The Difference Between GST and Income Tax: What You Need to Know

GST (Goods and Services Tax) and income tax are two key components of the tax system, but they serve different purposes.

GST is an indirect tax on the sale of goods and services based on product or service consumption. It replaces other indirect taxes and aims to streamline the tax process.

Income tax, on the other hand, is a direct tax imposed on individuals and businesses based on their earnings.

Income tax, on the other hand, is a direct tax imposed on individuals and businesses based on their earnings.

Read along to learn more about the basics of GST and how it differs from income tax.

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    Basics of GST

    What is GST?

    Goods and Services Tax (GST) is an indirect tax implemented to replace multiple existing indirect taxes such as excise duty, service tax, and VAT. It is levied on the supply of goods and services based on consumption rather than at the production stage.

    The GST framework includes both the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST) for intrastate transactions and the Integrated Goods and Services Tax (IGST) for interstate transactions.

    Our tax system is designed to avoid the cascading effect of taxes and facilitate smooth tax credit transfers between suppliers and receivers. By implementing GST, the government aims to streamline the tax process, promote transparency, and support economic growth.

    What is Income Tax?

    Income tax is a direct tax imposed on individuals and businesses based on their annual earnings. It is calculated by applying applicable income tax slab rates to the taxpayer’s total income after accounting for eligible deductions.

    The government collects this tax to fund public services like healthcare, education, and infrastructure. Unlike indirect taxes, income tax is paid directly by the taxpayer and cannot be transferred to someone else.

    In India, taxpayers can choose between the old and new tax regimes introduced in the Union Budget 2020. Income tax is assessed and paid annually, and its rates and regulations can vary based on the taxpayer’s income level and financial situation.

    Key Differences Between GST and Income Tax

    The most common difference between GST and Income Tax include:

    Aspect GST (Goods and Services Tax) Income Tax
    Type of Tax Indirect tax Direct tax
    Basis of Taxation Imposed on the consumption of goods and services Imposed on income from salary, capital gains, house property, etc.
    Tax Burden Levied on different levels, but the final consumer bears the ultimate burden Tax burden cannot be transferred from one person to another
    Registration Threshold Mandatory for businesses exceeding an annual turnover of Rs.40 lakh Individuals with annual income above Rs.3 lakh for the new regime
    Levied By Both central and state governments Only by the central government
    Purpose Simplify indirect taxes and limit the cascading effect of multiple indirect taxes Generate revenue for the government
    Return Filing Includes 13 types of GST returns (e.g., GSTR-1, GSTR-3B,GSTR-9), filed monthly, quarterly, or annually Includes seven forms, filed only once a year
    Applicable To Businesses providing goods and services to consumers All individuals and entities earning an income
    Frequency of Filing Monthly, quarterly, and annually Annually
    Key Software GST accounting software for managing GST returns and compliance Income tax software for filing returns and managing deductions

    Relationship Between GST and Income Tax Liabilities

    Here’s how GST assessments can impact income tax liabilities:

    • Reversal of Input Tax Credit (ITC):During GST assessments, if input tax credits are disallowed due to personal use or blocked nature, this can affect income tax calculations. The Income Tax department may scrutinise these disallowed credits under Section 37 of the Income Tax Act, 1961.
    • Anti-Profiteering Provisions:GST’s anti-profiteering measures ensure businesses do not unfairly benefit from reduced tax rates. If a business is found guilty under these provisions, the Income Tax department might examine whether the undue profits have increased income tax liabilities.
    • Compliance and Scrutiny:Frequent GST non-compliance or fraudulent practices, such as bogus transactions or fake invoices, can raise red flags with the Income Tax Department.

    Clarifying Myths Around GST and Income Tax

    Finally, let’s clear some myths that frequently revolve around GST and Income Tax:

    • Myth 1: GST and Income Tax are the Same
      Fact: GST (Goods and Services Tax) and Income Tax are distinct taxes. GST is an indirect tax levied on the consumption of goods and services, while Income Tax is a direct tax imposed on an individual’s or business’s income. GST is collected at various supply chain stages, whereas Income Tax is based on earnings and profits.
    • Myth 2: GST and Income Tax Liabilities are Unrelated
      Fact: GST assessments can impact Income Tax liabilities. Disallowed Input Tax Credits (ITC) under GST may lead to higher taxable income under Income Tax, resulting in additional tax liabilities. Similarly, GST-related non-compliance can trigger scrutiny from Income Tax authorities.
    • Myth 3: Income Tax Deductions are Affected by GST
      Fact: GST impacts on Income Tax deductions are mainly related to ITC on business expenses. GST does not directly affect Income Tax deductions beyond the scope of ITC disallowances and their implications.

    Conclusion

    While GST and Income Tax are crucial components of India’s taxation system, they serve distinct purposes and operate differently. GST is a consumption-based indirect tax levied on the supply of goods and services, affecting businesses and consumers alike. Conversely, Income tax is a direct tax imposed on individuals and entities based on earnings.

    Moreover, BUSY GST Accounting Software simplifies the management of GST and Income Tax for businesses. Its integrated platform allows seamless GST calculations, return filing, and reconciliation while facilitating income tax-related tasks such as TDS management and financial reporting. Try BUSY’s free trial now to learn more about the features!

    Frequently Asked Questions

    • Who is liable to pay GST?
      Businesses and individuals involved in the supply of goods and services are liable to pay GST if their annual turnover exceeds the threshold limit of Rs. 40 lakh
    • Who is liable to pay Income Tax?
      Individuals, Hindu Undivided Families (HUFs), companies, firms, and other entities with taxable income above the specified threshold limits are liable to pay Income Tax. The tax is based on the total income earned, including salaries, capital gains, and business profits.
    • How do I file GST returns?
      GST returns must be filed online through the GST portal, and different forms are required based on the type of business and the nature of the transactions. Businesses must report their sales, purchases, and tax liabilities in the relevant forms and comply with the filing schedule.
    • How do I file Income Tax returns?
      Income Tax returns are filed online through the Income Tax Department’s e-filing portal. Individuals and entities must choose the appropriate form based on their income sources. The return detailing income, deductions, and tax payable or refundable must be filed annually by the due date.
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