GST Fundamentals in India – GST Explained

GST stands for ‘Goods and Services Tax’. It consolidates all indirect taxes into a comprehensive single tax at the Central and State levels. And hence, it has played an essential role in simplifying India’s otherwise complex tax structure. It has also been pivotal in solving the previous indirect tax system’s demerits; for the same, it’s also referred to as a well-designed VAT. In this article, we simplify the concept of GST to help you understand the basics of the tax regime better.

What is GST in India?

Goods and Services Tax, or GST, is a reformative indirect tax which has subsumed all previous indirect taxes in India, such as VAT, Excise etc. It is a single and comprehensive tax levied on the supply of goods and services throughout India.

There are four categories of GST collected in India, as mentioned below:

• CGST (Central GST)
• SGST (State GST)
• IGST (Integrated GST)
• UTGST (Union Territory GST)

CGST and SGST are levied and collected by the Central and State Governments, respectively, where goods are supplied and purchased within the same state. In cases where there is an inter-state movement of goods and services, IGST is levied instead of CGST and SGST, and the Central Government collects it. The union territories of Jammu & Kashmir, Ladakh, Andaman & Nicobar Islands, Dadra & Nagar Haveli, Lakshadweep, Chandigarh and Daman & Diu do not have their own legislature, and hence UTGST and CGST are levied on any intra-union territory supply of goods and services. UTGST is a substitute for SGST in such cases.

The four tax slabs under GST are as under:

• 5%
• 12%
• 18%
• 28%

These rates are levied on different categories of goods and services as classified under HSN (Harmonised System of Nomenclature) Codes and SAC (Service Accounting  Code).

GST is always paid by the end consumer of goods and services. This is called the “destination-based” principle, one of the highlights of GST. It prevents the cascading effect of taxes, which improves the tax collection system’s efficiency and helps reduce suppliers’ total tax liability.

Businesses registered under GST can claim credit for the GST paid by them to manufacture or procure the goods and services they have sold (e.g. GST paid on raw materials). This mechanism is called Input Tax Credit (or ITC), one of the cornerstones of GST implementation in India. ITC is a crucial factor in reducing the tax burden on businesses.

GST Compliance is essential for all businesses registered under GST, but it can be overwhelming for small businesses. Using robust GST Accounting Software can ensure that your business maintains a high compliance rating, which will help to enhance your business’s reputation and encourage potential customers to choose your business over a competitor with poor GST Compliance.

Why was GST introduced in India, and what are its advantages compared to previous tax regimes?

The prime objective of GST is to simplify the tax structure in India to a certain extent. The following are key reasons behind the introduction of this new tax regime.

1. To implement the idea of ‘One Nation, One Tax.’

GST has replaced a host of indirect taxes, which prevailed under the previous tax systems. Having one comprehensive tax instead of multiple fragmented taxes means that every state will follow the same tax rate for a particular good or service, thereby making Tax administration easier with the Central Government deciding the rates and policies.

GST has subsumed several indirect taxes under the previous regime, which the central and state governments imposed at multiple supply chain levels. It was a highly complicated taxation system that was not in the best interest of economic growth. The country needed a unified and centralised tax system on goods and services, which led to the implementation of GST in 2017.

2. To eliminate the cascading effect of taxes

Under the GST, taxes are charged only on the net value-added portion, which helps avoid the tax-on-tax regime, lowering the cost of goods.

3. To subsume all significant indirect taxes of the previous tax regime

Before GST, India had a highly complicated taxation system. But GST has considerably reduced the compliance burden on taxpayers and has smoothened the government’s tax administration process.

4. To contain tax evasion

Another crucial aspect of GST is containing corruption and curbing tax evasion. Due to GST, taxpayers can claim an input tax credit only against invoices uploaded by their respective suppliers. Hence, there is less chance of claiming input tax credits on fake invoices. The launch of e-invoicing has further helped this cause. Also, given that GST is a nationwide tax with a centralised surveillance system, the crackdown on defaulters is faster and far more efficient.

