A Comprehensive Guide to GST (Goods & Services Tax) India
The Goods & Services Tax (GST) has been officially launched in India on July 1, 2017. The GST has been introduced as a single tax system for all the supplies of goods and services across and outside the country. It will effectively replace all the indirect taxes such as Service tax, VAT, CESS and other taxes levied by the Central and State governments. GST is probably the biggest change in the tax system of India ever since the independence of our country. It is expected to completely reform the way we do our taxes. Let’s find out the details about what GST is and how it will impact the Indian economy.
- 1 What is GST?
- 2 Needs and Importance of GST in India
- 3 Tax Calculation under GST
- 4 Types of GST (What are IGST, CGST, and SGST)
- 5 Tax rate slabs under GST
- 6 GSTN, GSTIN, and GST Council
- 7 GST Registration
- 8 GST E-Ledgers
- 9 What is Input Credit in GST and why is it important?
- 10 HSN and SAC Codes
- 11 How to file tax returns and pay tax under GST?
- 12 What is GST Composition Scheme?
- 13 GST – short-term and long-term impacts
- 14 Constitutional Amendment for GST
- 15 Other Important Points
What is GST?
The Goods and Service Tax (GST) is a multi-stage, destination based tax that is levied on the consumption of goods and services in India. Since GST is a multi-stage tax, it is levied at each stage of a business transaction, from manufacturing to final consumption. To overcome the problem of cascading taxes or multiple taxes on the same product or service, GST has the provision of Input Tax Credit, in which the credit of taxes already paid will be returned. (Read more about ITC below).
In short, GST will be levied only on value addition (the monetary value added) at every stage of a transaction and the final tax is to be paid only by the consumer.
The term Destination-based indicates that the GST is to be levied at every point of sale and only the government of that particular state where the item is being consumed finally will be the beneficiary of the tax revenue.
GST effectively replaces the following indirect taxes:
- Central Excise Duty
- Countervailing Duty
- Special Countervailing Duty
- Service Tax
- Central Sales Tax (CST)
- Entertainment Tax
- Entry Tax
- Value Added Tax (VAT)
- Purchase Tax
- Luxury Tax
- Advertisement taxes
- Taxes applicable on lotteries
Needs and Importance of GST in India
Many people have been wondering why we actually needed GST when we already had a perfectly working tax system in place. Let me tell you that our old tax system was not so perfect.
The old tax system of India had many different indirect taxes that were levied on the transaction of goods from one state to another, on import and export of goods, manufacturing and on every other stage of the business transaction. In short, a businessman had to pay all these taxes in order to be able to supply goods and services to the end customer. In most of the cases, the tax was being levied on an already taxed item. This is called cascading effect of the tax. And since there was no provision of tax credits or refund, the shopkeepers used to pass on the tax liability to the customer, which resulted in increased prices of items as the customer has to pay the price of the product as well as all the taxes on it.
The Goods and Services Tax will resolve this problem by replacing all the indirect taxes with a single GST tax. Yes, the tax will be levied on every stage but the previously paid tax will be available in the form of Input credits which can be used to pay further taxes. The GST will also help in making India a unified market for businesses on the international level.
Tax Calculation under GST
The GST will be calculated and levied at every transaction stage during the supply. Let’s understand this with an example.
Suppose the GST rate on a product is 20%. The manufacturing cost of the product is, say Rs. 100. So, after GST on manufacturing, its actual cost will be Rs. 120. Let’s say that the profit of the manufacturer is Rs. 30, so the selling cost of the product will be 120+30= Rs. 150. A 20% GST will be charged when selling this product to the consumer. So the GST should be 20% of 150, but since GST is levied only on the value, so the tax will be charged only on the difference, i.e. on Rs. 30. The GST applicable is 20% of 30 = Rs. 6 and the final cost of the product will be 150+6= Rs. 156. The total GST amount, which will be borne by the consumer, is Rs. 26.
In the previous tax system, the consumer was paying 20+30= Rs. 50 as tax and the final product cost would have been Rs. 180.
A normal business supply cycle is much more complex than this, where manufacturer, wholesaler, dealer, shopkeeper, and consumer are involved and tax is levied on every transaction. But in GST, the consumer will have to pay only the actual tax amount without cascading of taxes. There is also a different matter of state and central taxes, which we’ll learn about in the next topic.
Types of GST (What are IGST, CGST, and SGST)
Although GST is supposed to be a single tax system where one tax should be applicable on all the supplies, in fact, the government has introduced a dual-tax system in which different taxes will be paid to the state and the central government.
A dual-tax system has been implemented is to protect the constitutional right of the states. India is a federal country and both the states and the Centre have the right to levy taxes on the supplies made within their coverage area. These taxes are important for smooth running of the processing and working of the governments. This is why an amendment has been made in the Constitution defining the GST rights of the Central and state governments. According to which, the following three kinds of taxes will be applicable under GST:
CGST (Central GST) will be levied along with SGST on the intra-state (within a state) transaction of goods & services. The revenue will be collected by the Central government.
