Basics of GST

The introduction of the Goods and Services Tax (GST) law in India has garnered significant attention. This proposed legislation aims to reform business practices and the taxation of goods and services across the country. While its potential impact on affordability remains uncertain, there is no denying that it will have a profound effect on our daily lives. Here are the Basics of GST that you need to know.

The GST law will reshape the way businesses operate, manage their finances, and comply with taxation requirements. By eliminating complex and multiple layers of taxation, it aims to simplify processes, reduce compliance burdens, and create a more transparent and efficient business environment.

For individuals, the GST law will not only influence their purchasing power but also have implications for their careers and businesses. Employees may see changes in job roles and responsibilities as organisations adapt to the new tax regime. Entrepreneurs and business owners will need to navigate the intricacies of the Basics of GST to ensure compliance and make informed decisions that impact pricing strategies, supply chain management, and overall business profitability.

Moreover, the GST law will have a broader impact on the overall economic environment. It can affect factors such as inflation, investment patterns, consumer spending behaviour, and market competitiveness. Successfully implementing the GST has the potential to stimulate economic growth, attract investments, and enhance India’s position in the global market.

Given the significant influence of the GST law on our lives, including our jobs, businesses, and the overall economy, it is essential for us to familiarise ourselves with its provisions and implications. Understanding the Basic GST knowledge will empower us to adapt to the changes it brings and make informed decisions in this evolving economic landscape.

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    Who Does GST Apply To?

    Given below are some of the entities to which the GST are applicable to:

    • Any individual or entity that provides goods and/or services with a value exceeding Rs 20 lakh in a financial year (or Rs 10 lakh for special category states) is required to register under the Goods and Services Tax system. Additionally, it must be paid once the turnover surpasses Rs 20 lakh (or Rs 10 lakh for special category states).
    • Any person who engages in the inter-state supply of taxable goods and/or services is subject to the provisions of the Goods and Services Tax.
    • Every e-commerce operator is obligated to comply with the regulations of the Goods and Services Tax system.
    • Every individual or entity that provides goods and/or services, excluding branded services, through an e-commerce operator is required to adhere to the regulations of the Goods and Services Tax system.
    • Aggregators who supply services under their own brand name are also required to comply with the regulations of the Goods and Services Tax system.
    • Casual Taxable Person
    • Non-Resident Taxable Person
    • A person who is mandated to deduct or collect tax at source, commonly known as TDS (Tax Deducted at Source) or TCS (Tax Collected at Source), is required to fulfill this obligation as per the provisions of the Goods and Services Tax system.
    • Input Service Distributor
    • A person who provides online information and database access or retrieval services from a location outside India to an individual or entity in India, excluding registered taxable persons, is involved in such transactions.
    • A person who is required to pay tax under reverse charge mechanism is responsible for directly remitting the tax amount to the government, instead of the supplier, as per the regulations of the Goods and Services Tax system.
    • A person who supplies goods on behalf of another taxable person, acting as an agent, is involved in such transactions. The agent is responsible for facilitating the supply of goods on behalf of the principal taxable person under the regulations of the Goods and Services Tax system.
    • GST basics do not apply to individuals or entities exclusively engaged in supplying goods and/or services that are either not taxable or fully exempt from tax under the GST Act.

    What is the Basics of GST Framework?

    The Goods and Services Tax is anticipated to replace various indirect taxes, including VAT, customs duty, Excise, CST, Service Tax, and Entertainment Tax. It aims to streamline and consolidate these taxes into a single unified tax system.

    • In India, the GST system will be broadly categorised into two forms.
    • Goods and services tax is implemented at two levels in India: intra-state, which applies when goods travel within a state, and inter-state, which applies when goods travel between different states.
    • Within a state, two types of GST will be levied: CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax).
    • At the inter-state level, IGST (Integrated Goods and Services Tax) will be levied.
    • Imports will be treated as inter-state supplies under the Goods and Services Tax system.
    • Exports will be zero-rated under the Goods and Services Tax system.
    • Supplies made to Special Economic Zones (SEZ) will be zero-rated under the Goods and Services Tax system.

