What is GST?
GST is a consumption-based tax imposed on goods and services. It is a single uniform tax which has eliminated and absorbed multiple taxes under the previous indirect tax regime that included Value Added Tax (VAT), Service Tax, Excise Duty, Central Sales Tax (CST), Entry Tax, Local Body Tax (LBT), etc. GST is applicable on all goods and services, manufactured or supplied inside India; however, there are three products which are exempted from GST, i.e., alcohol for human consumption, petroleum products and electricity.
Table of Content
Broadly, the GST is categorised into four categories. These are:
- Central Goods and Services Tax (CGST)
- Integrated Goods and Services Tax (IGST)
- State Goods and Services Tax (SGST)
- Union Territory Goods and Services Tax (UTGST)
Let us discuss about these categories in the subsequent sections.
CGST
CGST is a constituent of GST. CGST comes under the Central Goods and Services Tax Act, 2016. CGST is levied on the migration of goods and services within a state and amendments can be made to it from time to time by a separate body. The total revenue collected under CGST is intended for the Centre. However, the states get input tax credit on CGST and it may be utilised against the Central GST’s payment.
IGST
IGST is a constituent of Integrated Goods and Services Tax Act, 2016. IGST is levied on the migration of goods and services from one state to another. The share of the revenue earned on IGST is divided according to the rates fixed by the governing authorities among state governments and central government.
SGST
SGST is a constituent of State Goods and Services Tax Act, 2016. SGST is introduced as the replacement of all the present taxes including sales tax, VAT, luxury tax, entertainment tax , entry tax, taxes on lottery, betting and gambling. However, it has not replaced Octroi, State Cesses and Surcharges. The revenue accumulated under SGST is solely for the state government.
UTGST
UTGST is a constituent of GST in India. GST levied on the supply of goods and services in the Union Territories like Andaman and Nicobar Islands, Chandigarh, Dadra and Nagar Haveli, Daman and Diu, Delhi (National Capital Territory of Delhi), Lakshadweep, Puducherry, etc. category.
There is a separate Act, namely UTGST Act implemented for Union Territories, for imposing and administering GST in India. Under this Act, the entire details of GST rates against the migration of goods and services in Union Territories are stated. There is a bill named UTGST bill, which has been presented in states government to implement it as UTGST Act.
Importance of GST
GST has improved tax governance in two ways. The first one is related to the self-policing incentive inherent to a VAT. For claiming input tax credit, dealers have an incentive of requesting documents from other dealers situated behind him in the VAT chain. The second one is related to the GST’s dual monitoring structure, one by the Centre and one by the States. The dual structure has been viewed by the taxpayers and critics with some worry, with a fear that two sources of interface would be involved.
However, this structure should also be considered from a point of view of creating the desired tax competition and coordination between central and state authorities. In this case, if one set of tax authorities fails in detecting evasion, the possibility is the other would not. To conclude, GST has made the tax structure simple and clear. It has made the entire Indian market unified, resulting into lower business costs. It also enables smooth goods movement across India and lowers down business transaction costs.
It is not applicable for goods and services exported from India and, therefore, it is good for businesses oriented to export. As time passes, it would translate into low prices of consumer goods. Manufacturers, suppliers, retailers and wholesalers can recover the GST that has been incurred as tax credits on input costs. This lowers down the cost of running a business, which allows fair costs for consumers. It brings better compliance and more transparency.
Features and Benefits of GST
Salient features of GST are as follows:
- Dual goods and services tax: GST is an indirect tax structure, dual in nature, which enables both central government and state governments to levy the tax.
- Inter-State transactions and the IGST mechanism: Integrated Goods and Services Tax (IGST) is to be levied by the Centre at the inter-state level on the distribution of goods and services. The design of the IGST mechanism guarantees a coherent flow of input tax credit between any two states. IGST will have to be paid by the inter-state seller on goods sold by him/her after adjusting for IGST, CGST and SGST on his purchases.
The state that exports will transfer SGST’s credit used in IGST’s payment to the Centre. The claim of IGST’s credit can be done by the dealer who imports, in his own state only, while releasing the output tax liability (both the CGST and SGST). The IGST’s credit used in the payment of SGST will be transferred to the state that is imported by the Centre. - Destination-based consumption tax: GST is a tax based on destination, which means that all the accumulated SGST will complemented to the State where the consumer of the sold goods and services resides.