5. To increase the base of taxpayers in India

GST has helped expand the taxpayer base in India. Previously, each tax law had a different registration threshold. GST is a combined tax charged on goods and services, increasing the number of tax-registered businesses. The stricter laws around input tax credits have brought many unorganised sectors inside the tax radar.

6. Ease of doing business

Before the introduction of GST, taxpayers faced many difficulties dealing with different tax authorities under each tax law. Moreover, most assessment and refund procedures were offline, while return filing was online. Now, GST procedures take place almost entirely online. Tasks like GST registration, GST return filing, processing of refunds and credits and generation of e-way bills and e-invoices can all be done online in a few clicks. This new digital approach has immensely helped to improve the ease of carrying on business in India and simplified compliance for taxpayers to a great extent. However, GST is not without its limitations. To know more, please refer to our article highlighting the advantages and disadvantages of GST.

To whom do GST laws apply?

Following are the entities and individuals that are must register for Goods and Services Tax:

• E-commerce aggregators
• Individuals who make supplies through e-commerce aggregators
• Individuals who pay their taxes as per the reverse charge mechanism of GST
• Persons who are agents of input service distributors and suppliers
• Non-Resident individuals who pay taxes
• Businesses with an annual turnover higher than the threshold limit
• Individuals who were registered even before the introduction of GST

Who is exempt from GST?

Goods, services, businesses, suppliers and individuals must register for GST, given that they fulfil certain conditions. However, there are a few exceptions to this, as mentioned below:

GST exemption from registration

The following category of taxpayers is not required to register for GST:

• Individuals who are coming from the threshold exemption limit.
• Exempt suppliers of goods and services.
• A person who is supplying non-GST goods and services.
• Taxpayers involved in economic activities other than the supply of products or services.
• Agriculturists.
• Persons who are supplying goods under the Reverse Charge Mechanism.

GST exemption for start-ups and small businesses

Individuals wanting to start a business can avail great benefits from the latest regulations of the GST scheme. Following are a few points to remember regarding this exception for start-ups:

• Any business that turns over below ₹40 lakhs is recognised as GST-exempt.
• Businesses with a lower annual aggregate turnover than ₹1.5 crores can avail of the composition scheme under GST. The scheme permits eligible individuals to pay their taxes as a fixed percentage of their turnover. The rates vary between 1-6%.
• Small businesses also enjoy exemption from e-invoicing. However, businesses that turn over more than ₹10 crores must compulsorily register for e-invoicing.
• Small businesses with turnover below ₹5 crores can opt for a quarterly filing system.

Exempted goods under GST

The following goods are exempted from GST charges:

• Fresh and dry vegetables e.g. potatoes, onions, and any other leguminous vegetables.
• Non-GST food items include eggs, fish, or fresh milk, etc.
• Grapes, melons, ginger, garlic, unroasted coffee beans that are not roasted, green tea leaves that are not processed, and more.
• Food items that have not been put into branded containers, e.g. rice, hulled grains of cereal, corn, wheat etc.
• Components such as human blood.
• Jute fibres that are unspun, raw silk, khadi fibre, etc.
• Manufacturing parts for hearing aids, chalks, slates, handloom, etc.

Note: Certain non-GST goods, once processed, will come under GST.

Exempted services under GST

• Agricultural services, including harvesting, warehouse, packaging, cultivation, machinery leasing, and supply, are exempted from GST. Rearing of horses is an exception to these exempted services.
• Public transportation services such as auto-rickshaws, cabs with meters, metro rail, etc.
• The transport of agricultural products and goods outside of India.
• Supply of labour to farms.
• Transportation of goods where the charges are less than ₹1500.
• Services such as retail packing, pre-conditioning, or waxing and others.
• Foreign, diplomatic and/or government services.
• Healthcare and educational services such as catering for mid-day meals, VET clinics, paramedics, etc. Ambulance and charity services are also exempt under GST.
• Services provided by the Reserve Bank of India (RBI), or bodies such as the IRDAI, Central Government, State Governments, National Pension Scheme and others.
• Banking related services such as Basic Savings Bank Deposit account, which is operable under the Pradhan Mantri Jan-Dhan Yojana (PMJDY).

