GST, aka the Goods and Services Tax, is an indirect tax in India. With its origin, it has replaced many other indirect taxes in India such as VAT, CST, central excise duty, service tax and so on.
Let’s understand the new indirect tax in detail and its implications on businesses, corporates and individuals in India.
What is GST?
As the name suggests, GST is levied on the 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 which 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.
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.
GST is levied at the point of consumption of the 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.
Journey of GST
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 from the 1st of July 2017.
Benefits of GST
Here are the advantages of GST:
- Removal of cascading effect: GST 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
- Simplification of taxes: GST has replaced 17 indirect taxes which has automatically eliminated the compliance cost for the businesses.
- 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
- Uniformity in the market: The past fragmented market across state lines has been unified with a huge decline in the cost of the goods
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 was 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 did GST help in price reduction
Let’s understand how the introduction of GST reduced cost for end consumers through an example.
A manufacturer produces goods (10% tax rate applicable) worth Rs 1,000 and sends it to a warehouse for labelling & packaging. The warehouse adds Rs 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||Rs 1,000||Rs 100||Rs 1,100|
|Warehouse adds Rs 250 for labelling & packaging||Rs 1,350||Rs 135||Rs 1,485|
|Advertisement cost of Rs 300 added by the retailer||Rs 1,785||Rs 178||Rs 1,963|
|Total||Rs 1,550||Rs 413||Rs 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||Rs 1,000||Rs 100||Rs 100||Rs 1,100|
|Warehouse adds Rs 250 for labelling & packaging||Rs 1,250||Rs 125||Rs 25||Rs 1,375|
|Advertisement cost of Rs 300 added by the retailer||Rs 1,550||Rs 155||Rs 30||Rs 1,705|
|Total||Rs 1,550||Rs 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 Rs 1,963 to Rs 1,705. And, the tax burden on the end consumer is reduced.
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
Components of GST
The components of GST are as follows:
|Central Goods and Services Tax (CGST)||Applicable to the transactions done within state boundaries or at the intrastate level|
|State Goods and Services Tax (SGST)||Like CGST, this tax is also applicable to the transactions done within state boundaries or at the intrastate level|
|Integrated Goods and Services Tax (IGST)||Applicable to the transactions done between different states or at the interstate level|
Any sale or supply of goods or services within the state will be liable to CGST & SGST. That means the revenue collected from such sales are shared equally between the centre and the state. Before the introduction of GST, such transactions were subjected to VAT, central excise or service tax.
Similarly, IGST collected from any interstate transaction is collected by the Centre and then shared on the basis of destination of goods.
- A manufacturer in Punjab has sold goods to a dealer in Karnataka worth Rs 20,000. Only IGST of 18% will be levied on such goods. In this case, the manufacturer will charge Rs 3,600 as IGST and the revenue will be collected by the central government
- If the same dealer sells the goods further in Karnataka only, then he will charge CGST of 9% and SGST of 9% from the receiver of the goods. These taxes will be deposited to the central government and the state government
GST Tax 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. These products and services are taxed by the individual State Governments, as per their tax policies.
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.
Under the GST law, businesses with turnover exceeding Rs 40 lakh* (Rs 10 lakh for North-Eastern States, J&K, Himachal Pradesh and Uttarakhand) is compulsorily required to obtain GST registration. The limit is applicable to the supplier of goods only.
The threshold remains to be Rs 20 lakh and in case of special category States at Rs 10 lakh for the service providers.
*CBIC had notified the increase in threshold turnover from Rs 20 lakh to Rs 40 lakh which came into effect from the 1st of April 2019.
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, GST 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 total GST 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 GST-compliant invoices can be generated easily using Razorpay Invoices.
There are different types of GST 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 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 Rs 1.5 crore. In the case of North-Eastern states and Himachal Pradesh, the threshold is Rs 75 lakh. Small taxpayers can bid tedious GST formalities adieu and only pay GST at a fixed rate of turnover.
The GST 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 composition scheme. Some of these include the following:
- 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 Rs 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
- Businesses can also enjoy much higher liquidity as their taxes are set at a lower rate
- 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
Read this detailed article on the merits and demerits of the GST Composition Scheme.
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.
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.
Read everything about reverse charge mechanism and self-invoicing here.
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, excise duty have been subsumed, and now there are no restrictions on claiming tax paid on purchases.
Read everything about Input tax credit under GST
Difference between GSTN and GSTIN
GSTN and GSTIN are two different things under GST.
GSTIN is a tax registration number under GST that businesses get after a successful registration.
Whereas, GSTN aka the Goods and Services Network is an organisation which manages the entire information technology (IT) system of the GST portal. This portal is used by the Government of India to track every financial transaction, provide taxpayers with all GST-related services – from registration to filing taxes and maintaining all GST details.
GST rules for startups
GST offers a wide range of benefits to start-ups. Some of these include the following:
- 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
- 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
- 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.
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