- Computation of GST on the basis of invoice credit method: Under GST, the invoice credit method will be the liability, i.e., the invoice is issued by the suppliers will be the basis for allowing CENVAT credit.
- Payment of GST: The payment of CGST and SGST are to be done to the central accounts and state accounts, respectively.
- Goods and Services Tax Network (GSTN): GSTN is a joint non-government and not-for-profit company set-up by the central and state governments which allocate the IT infrastructure and services shared by central and state governments, taxpayers and other stakeholders.
- Input Tax Credit (ITC) Set-off: For the taxes that are allowed against central and state, ITC for CGST and SGST will be allowed to be taken.
- GST on imports: IGST will be levied by the centre on supply of inter-state goods and services. The centre will levy IGST on the inter-state supply of goods and services. Goods that are imported will be subject to customs duty and IGST.
- Maintenance of records: To avail, utilise or refund ITC of CGST, SGST and IGST, separate details in books of account will have to be maintained by the taxpayer or the exporter.
- Administration of GST: The GST Council will be responsible for the administration of GST and it also acts as the prime policy-making body of the GST. The council comprises central and state ministers, who are in-charge of the financial body.
- GST Council: The GST Council is a union of the Centre and the States. Recommendations will be made to the Union and the States by the Council on vital issues like rates of tax, list of exemption, threshold limits, etc. Half of the gross members of the Council form the GST Council’s quorum.
Some benefits of GST are as follows:
- No more multiple taxes: GST has eliminated multiple indirect taxes. The taxes that existed earlier will not be levied after the GST is implemented. Taxes like Excise duty, Sales tax, CENVAT, Service tax and are no more applicable. All these taxes fall under GST.
- Uniformity of tax rates and structure: GST guarantees that all indirect taxes and their structures must be common throughout the country as this will increase the conviction and comfort of carrying out any business. Each state will come under one tax regimen only, hence preventing any unhealthy competitions amongst states. GST proves to be beneficial for all those who do inter-state business or want to expand their business in other states.
- Easy tax filing: For entrepreneurs and small businessmen, the complicacy that is associated with taxing documentation can be easily avoided. Filing returns, payment of taxes and the process of refund is convenient. Tax evasion and corruption has been reduced to an extent, making the system more efficient.
- Reduction in cost: After GST, dual charges have been eliminated. Earlier, VAT was applicable on the goods such as cosmetics, detergents, etc., apart from excise. GST has eliminated these type of dual charges. Therefore, the prices of goods and services may decrease, enabling consumers to save more money. GST is advantageous for both the businessman and the consumers.
- Better control on leakage: A sturdy IT infrastructure makes it possible to adapt with GST. The coherent transfer of input tax credit from one stage to another in the chain of value-addition is a built-in mechanism in GST design.
- From input to output: From manufacturing to consumption, GST is applicable to all the stages. Every stage of the chain is entitled to the benefit of tax credit. The margin of tax is added and the tax will be paid on the total amount at every stage. GST is to be paid on the margin amount only.
- Saving more money: The application of GST for a consumer implies the dual charging system elimination. This helps the consumer save more money as a result of reduced prices.
Evolution of GST
The entire timeline of GST and how it has evolved over time is presented in Table:
| Year | Event |
|---|---|
| 2000 | Committee was set up to draft the GST Law |
| 2005 | Kelkar Committee recommends to roll out GST by 12th Finance Commission |
| 2006 | GST proposed in the Parliament by the then Finance Minister and set a deadline of April 01, 2010 to implement it |
| 2009 | The then finance minister presents a basic structure for GST and retains deadline |
| 2010 | Computerisation of commercial taxes in states |
| 2011 | Constitution Amendment bill for GST was presented in Lok Sabha |
| 2012 | New deadline (i.e., December 31, 2012) was set up by the then Finance Minister |
| 2014 | In the budget speech, the then Finance Minister announced a compensation of ₹9,000 crore for states. |
| December 2014 | The Finance Minister introduces bill in the Lok Sabha |
| February 2016 | New deadline (i.e., April 01, 2016) was set up |
| January 2017 | New deadline to roll out GST was set up (i.e., July 01, 2017) |
| March 2017 | Four key bills (CGST, IGST, SGST and UTGST) are passed in both houses |
| May 2017 | Four slab rates (i.e., 5%, 12%, 18% and 28%) are unveiled by the GST council |
| July 01, 2017 | GST rolled out |
Goods and Service Tax Network
Goods and Service Tax Network (GSTN) is a non-government body that handles the IT system of the GST portal. It gives a IT infrastructure and services to both central and state governments, tax payers and other stakeholders to implement GST.