Along with this, services related to religious ceremonies, tour guides, sports organisations and libraries enjoy exemptions under GST.

Registration of GST

Any individual or company eligible under GST must register on the GST Portal created by the Government of India. The registered entities will then be given a unique registration number called GSTIN.

It is liable for all Service providers, buyers, and sellers to register. A business that makes a total income of ₹20 lakhs or more in a financial year must be required to do GST registration. It takes 2-6 working days to process. To get an in-depth understanding of the process, refer to How to Register for GST.

What are the different rates of GST?

GST has been designed so that essential services and food items are placed in the lower tax slabs, whereas luxury services and products have been placed in the higher tax slabs.

The GST Council has allotted GST rates to different goods and services. While consumers can buy some products without paying any GST, others come at 5% GST, 12% GST, 18% GST, and 28% GST.

GST rates for goods and services have been changed a few times since the government adopted the new tax regime in July 2017.

What are the various components of GST?

There are four major components of GST, as mentioned below:

• Central GST (CGST)
• State GST (SGST)
• Integrated GST (IGST); and
• Union Territory GST (UTGST)

CGST: Central GST or CGST is a tax paid to the Central Government on the intra-state supply of products and services.

SGST: State GST (SGST) is the tax the state government collects on an intra-state sale.

IGST: Integrated GST (IGST) is paid to the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)

UTGST –  Union Territory GST (UTGST) is an indirect tax collected by the Union Territory on the supply of goods or services in Union Territories. This tax is governed by the Union Territory Goods and Services Act (UTGST), 2017 UTGST is charged on the intra-state supply of goods and services.

What impact has GST had on India’s economy?

GST has been India’s most significant tax reform, implemented to realise the idea of “one nation, one market, one tax”. It has helped erase all the inter-state barriers concerning trade. 

The objective behind implementing GST across the country is to simplify India’s otherwise complex structure of tax systems. The new tax regime has benefited manufacturers and traders to a great extent, as there are transparent rules, fewer tax filings, and easy bookkeeping. As far as consumers are concerned, they would be spending less on goods and services, and the government would raise more revenues as the implementation of GST is intended to fix revenue leaks.

Short-term impact: From the consumer’s perspective, they would now have to pay more tax for most of the products and services they avail. Most everyday consumables now bear the same or a little higher tax rate. Moreover, the GST has a high cost of compliance. Over time, this cost may prove to be prohibitive for small-scale manufacturers and traders. They may be forced to price their goods at higher rates to cover the additional costs.

What the Future Looks Like

It is expected that GST would mean a lower rate of taxes and minimum tax slabs. Countries where GST has helped reform the economy have implemented only two or three tax rates – one mean rate, one lower rate for essential commodities considered to be essential, and one higher rate for luxury commodities considered a luxury.

The impact of GST is likely to have a positive impact on macroeconomic indicators such as inflation over the short to medium term, as the cascading effect of taxes will be eliminated.

The revenue from taxes for the government is likely to increase with an extended taxpayer base, whereas fiscal deficit is expected to remain under check. Moreover, exports would grow, while FDI (Foreign Direct Investment) would also increase. Industry leaders believe that the country will climb several ladders in the ease of doing business by implementing the most critical tax reform ever in the country’s history.

What are the various compliances under GST?

Along with the online filing of GST returns, the new regime has launched several systems.

E-Way Bills

GST brought in a centralised system of waybills by launching “E-way bills”. This system was brought into action on 1st April 2018 for the inter-state movement of goods and on 15th April 2018 for the intra-state movement of goods in a staggered manner.

