and input tax credit (ITC) of a registered business. The return has to be filed with the tax authorities and the authorities use the same information to calculate the tax liability of a business.

What is important here is that to file GST returns, a business needs to have GST-compliant invoices of their sales and purchases. Such invoices can be generated easily using Razorpay Invoices.

There are different types of returns that need to be filed either every month or every quarter depending on the type of registration the business. For example, GSTR-1 has to be filed by a regular taxpayer every month with the details of outward supplies of goods or services.

On the other hand, GSTR-4 is a quarterly return that needs to be filed by a business that is registered under the composition scheme.

GST rate slabs

GST consists of the following tax slabs – 0%, 5%, 12%, 18% and 28%.

Certain products and services like petroleum products, high-speed diesel, motor spirit, natural gas, aviation turbine fuel, and alcoholic liquor for human consumption do not come under GST rates. These products and services are taxed by the individual State Governments, as per their tax policies.

Here is the rate for a few commodities:

Items GST rates
Books 12%
Cement 28%
Mobile phones 18%
Steel 18%
Hotel food 5%

GST Calculation

Any business, manufacturer, wholesaler and retailer can calculate GST easily with the help of the following formula: Where GST is excluded:

GST Amount = (Value of supply x GST%)/100
Price to be charged = Value of supply + GST Amount
Where GST is included in the value of supply:
GST Amount = Value of supply – [Value of supply x {100/(100+GST%)}]

GST Composition Scheme

The composition scheme under GST allows taxpayers to enjoy a certain amount of flexibility when paying their taxes.

The scheme is ideal for businesses with a turnover of less than INR 1.5 crore. In the case of North-Eastern states and Himachal Pradesh, the threshold is INR 75 lakh. Small taxpayers can bid tedious formalities adieu and only pay tax at a fixed rate of turnover.

The rates applicable to composition dealers are as follows

Type of business CGST SGST Total
Manufacturers and traders (goods) 0.5% 0.5% 1.0%
Restaurants not serving alcohol 2.5% 2.5% 5.0%
Other service providers 3.0% 3.0% 6.0%

There are many advantages to availing the GST composition scheme. Some of these include the following:

  1. Businesses can enjoy a much lesser tax liability when they avail this scheme. The biggest advantage of this is for startups and smaller businesses that often see cash crunches on a regular basis. Most startups that do not see a turnover of over INR 1.5 crore are less likely to have extra cash that can go into taxes. With the composition scheme, the government has ensured that more startups can flourish in a market that has become friendlier towards their plight.
  2. Businesses can also enjoy much higher liquidity as their taxes are set at a lower rate.
  3. Businesses can gain from lesser compliance that comes with all of these exemptions (maintaining records, filing returns, issuance of invoices, and so on), making it easier for them to run their operations as they do not have to spare a resource to get these things done.

GST HSN and SAC Codes

HSN stands for Harmonized System of Nomenclature and is used to classify goods in a systematic manner. It was developed by the World Customs Organization (WCO) and is considered the global standard when it comes to naming goods.

This 6-digit uniform code can be used to classify more than 5,000 products, and are also used for classification for tax purposes.

With the introduction of GST in India, HSN is now being used under a 3-tiered system.

HSN and SAC codes under GST are explained with examples here.

Reverse Charge Mechanism under GST

In regular circumstances, any supplier of goods and services is liable to pay the Goods and Services Tax (GST). However, when the reverse charge mechanism is applied, the receiver of the goods becomes liable to pay tax.

The government has clearly spelt out a few instances in which the reverse charge mechanism is employed and understanding the same can help both businesses and individual customers understand their transactions in a more comprehensive manner.

Input tax credit under GST

Input tax credit under GST means reducing the taxes paid on purchases (inputs) from the taxes to be paid on sales (output).

In the pre-GST time, the taxpayers could not claim the credit on central sales tax, entry tax, luxury tax, and other indirect taxes. Also, service providers and manufacturers could not claim excise duty and service tax paid on their purchases.

With the introduction of GST, many indirect taxes such as VAT, CST, and excise duty have been subsumed, and now there are no restrictions on claiming tax paid on purchases.

GST Payments

Different categories of taxpayers need to follow different GST payment processes as described below:

  • Regular taxpayer: For a regular taxpayer, a PMT-06 challan is required for making payment to the cash ledger. This is required when they are filing the GSTR-3B, every detail of which will be provided in the form. They can also create the challan and make payment either before or post login or even while filing the return for GSTR-3B.
  • Quarterly taxpayer: Taxpayers who have chosen the QRMP Scheme fall under this category. The tax for the first 2 months of the quarter must be deposited using the PMT-06 challan, and the payment must be made during the last month of the quarter while filing the GSTR-3B. The tax must be paid within the 25th of the succeeding month for the first and the second months of the quarter. For example, April and May for the April to June quarter.
  • Nil GST return taxpayer: Whether, for a month or a quarter, these taxpayers do not have any purchase or sale or tax payable for the respective period. Therefore, they are not required to make the payment or generate any challan.
  • A taxpayer under the composition scheme: Such taxpayers are required to summarize their turnover or sales during a quarter and generate the CMP-08 challan for paying tax. For example, the tax payable for April to June quarter needs to be paid by 18th June under the Composition Scheme.