The functions of GSTN are as follows:
- It gives the facility to register under GST.
- It forwards the return to both the central and the state authorities.
- It provides the facility to calculate and settle the amount of IGST.
- It verifies the tax payment details with concerning banks.
- It offers various MIS reports to both central and state governments.
- It provides analysis of taxpayers’ profile.
- It runs the matching engine for comparing and reclaiming of input tax credit.
GST Rates in India
The rates of GST in India do not come under the provision of the Act but there was a promise made by Hon. Finance Minister, Shri Arun Jaitley in the Rajya Sabha for making the upper limit of the tax rate a part of the law. Thus, 14% is fixed as the upper limit for CGST/SGST rate and 28% is fixed as the upper limit on IGST rate.
Table shows the categories of the tax rates:
| Rate of Tax | Expected Bifurcation | Products |
|---|---|---|
| Nil (Exempted Supply) | (0% of CGST & 0% of SGST) | Milk, Kajal, Eggs, Educations Services, Curd, Health Services, Lassi, Children’s Drawing and Colouring Books, Unpacked Foodgrains, Unbranded Atta, Unpacked Paneer, Unbranded Maida, Gur, Besan, Unbranded Natural Honey, Prasad, Fresh Vegetables, Palmyra Jaggery, Salt, and Phool Bhari Jhadoo, Cereals, Fresh Fish (not frozen), Meat (not frozen or processed), Tender Coconut Water, Silkworm Laying Cocoon, Raw Silk, Silk Waste, Puja Samagri, Live Animals Except Horses, Unroasted Coffee Beans, Fresh Ginger, Fresh Turmeric, Contraceptives, Betel Leaves, Handloom, Hearing Aids, etc. |
| Services by the Reserve Bank of India, Services by a foreign diplomatic mission located in India, Services relating to cultivation of plants. | ||
| 5% | (2.5% of CGST and 2.5% of SGST) | Sugar, Packed Paneer, Tea, Coal, Edible Oils, Raisin, Domestic LPG, Roasted Coffee Beans, PDS Kerosene, Skimmed Milk Powder, Cashew Nuts, Footwear (<₹500), Milk Food for Babies, Apparels (< ₹1,000), Fabric, Coir Mats, Matting & Floor Covering, Spices, Agarbatti, Coal, Mishti/Mithai (Indian Sweets), Life-saving drugs, and Coffee (except instant), etc. |
| 12% | (6% of CGST and 6% of SGST) | Butter, Ghee, Processed food, Almonds, Mobiles, Fruit Juice, Preparations of Vegetables, Fruits, Nuts or other parts of Plants including Pickle Murabba, Chutney, Jam, Jelly, Packed Coconut Water, and Umbrella, etc. (computers and processed foods) |
| 18% | (9% of CGST and 9% of SGST) | Hair Oil, Capital goods, Toothpaste, Industrial Intermediaries, Soap, Ice-cream, Pasta, Toiletries, Corn Flakes, Computers, Soups, and Printers, etc. |
| 28% | (14% of CGST and 14% of SGST) | All other items that directly reach the consumer including luxury goods, i.e., white goods and beverages are covered under this category |
GSTIN Structure
Goods and Services Tax Identification Number (GSTIN) is a 15 digit unique code. It is a state and PAN based code that is assigned to each taxpayer. The structure of GSTIN is as follows:
The description of the structure of GSTIN is as follows:
- The first two digits of GSTIN signify the state code. This state code is numbered as per Indian Census 2011.
- The next ten digits of GSTIN signify PAN number of the taxpayer.
- The thirteenth digit of GSTIN signifies the number of registration in a state.
- The fourteenth digit of GSTIN is ‘Z’ by default.
- The last digit of GSTIN signifies the check code, which can be an alphabet or a number.