    Why Do We Need GST?

    The previous tax system in India was characterized by multiple taxes, intricate compliance procedures, and involvement of various State and Central tax authorities. This created significant challenges for setting up and operating businesses in the country.

    In contrast, the Goods and Services Tax regime has simplified the taxation structure. Instead of taxing the entire value of a product at each stage, GST is levied only on the value addition. This approach allows businesses to claim credit for the input tax paid at previous stages of the supply chain, resulting in a substantial reduction in the overall manufacturing and selling costs of goods.

    The implementation of Basics of GST has streamlined business operations, improved ease of doing business, and fostered a more conducive environment for trade and commerce in India. It has brought about greater transparency, efficiency, and harmonization in the tax system, promoting economic growth and attracting investments.

    Which Indirect Taxes Have Been Replaced With the Implementation of GST?

    The Goods and Services Tax implementation in India marked a monumental shift in the country’s taxation system. This comprehensive tax reform replaced a web of multiple indirect taxes with a unified tax structure. Here are the major indirect taxes that were replaced by GST, streamlining the complex taxation framework.

    • Central Excise Duty: Central Excise Duty was a tax levied on the production or manufacture of goods within the country. It was collected by the central government and applied to specific goods at various rates. With the introduction of GST, Central Excise Duty was subsumed, simplifying the taxation structure.
    • Service Tax: Service Tax was imposed on specified services provided by service providers. It was collected by the central government and applied to a wide range of services, from hospitality to telecommunications. GST replaced Service Tax, unifying the taxation of goods and services.
    • Value Added Tax (VAT): Value Added Tax (VAT) was a state-level tax applicable to the sale of goods. It aimed to tax the value added at each stage of production and distribution. With GST’s introduction, VAT was merged into the new tax structure, reducing complexities for businesses.
    • Central Sales Tax (CST): Central Sales Tax (CST) was levied on inter-state sales of goods, and the revenue was collected by the central government. GST replaced CST, ensuring that the new tax system is seamless for both intra-state and inter-state transactions.
    • Entry Tax: Many states imposed entry taxes on goods entering their territories. These taxes created barriers to inter-state trade, as businesses had to pay entry taxes at state borders. GST’s introduction eliminated these entry taxes, facilitating smoother movement of goods.
    • Luxury Tax, Octroi, and Others: Apart from the major taxes mentioned above, various other taxes existed, such as luxury tax on high-end services, octroi (a local tax on goods entering a city), and entertainment tax on various forms of entertainment. GST subsumed these taxes, bringing uniformity to the taxation of diverse goods and services.
    • Customs Duty: While Customs Duty was not replaced by GST, its role was redefined. Customs Duty continues to be levied on imported goods, but its calculations were adjusted to integrate with the GST framework, ensuring a seamless transition for international trade.

    The implementation of GST in accounting in India streamlined the taxation system by replacing numerous indirect taxes. The reform not only simplified the tax structure but also promoted transparency, efficiency, and ease of doing business. By unifying the taxation of goods and services, GST has played a vital role in reshaping the country’s economic landscape and fostering a more favourable environment for businesses and consumers alike.

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    Who Does the GST Apply To?

    Given below are some of the entities to which GST is applicable to:

