GST Fundamentals in India - GST Explained
GST stands for ‘Goods and Services Tax’. It consolidates all the indirect taxes into a comprehensive single tax, both at the Central and State level. And hence, has played an important role in simplifying the otherwise complex tax structure in India. It has also been pivotal in solving the demerits of the previous indirect tax system and for the same, it’s also referred to as a well-designed VAT. Here in this article we try to 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 tax that is levied on the supply of goods and services in India.
There are 4 categories of GST collected in India: CGST (Central GST), SGST (State GST), and IGST (Integrated GST) and UTGST (Union Territory GST). CGST and SGST are levied and collected by the Central and State Governments respectively, in cases where goods are supplied and purchased within the same state. In cases where there is inter-state movement of goods and services, IGST is levied instead of CGST and SGST, and it is collected by the Central Government. 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 essentially a substitute for SGST in such cases.
Currently, there are four tax slabs under GST: 5%, 12%, 18% and 28%. These rates are levied on different categories of goods and services as classified under HSN (Harmonised System of Nomenclature) Codes.
GST is always paid by the end consumer of goods and services. This is called the “destination-based” principle and it is one of the highlights of GST. This prevents the cascading effect of taxes, which improves the efficiency of the tax collection system.
Businesses that are registered under GST are allowed to claim credit for the GST paid by them in order to manufacture or procure the goods and services that they have sold (eg. GST paid on raw materials). This mechanism is known as Input Tax Credit (or ITC), and it is one of the cornerstone concepts on which GST has been implemented in India. ITC is a key factor in reducing the tax burden on businesses.
GST Compliance is important for all businesses registered under GST, but it can be an overwhelming task for small businesses. Using a robust GST Accounting Software can ensure that your business maintains a high compliance rating, which will help to enhance your business’ 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. Prime Minister Narendra Modi described GST as ‘Good and Simple Tax’ and billed it as an example of ‘cooperative federalism.’ Following are the 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 single tax means every state follows the same rate for a particular good or service thereby making Tax administration easier with the Central Government deciding the rates and policies.
a number of indirect taxes which were imposed at multiple supply chain levels. With some taxes being levied by the States and some governed by the Centre, the country lacked a unified and centralised tax system on goods and services. Hence, GST was implemented, under which all the major indirect taxes were merged into.
2. To eliminate the cascading effect of taxes
Under the GST, taxes are charged only on the net value-added portion, which helps do away the tax-on-tax regime, thereby lowering the cost of goods.
3. To subsume all major indirect taxes in India
Prior to GST, India had one. It has considerably reduced the compliance burden on taxpayers and has smoothened the process of tax administration for the government.
4. To contain tax evasion
Another very important 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, the chances of claiming input tax credits on fake invoices are less. The launch of e-invoicing has further helped this cause. Also, given the fact that GST is a nationwide tax having a centralized surveillance system, the crackdown on defaulters is faster and far more efficient.
5. To increase the base of taxpayers in India
GST has helped in expanding the tax base in India. Previously, each of the tax laws had a different threshold limit for registration depending on the turnover. As GST is a combined tax charged on both goods and services, it has raised the number of tax-registered businesses. Besides, the stricter laws around input tax credits have helped bring certain unorganized sectors inside the tax radar. For example, the construction industry in India.
6. Ease of doing business
Before the introduction of GST, taxpayers faced a lot of difficulties dealing with different tax authorities under each tax law. Moreover, while return filing was online, most of the assessment and refund procedures were carried out offline. Now, GST procedures take place almost entirely online. With everything being done with a few clicks of a button- right from registration to return filing to refunds to e-way bill generation- It has immensely contributed to the overall ease of doing business in India and simplified taxpayer compliance to a great extent. To know more please refer to our article highlighting advantages and disadvantages of GST.
To whom do GST laws apply?
Following are the entities and individuals that are required to register for Goods and Services Tax:
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E-commerce aggregators
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Individuals who supply through e-commerce aggregators
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Individuals who pay tax as per the reverse charge mechanism
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Agents of input service distributors and suppliers
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Non-Resident individuals who pay tax
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Businesses that have a turnover that is more than the threshold limit
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Individuals who have registered before the GST law was introduced
Who is exempt from GST?
