What is the Goods and Services Tax? GST Explained

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GST, the Goods and Services Tax, is an indirect tax in India. As the name suggests, the tax is levied on the sale of goods as well as services in the country..

GST is known as a comprehensive tax because it has replaced most other indirect taxes like service tax, value added tax (VAT), central excise duty, additional customs duty, surcharges and octroi. Unlike these previous taxes, GST is collected at the point of consumption and not at the point of origin.

GST is imposed at every step in the process of production of a particular good or service. This tax came into force on 1 July 2017. The aim of GST was to simplify the indirect taxation process in India and increase the ease of running a business within the country.

GST tax slabs

GST has been dividend into the following slabs – 0%, 5%, 12%, 18% and 28%.

Certain products and services like petroleum products, alcoholic drinks and electricity do not come under GST. These products and services are taxed by the individual State Governments, as per their tax policies.

GST Council

The rules and regulations that form GST are governed by a government body called 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.

Filing GST returns

All businesses that are registered in India have to file GST returns every month, quarter and/or year. The type of returns that need to be filed vary from business to business.

A GST return is typically a document that carries details about the income earned by the business. The return has to be filed with the Income Tax Department. 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 Razopay Invoices.

There are different types of GST returns that need to be filed either every month or every quarter. For example, GSTR-1 has to be filed 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 is a plan that falls under GST, allowing 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. Small taxpayers can bid tedious GST formalities adieu and only pay GST at a fixed turnover rate.

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 detail article on 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.

This includes the following:

  • Businesses that have a turnover of less than Rs 1.5 crore do not need to use HSN
  • Businesses that have a turnover of more than Rs 1.5 crore, but still less than Rs 5 crore, must use 2-digit HSN codes
  • Businesses that have a turnover of more than Rs 5 crore must use 4-digit HSN codes
  • Businesses that deal with imports and exports have to use an 8-digit HSN code

On the other hand, SAC stands for Servicing Accounting Code and are used to classify services instead of goods. All services tend to begin with the number 99, which is what identifies the code as an SAC and not an HSN.

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 the party that is liable to pay the taxes.

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.

Reverse charge becomes applicable in three main instances:

  • Supply from an unregistered dealer to a registered dealer
  • Services through an e-commerce company
  • Supply of specific goods listed by CBIC

Read more about reverse charge mechanism and self-invoicing here.

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 services and goods together just need to file a single tax instead of different ones
  • Simple 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 ecommerce sites: With ecommerce services being a big sector in India, the implementation of GST has been a huge boon. Let us say 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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