SGST (State GST) will also be applicable on the intra-state (within a state) transactions but the revenue will be collected by the respective state governments.
IGST (Integrated GST) will be applicable on all inter-state (between states) transactions and also on the import of goods. The revenue will be collected by the Central government and will be further distributed among the participating states.
Read the article IGST, CGST and SGST to know more about the GST Tax structure.
Tax rate slabs under GST
Again, on contrary to the previously suggested single tax system, GST contains multiple rate slabs for different category of products. The government realized that it won’t be justified to put all the commodities, such as luxury items and basic need items, etc. in the same tax rate slab. Therefore, the government has finalized a four-tier tax structure consisting of the following tax slabs.
- 5% GST: It is for common use items such as sugar, tea, spices, oils, domestic LPG, etc.
- 12% GST: It will be applicable to most of the goods and services which fall under the fast-moving goods category, including butter, fruit juice, almonds and other similar items.
- 18% GST will be levied on more sophisticated items like hair oil, toothpaste, soups, pasta, etc.
- 28% GST will be levied on the luxury items and services like business-class travels, cars, AC/fridge, etc. which are currently taxed at around 30-31%.
- 0% GST or no tax will be levied on the essential items like food.
- Some commodities like the sale of lands, Petroleum products, electricity, Alcohol for human consumption are not included in the GST system and will be continued to tax as per the previous VAT based system.
- Ultra luxuries and sin goods like tobacco and aerated drinks will attract a cess in addition to the 28% GST for a period of five years. The cess is likely to be completely removed after five years.
- 3% GST to be levied on Gold.
Click here to find the complete list of GST rates for different products.
GSTN, GSTIN, and GST Council
The Goods and Service Tax Network (or GSTN) is the organization formed by the government to manage the entire IT administration of the GST Portal, which is the online portal for GST registration, e-filling, and billing. The GST Portal will allow the government to keep track of all the taxable entities and tax payments, and it will provide taxpayers the facility to file taxes and maintain their tax accounts (ledgers) online.
Official website: http://www.gstn.org/
GSTIN (GST Identification Number) is a unique PAN based identification number assigned to all GST registered taxpayers. This is to be mentioned while filing taxes on GST Portal.
The GST Council is a federal body under the government of India which is responsible for governing the GST system in the country. The Finance Minister of India is the Chairman of the GST Council. The Council has the right to make decisions to ensure a smooth implementation of GST and tax applications. It can also make recommendations on various aspects of taxes including tax-exemption, GST rates, GST threshold limit, GST laws, and other related matters.
Official website: http://gstcouncil.gov.in/
All the GST applicable taxpayers in India performing taxable supplies of goods & services and having a turnover over the GST threshold limit are required to register themselves on GST Portal. The GST tax filing, e-billing, return credit claims, GST ledgers maintenance and related processes will be performed only through the online portal. There is no other mechanism for tax return filing under GST.
Click here to know complete process for GST Registration.
While implementing GST, the government has put emphasis on keeping everything digital to make it easier for taxpayers to manage and file their tax returns and keep proper records online. This is why GST also has the provision of electronic ledgers or accounts through which users can manage their tax credits, cash and liability online. The following are the three electronic ledgers under GST.
- E-cash Ledger: This ledger will keep the records of all the cash payments, and TDS and TCS made towards taxpayers’ accounts. The cash available in this ledger can be used for making tax payment.
- E-credit Ledger: This will hold the Input Tax credit (ITC) received after monthly returns. The amount in this ledger can be used only for the payment of further taxes and not for payment of penalty, late fees or other dues.
- E-liability Ledger: This ledger will contain the information of your tax liability (net amount) for a particular month. It will show the details right on your GST dashboard.
What is Input Credit in GST and why is it important?
The Input Tax Credit (ITC) is one of the things that make GST much better than the previous tax system. There was a provision of input credit in VAT system as well, but this one is quite different.
The input credit means that while paying tax on output, the taxpayer can reduce the tax amount by claiming credits against the taxes already paid on inputs. In short, you won’t have to pay tax again on a value for which you have already paid tax. For example, if you have already paid Rs. 300 tax on input (purchases), the final tax amount on output (product cost) will be 450-300= Rs. 150. Here, you have claimed the input tax credit of Rs. 300.
ITC is applicable only for a registered taxpayer under GST.
Click here to read more about ITC and how to claim it.
HSN and SAC Codes
The GST tax system follows the Harmonized System of Nomenclature (HSN) for the identification of various goods and product categories. The GST rate of a product is assigned based on its HSN code, therefore businesses are required to mention their products’ HSN codes when filing tax returns and creating invoices. There are several free HSN/SAC code finder tools online that you can use to find out the codes for your taxable goods and services. SAC refers to the Service Access Codes which are assigned to different types of services.
The HSN codes also ensure that the Indian tax system is valid on the international standard. Different HSN codes parameters are defined for different product categories and on the basis of tax provisions.