Under the latest e-way bill system, traders, manufacturers and transporters can easily create e-way bills for goods transported from the location of their origin to their destination on a common portal.

Tax administration has also become smooth as this system has reduced time at check-posts and helps reduce tax evasion.

E-invoicing

The government enacted the e-invoicing system on 1st October 2020 for businesses with an annual aggregate turnover of more than ₹500 crores in any preceding financial year. (from 2017-18). Further, from 1st January 2021, this system was also applicable to those with an annual aggregate turnover of more than ₹100 crores. As of 1st October 2022, E-Invoicing is applicable to all businesses with an annual turnover of ₹10 crores or more.

These businesses must obtain a unique invoice reference number for every business-to-business invoice by uploading it to GSTN’s invoice registration portal. The portal verifies the correctness and authenticity of the invoice. After that, it authorises using the digital signature and a QR code.

E-Invoicing enables the interoperability of invoices and helps minimise data entry errors. It is structured to carry the invoice information directly from the IRP to the GST portal and the e-way bill portal. It will, therefore, discard the requirement for manual data entry while filing GSTR-1 and facilitate the generation of e-way bills.

Some Basic GST Terms You Must Know:

Here is a list of some basic GST terms and their brief descriptions that will help you understand the concept of GST better.

Input Tax Credit

Input tax is the GST levied on purchases of goods & services. It includes GST charged by the State (SGST), Central Government (CGST), along with the Integrated GST (IGST), which is levied on both inter-state sales as well as imports. Input tax credit refers to the reversal of GST which was imposed on purchases of goods and services. It is available as a deduction against output tax to be paid on sales and is done to cut down the cascading effect, i.e., tax on tax effect. However, input tax credit is not applicable for taxpayers who opt for composition levy.

To know more, you can read our Complete Guide to Input Tax Credit.

Taxable Person

A Taxable Person is an individual who carries on any business in the territory of India and is registered or required to be registered under the GST Act. Any individual who carries out any economic activity, including trade and commerce, is considered taxable. It could be a person, company HUF, firm, LLP, an AOP/BOI, any corporation or Government company, body corporate incorporated under laws of a foreign country, a cooperative society, local authority, government, trust, or an artificial juridical person.

Casual Taxable Person

A person who occasionally supplies goods and services in a region where GST is applicable but who does not have a fixed place of business. According to GST, such a person is a casual taxable person. Example: A person who usually carries out business based in Bangalore but also provides taxable consulting services in Pune, though he has no place of business there. Such a person will be recognised as a casual taxable person in Pune. To enhance your understanding of the same, refer to our article on Casual Taxable Person.

Non-Resident Taxable Person

A non-resident who occasionally supplies goods/services in a territory where GST applies but does not have a fixed business spot in India is a non-resident taxable person according to the GST Act. The concept is similar to that of a ‘casual taxable person’, except the non-resident has no place of business in India. 

Reverse Charge

Reverse Charge implies that the liability to pay tax to the government is on the recipient of the goods/services, not the supplier. The Centre or State Government will notify categories of supplies applicable for reverse charge.

Presently, similar provisions of Reverse Charge are available in Service Tax for the services like Manpower supply, Mutual fund agents, Works contract, Goods Transport Agencies etc. In the GST regime, reverse charge may be applicable for both services as well as goods.

• Every person liable to pay tax under reverse charge must furnish details of all inward supplies.
• Persons liable to pay tax under reverse charge must be registered, irrespective of the threshold limit.
• There are separate provisions relating to the time of supply of goods and services where tax is payable on a reverse charge basis.

To read more about the same, refer to our Guide to Reverse Charge Mechanism

Conclusion

GST is a significant reform in the Indian taxation system. It aims to improve the efficiency of the tax collection system by simplifying taxation laws and bringing more businesses under their purview. It also boosts businesses, as it reduces their tax burden through the mechanism of ITC. Overall, the intention is that implementing GST will boost India’s economy.