    • Any individual or entity that provides goods and/or services with a value exceeding Rs 20 lakh in a financial year (or Rs 10 lakh for special category states) is required to register under the Goods and Services Tax (GST) system. Additionally, GST must be paid once the turnover surpasses Rs 20 lakh (or Rs 10 lakh for special category states).
    • Any person who engages in the inter-state supply of taxable goods and/or services is subject to the provisions of the Goods and Services Tax.
    • Every e-commerce operator is obligated to comply with the regulations of the Goods and Services Tax system.
    • Every individual or entity that provides goods and/or services, excluding branded services, through an e-commerce operator is required to adhere to the regulations of the Goods and Services Tax system.
    • Aggregators who supply services under their own brand name are also required to comply with the regulations of the Goods and Services Tax system.
    • A person who is mandated to deduct or collect tax at source, commonly known as TDS (Tax Deducted at Source) or TCS (Tax Collected at Source), is required to fulfill this obligation as per the provisions of the Goods and Services Tax system.
    • A person who provides online information and database access or retrieval services from a location outside India to an individual or entity in India, excluding registered taxable persons, is involved in such transactions.
    • A person who is required to pay tax under reverse charge mechanism is responsible for directly remitting the tax amount to the government, instead of the supplier, as per the regulations of the Goods and Services Tax system.
    • A person who supplies goods on behalf of another taxable person, acting as an agent, is involved in such transactions. The agent is responsible for facilitating the supply of goods on behalf of the principal taxable person under the regulations of the Goods and Services Tax system.
    • Basics of GST do not apply to individuals or entities exclusively engaged in supplying goods and/or services that are either not taxable or fully exempt from tax under the GST Act.

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    Basics of GST Framework

    The Goods and Services Tax is anticipated to replace various indirect taxes, including VAT, customs duty, Excise, CST, Service Tax, and Entertainment Tax. It aims to streamline and consolidate these taxes into a single unified tax system.

    • In India, the GST system will be broadly categorised into two forms.
    • GST is implemented at two levels in India: intra-state, which applies when goods travel within a state, and inter-state, which applies when goods travel between different states.
    • Within a state, two types of GST will be levied: CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax).
    • At the inter-state level, IGST (Integrated Goods and Services Tax) will be levied.
    • Imports will be treated as inter-state supplies under the Goods and Services Tax (GST) system.
    • Exports will be zero-rated under the Goods and Services Tax system.
    • Supplies made to Special Economic Zones (SEZ) will be zero-rated under the Goods and Services Tax (GST) system.

    Does GST Allow Cascading Tax Benefits?

    Service tax and VAT provide a cascading benefit known as input tax credit, which allows businesses to claim credit for the tax paid on their inputs. This means that when you sell a service and charge service tax, you can offset the tax liability by deducting the service tax already paid on the services used as inputs in your business operations.

    Under the GST system, this cascading benefit of input tax credit continues. It enables businesses to claim credit for the GST paid on their purchases of goods and services used in their business activities. This credit can be utilised to offset the GST liability on the supplies made by the business.

    By availing input tax credit (ITC), businesses can avoid the double taxation of the same goods or services at multiple stages of the supply chain. This promotes efficiency, reduces the tax burden, and prevents the cascading effect of taxes. It ultimately benefits both businesses and consumers by ensuring fair and transparent taxation.

    The introduction of Basics of GST streamlines and extends the concept of input tax credit across different sectors and industries, facilitating seamless credit flow and reducing the overall tax burden on businesses. It simplifies the tax structure and encourages compliance, as businesses can claim credit for the taxes they have already paid, minimising their tax liability and promoting economic growth.

    Will the New GST Allow Tax Cascading Benefits?

    The introduction of Goods and Services Tax in India brought about a transformation in the taxation landscape, aiming to eliminate the cascading effect of taxes, commonly referred to as “tax cascading.” Tax cascading occurs when taxes are levied on taxes at various stages of production and distribution, leading to an inflated tax burden on the final consumer. This article delves into whether the new GST framework allows for tax cascading benefits and its impact on businesses and consumers.