- A dealer with annual turnover less than Rs. 1.5 crore is not required to mention HSN codes.
- Businesses with annual turnover between 1.5 crores and 5 crores will use the relevant two-digit HSN codes for their commodities.
- Dealers with an annual turnover of 5 crores and above are required to use four-digit HSN codes.
- For import and export of goods, eight-digit HSN codes are to be used.
How to file tax returns and pay tax under GST?
Under GST, a regular taxpayer is required to file 3 tax returns every month and one final return every year, resulting in total 37 returns in a financial year. A return is a tax document consisting of the details of supplies, income, tax payable, input credit, etc. which is to be filed on the GST portal.
Taxpayers can file their GST returns on the GST portal after registration. The portal also gives you the facility to generate GST compliant bills and invoices. The return filing system on the GST Portal consists of several forms from GSTR-1 to GSTR-10 which are to be filled in different cases. The good thing is that most of the information in these forms will get auto-populated after first return filing.
To ease the process of return filing in the beginning months of GST, the government has introduced the GSTR-3B form which is to be filled for the first two months (July & August) post-GST. After that, the regular return forms are required to be filled as below.
- GSTR-1: Details of outward supplies of taxable goods and/or services effected – Monthly (by 10th of the next month)
- GSTR-2: Details of inward supplies of taxable goods and/or services effected claiming input tax credit – Monthly (by 15th of the next month)
- GSTR-3: Monthly return on the basis of finalization of details of outward supplies and inward supplies along with the payment of amount of tax – Monthly (by 20th of the next month)
- GSTR-9: Annual Return – Annually (by 31st Dec of next financial year)
* A composition taxpayer is only required to file quarterly tax returns, thus total 5 (4 quarterly and 1 annual) returns in a financial year. Read more about GST composition scheme below.
What is GST Composition Scheme?
GTS composition scheme is for small businesses dealing only in goods and for restaurant businesses. The annual turnover of such businesses must not be more than 75 lakh to be eligible for this scheme. Under GST composition scheme, a registered business will only have to pay a fixed percentage of their annual income as tax. The tax rates are as below
- Manufacturers (other than manufacturers of notified goods): 2%
- Restaurants and food suppliers: 5%
- Traders (other supplies): 1%
The composition levy is not liable for Input tax credit, and the composition registered dealers cannot charge tax (GST) from their buyers/costumers.
Click here to find complete details about GST Composition scheme.
GST – short-term and long-term impacts
GST was launched with the aim to remove the cascading effects of indirect taxes, make goods & services cheaper, make it easier for common people to file returns and pay tax, digitization of the system, decrease corruption, increase tax compliance in the country, and establish India as a solid business platform for the global companies. Following are some of the immediate impacts of GST launch.
- The price of various goods has decreased due to reduced tax.
- The price of some goods increased because of increase in tax.
- More benefit for businesses and the end customer due to input tax credits.
- Businesses are still getting familiar with the revised tax rates on their goods and services. Most of them are confused about the right rates.
- Taxpayers are confused about the process of creating GST compliant invoices and filing tax returns under GST.
- Many illiterate and/or small manufacturers are unhappy because they either cannot afford the increased cost or are unable to understand the paperwork associated with GST.
- Business class travels have become more expensive.
- Many businesses and industries reported a downfall soon after the launch of GST, but it will begin to rise as the new tax system settles in.
- GST has definitely improved the operational and profitable efficiency of the logistics sector in India.
- Small shopkeepers are choosing to buy from GST compliant stores instead of unorganized wholesalers. Therefore, the unorganized trade market is expected to go down.
Long-term impacts of GST
- Since GST is a transparent tax, it is now easier for businesses to show taxes in their sales invoice.
- GST is expected to improve tax compliance level by bringing more taxpayers into the fold, thus increasing revenue for the government.
- In the long-term, as the prices of commodities get steady, both the dealers and consumers will benefit more.
- GST will unify the market for the businesses.
Constitutional Amendment for GST
Since the Goods & Services Tax is such a great bill, it demanded some particular changes in the Constitution regarding the powers of the Centre and the States to ensure a proper implementation of the tax system in the country while protecting the rights of all the entities. In the old tax system, both the Centre and the States had their defined areas in which they had powers to levy the tax.
Now, GST proposed a single tax system throughout the country, which was almost impossible without disregarding the Constitutional rights of the States to charge tax on services and supplies. This is why a dual-tax system was implemented in which both the Center and the States will be simultaneously eligible to levy and collect the GST tax. The Constitution was amended by the Constitution (one hundred and first amendment) Act, 2016 for this purpose.
Other Important Points
- The GST will be levied at every step of value creation.
- GST is only applicable for traders, manufacturers, and restaurants with an annual turnover of 20 lakhs and more.
- GST is a consumption based tax, as opposed to the VAT, which is a destination based tax, and Excise duties, which is levied at the origin.
- GST was initially proposed to be implemented on 1st April 2017 but was actually implemented on 1 July 2017.