Goods, services, businesses, supplies and individuals are required to register for GST given they fulfill certain conditions. However, there are few exceptions to this. Here we take a look at all the items, businesses, and taxpayers who can enjoy tax exemption under the new GST regime.
GST exemption from registration:
The following category of taxpayers are not required to register for GST:
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Individuals coming from the threshold exemption limit.
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Exempt suppliers of goods and services.
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A person supplying non-GST goods and services.
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Taxpayers involved in economic activities other than the supply of products or services.
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Agriculturists.
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Ones supplying goods covered under reverse charge.
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 keep in mind regarding this exception for start-ups.
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Any business with a turnover of less than Rs.40 lakhs is recognised as a GST-exempt business.
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Businesses that have a lower annual aggregate turnover than Rs.1.5 crores can avail of a composition scheme under GST. The scheme allows individuals to pay taxes at a fixed rate depending on the turnover amount. The rate may vary between 1-6%.
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Also, small businesses also enjoy exemption from e-invoicing under GST. However, businesses with a turnover more than Rs.50 crores have to apply for e-invoicing compulsorily.
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Small businesses with an income of less than Rs.5 crores can opt for a quarterly filing system.
Exempted goods under GST
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Fresh and dry vegetables like potatoes, onions, and other leguminous vegetables.
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Non-GST food items include eggs,fish, fresh milk, etc.
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Grapes, melons, ginger, garlic, unroasted coffee beans, green tea leaves that are not processed, and more.
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Food items that are not put into branded containers like rice, hulled cereal grains, wheat, corn, etc.
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Components like human blood.
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Unspun jute fibres, raw silk, khadi fibre, etc.
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Hearing aid manufacturing parts, chalks, slates, handloom, etc.
Note: Certain non-GST goods, once processed, will come under GST.
Exempted services under GST
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Agricultural services, including harvesting, warehouse, packaging, cultivation, leasing of machinery, supply, are essentially exempted from GST. An exception to these exempted services includes the rearing of horses.
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Public transportation services, auto-rickshaws, metered cabs, metro, etc.
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Transportation of agricultural products and goods outside of India.
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Labour supply for farms.
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Goods transportation where the charges are less than Rs.1500.
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Services like retail packing, pre-conditioning, waxing, etc.
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Foreign diplomatic and government services.
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Healthcare and educational services like mid-day meal catering, VET clinics, paramedics, etc. Ambulance and charity services also qualify for exemption under GST.
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Services offered by RBI, IRDAI, Central and State Government, NPS and more.
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Banking services like Basic Saving Bank Deposit (BSBD) account operable under the Pradhan Mantri Jan-Dhan Yojana (PMJDY).
Along with this, services related to religious ceremonies, tour guides,sports organizations and libraries enjoy exemptions under GST.
Registration of GST
Any individual or company that is eligible under GST must register itself in 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 Rs.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 in a way 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 some products can be bought without any GST, there are others that 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 new tax regime was adopted in July 2017.
What are the various components of GST?
There are four major components of GST: Central GST (CGST) , State GST (SGST), Integrated GST (IGST), Union Territory GST (UTGST).
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CGST: Central GST or CGST is a tax collected by the Central Government on the intra state supply of products and services.
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SGST: State GST (SGST) is the tax collected by the state government on an intra-state sale.
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IGST: Integrated GST (IGST) is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)
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UTGST - Union Territory GST (UTGST) is an indirect tax collected by the Union Territory on the supply of goods or services that take place 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 the biggest tax reform in India, implemented with the goal of realizing the idea of “one nation, one market, one tax”. It has helped erase all the inter-state barriers with regards to trade.
The objective behind implementing GST across the country is that it would simplify the otherwise complex structure of tax systems in India. The new tax regime has benefited the manufacturers and traders to a great extent as there are transparent rules, fewer tax filings, and easy book-keeping. As far as consumers are concerned, they would be spending less for the goods and services, and the government would raise more revenues as revenue leaks would be fixed.
Short term impact: From the perspective of the consumer, they would now have to pay more tax for most of the products and services they avail. The majority of everyday consumables now bear the same or a little higher rate of tax. Moreover, the GST has a cost of compliance attached to it. It seems that this cost of compliance will be prohibitive and high for the small scale manufacturers and traders, who were also seen protesting against the same. They may end up pricing their goods at higher rates.