    • Input Tax Credit Mechanism: The cornerstone of GST’s approach to combating tax cascading lies in the Input Tax Credit (ITC) mechanism. Under this mechanism, businesses can claim credits for the taxes paid on their inputs (raw materials, goods, and services). This credit can be utilised to offset the GST liability on the final product or service. By allowing businesses to claim ITC, GST prevents the duplication of taxes and eliminates the tax-on-tax accumulation.
    • Elimination of Tax Cascading: The new GST regime significantly reduces tax cascading by allowing businesses to offset the taxes they’ve paid on inputs against the taxes they collect on their output. In the pre-GST era, the cascading effect led to increased costs for businesses and consumers due to the compounding of taxes. With ITC in GST, the system ensures that taxes are levied only on the value added at each stage, curbing the cascade and leading to reduced costs.
    • Efficiency in Supply Chain: GST’s elimination of tax cascading streamlines the supply chain and lowers production costs. Manufacturers, distributors, and retailers can now operate with reduced tax-related complexities. This efficiency translates into cost savings that can potentially be passed on to consumers, resulting in price stabilisation or even reduction for end products.
    • Impact on Consumer Prices: The reduction in tax cascading benefits consumers as it leads to lower costs of production and distribution. These savings can potentially lead to a decrease in the prices of goods and services. While the extent of price reduction may vary across industries, the overall objective is to create an environment where consumers can access products at more affordable rates.
    • Business Competitiveness: By allowing businesses to claim ITC and avoid tax cascading, it enhances their competitiveness. Manufacturers can produce goods at a lower cost, making their products more price-competitive in the market. This not only benefits consumers but also strengthens businesses’ positioning in a competitive marketplace.
    • Challenges and Adjustments: While GST aims to eliminate tax cascading, the system requires proper implementation and compliance to realise these benefits fully. Businesses must accurately record and report transactions, and the availability of ITC is subject to adherence to rules. Any gaps in compliance or understanding can impact the realisation of tax cascading benefits.

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    The new GST framework in India takes significant strides towards eliminating tax cascading by introducing the Input Tax Credit mechanism. By allowing businesses to claim credits for taxes paid on inputs, prevents tax-on-tax accumulation, leading to cost savings, price stabilisation, and enhanced business competitiveness. While proper implementation and compliance are crucial, the overall objective of minimising the cascading effect and creating a more efficient and equitable tax system has been a driving force behind the GST reform.

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    Frequently Asked Questions

    • What are the different types of GST in India?
      India has four main types of GST: CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax) are applied to intra-state transactions, meaning sales within the same state. IGST (Integrated Goods and Services Tax) applies to inter-state transactions or sales between states. Lastly, UTGST (Union Territory Goods and Services Tax) is charged for sales within union territories. Together, these taxes create a unified system to replace previous indirect taxes.
    • How is GST different from the previous tax regime?
      Under the previous tax regime, the central and state governments collected indirect taxes like VAT, excise duty, and service tax separately. GST simplified this by merging these taxes into one comprehensive tax. This single tax applies across the country and prevents the “tax on tax” effect, where products get taxed multiple times in the supply chain. GST has reduced tax complexity, streamlined compliance, and created a unified market.
    • How is GST collected and paid to the government?
      Businesses collect GST from consumers at the point of sale. Depending on their turnover, businesses are responsible for filing monthly or quarterly returns. This collected GST is then paid to the government through online portals. Each business can claim input tax credits for GST paid on purchases, reducing its final tax liability. This process creates transparency and ensures that GST is remitted accurately to the government.
    • How does GST affect the pricing of goods and services?
      GST has generally simplified pricing by replacing multiple taxes with a single tax rate. The “tax on tax” effect, which led to higher prices in the old system, is eliminated under GST, often resulting in lower overall costs. However, the price impact depends on the GST rate applied: some items may become cheaper, while others may be more expensive. Input tax credits also help lower costs, as businesses can reduce tax liabilities and pass on savings to consumers.
    • Is GST applicable to all types of businesses?
      Most businesses with annual turnover above a certain threshold (typically ₹20 lakh for services and ₹40 lakh for goods) must register for and pay GST. However, certain exemptions exist for small businesses, agricultural income, and specific items like unprocessed foods. Additionally, small businesses below the threshold can opt for the Composition Scheme, which simplifies tax compliance but limits certain tax benefits. GST applies to a broad range of industries, with few exceptions.
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