GST Council

GST is implemented and regulated by the GST council. This council is made up of the finance ministers of the Central as well as different State Governments. The Council is chaired by the Union Finance Minister and is tasked with revisions, regulations and rates that may apply to the GST law.

GST e-Way Bill

Electronic Way Bill or e-Way Bill is proof of movement of goods. 

On 1st April 2018, the Government of India launched this centralised system for inter-state movement of goods. A couple of days later, e-Way bills became mandatory for intra-state movement of goods, too. 

The government has mandated that every GST-registered trader who is transferring goods worth more than Rs. 50,000 must have this document That is, the person in charge of conveyance needs to carry the GST e-Way Bill. 

You can easily obtain an e-Way bill through the GST mobile app, by SMS, or by an API-facilitated site-to-site integration. You can also cancel this bill through the same ways. Once this bill is generated, the transporters, suppliers and recipients will get a unique EBN or e-Way Bill Number. 

GST network

The Goods and Service Tax Network (or GSTN) is a non-profit, non-government organization that manages the entire IT system of the GST portal, which is the central database for all things GST. The government uses this platform to track every financial transaction and provides taxpayers with services ranging from registration to filing taxes and maintaining all tax details.

Features of GSTN

The features of GSTN are:

  • Ownership

The Central Government owns 49% while private institutions like banks own 51%

  • Infrastructure and Operations

GSTN aims to make registration, payments and claiming of returns a seamless task for taxpayers 

  • National Information Utility

GSTN provides a solid IT infrastructure which helps in the passage of information

  • Payment

Taxpayers can make payments via both online and offline modes

  • Expenses

The Central and state governments pay user charges in equal proportions. The state share is divided according to the number of taxpayers living in the state

How to apply for GSTN

You’d need a  mobile number, email ID and PAN of the business to apply for GSTN. Follow the steps below.

Step 1: Visit the official GST portal

Step 2: Under the “Services” tab, select the option for GST Registration.

Step 3: Go to “New Registration” and fill in the required details.

Step 4: Click on the ‘proceed’ button

Functions of GSTN

Given below is the list of important functions of GSTN:

  • Registration

GSTN provides the GST Identification Number to taxpayers. After registration is completed and verified, GSTN files the information with tax authorities. 

  • Matching of invoices

GSTN is also responsible for checking whether the purchase and sale invoices match or not. Mismatches, if detected, are fixed by GSTN. Thus, taxpayers receive Input Tax Credit

  • Return filing

GSTN is responsible for submitting returns to tax authorities under both Central and state governments. Under GSTN, taxpayers can file a common return for CGST, SGS and IGST. 

GST Helpline & App

Individuals who have any confusion or doubts regarding their tax filing can get in touch with the concerned authority through the GST Helpline. Earlier, taxpayers could get in touch through the helpdesk email ID – helpdesk@gst.gov.in. However, this email ID has been discontinued.

Here are the new contact details for any queries you may have:

Toll-free number 1800 1200 232
Help portal https://selfservice.gstsystem.in/

GST benefits for startups

The new taxation machinery offers a wide range of benefits to start-ups. Some of these include the following:

  1. Simple tax processes: As start-ups have tight budgets and tighter deadlines, they cannot always afford to spare resources to oversee a myriad of tax compliances that fall under VAT, excise, service tax, CST, and so on. With GST in place, most of these taxes are eliminated, making it much easier for them to be on top of filing their taxes and returns. Furthermore, start-ups that deal with both services and goods together just need to file a single tax return instead of different ones.
  2. Seamless online procedures: Gone are the days when people had to run around tax offices, waiting in lines day in and out only to be told to come back the next day. Now, the procedure occurs online, making it not only simple but also extremely quick. If you keep all your documents in perfect order, then filing your taxes becomes a task that’s reduced to a few simple clicks.
  3. Ease of business for e-commerce sites: With e-commerce services being a major sector of the economy in India, the implementation of GST has been a huge boon. Suppose you are an online marketplace that delivers goods all over the country. With different VAT laws in different states, you were required to file various tax documents accurately and on time. With GST, this issue is totally eliminated.

Our in-depth article on GST rules for startups will help you better understand this subject.

FAQs

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.

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.

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.

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)

Can I apply for GST myself?

Yes, you can register yourself for GST online through the government website (gst.gov.in.).

Where does GST money go?

GST paid by the individuals goes to the central and state governments and acts as a vital source of revenue to operate the country.

Author

Writer-by-chance and overthinker-by-choice, raging a war against the Pineapple-on-pizza brigade

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