What the Future Looks Like:
Speaking of the long-term benefits, it is expected that GST would not only mean a lower rate of taxes, but also minimum tax slabs. Nations where the GST has helped in reforming the economy, have implemented only two or three rates – one being the mean rate, a lower rate for essential commodities, and a higher tax rate for the luxurious commodities.
Presently, in India, we have five slabs, with as many as three rates – an integrated rate, a central rate, and a state rate. Along with these, cess is also charged. The fear of losing out on revenue has kept the government from gambling on fewer or lower rates. This is very unlikely to see a shift anytime soon; though the government has said that rates may be revisited once the RNR (Revenue Neutral rate) is reached. The impact of GST on macroeconomic indicators is likely to be very positive in the medium-term. Inflation would be reduced as the cascading (tax on tax) effect of taxes would be eliminated.
The revenue from the taxes for the government is very likely to increase with an extended tax net, and the fiscal deficit is expected to remain under the checks. Moreover, exports would grow, while FDI (Foreign Direct Investment) would also increase. The industry leaders believe that the country would climb several ladders in the ease of doing business with the implementation of the most important tax reform ever in the history of the country.
What are the various compliances under GST?
Alongwith online filing of the GST returns, the GST regime has launched several new systems with it.
E-Way Bills
GST brought in a centralized system of waybills by the launch of “E-way bills”. This system was brought into action on 1st April 2018 for inter-state movement of goods and on 15th April 2018 for intra-state movement of goods in a staggered manner.
Under the latest e-way bill system, traders, manufacturers and transporters can create e-way bills for the goods transported from the location of its origin to their destination on a common portal with ease.
Tax administration has also become smooth as this system has reduced time at check -posts and helps reduce tax evasion.
E-invoicing
The e-invoicing system came into effect from 1st October 2020 for businesses with an annual aggregate turnover of more than Rs.500 crore 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 Rs.100 crore.
These businesses are required to obtain a unique invoice reference number for every business-to-business invoice by uploading on the GSTN’s invoice registration portal. The portal verifies the correctness and authenticity of the invoice. Thereafter, it authorises using the digital signature along with a QR code.
e-Invoicing enables interoperability of invoices and helps minimize 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 too.
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) alongwith 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 who is registered or is required to be registered under GST Act. Any individual who carries out any economic activity including trade, commerce is viewed as a taxable person. It could be a person, company HUF, firm, LLP, an AOP/BOI, any corporation or Government company, body corporate incorporated under laws of foreign country, co-operative society, local authority, government, trust, artificial juridical person.
Who is required to be registered?
Casual Taxable Person
A person who occasionally supplies goods and/or services in a region where GST is applicable but he does not have a fixed place of business. According to GST such a person will be termed as a casual taxable person. Example: A person who usually carries out business in Bangalore supplies taxable consulting services in Pune where he has no place of business would be treated as a casual taxable person in Pune. To enhance your understanding of the same, refer to our article Casual Taxable Person
Non-Resident Taxable Person
When a non-resident individual occasionally supplies goods/services in a territory where GST applies, but he does not have a fixed spot of business in India. According to GST he will be considered as a non-resident taxable person. 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 is on the recipient of goods/services instead of the supplier. Categories of supplies applicable for reverse charge will be notified by the Centre or State Government.
Presently, similar provisions of Reverse Charge are available in Service Tax for the services like Manpower supply, Mutual fund agent, Works contract, Goods Transport Agencies etc. In the GST regime, reverse charge may be applicable for both services as well as goods.
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Every person liable to pay service tax under reverse charge is required to furnish details of inward supplies.
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Persons who are required to pay tax under reverse charge are required to be registered, irrespective of the threshold limit.
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There are separate provisions relating to time of supply of goods and services where tax is payable on reverse charge basis.
To read more about the same refer to our article All about Reverse Charge Mechanism
Conclusion
GST is a significant reform in the Indian taxation system. It is aimed at improving the efficiency of the tax collection system, by simplifying taxation laws and bringing more businesses under their purview. It is a boost for businesses as well, as it reduces their tax burden through the mechanism of ITC. Overall, the intention is that the implementation of GST will boost the economy of India.