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
Dual GST Model in India
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 provides a comprehensive chain of tax credits from the producer’s point/service provider’s point up to the retailer’s level/consumer’s level, thus, taxing only the value added at each stage of supply chain. The following points explain the significance of GST:
- 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 such as 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 types 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.
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.
Benefits of GST
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.
Levy and Collection of GST
The Section 9(1) of the GST Act, 2017, states that the GST shall be levied on supply of all goods and services on inter-state and intrastate level. The rates of GST are decided by the GST Council’s recommendation and shall be levied in a prescribed manner according to the Act provisions.
Any person who carries out a business at any place throughout India, who is already registered or needs to get registered under the GST Act can be called a taxable person. Additionally, a person who is engaged in any kind of economic activity, involving in trade and commerce will also be considered a taxable person.
The ‘person’ in the GST act may include any of the following:
- Individuals
- Hindu Undivided Family or HUF
- Company or Firm
- Limited Liability Partnership
- Association of Persons or Body of Individuals
- Corporation or Government company
- Body incorporated under any foreign country’s laws
- Co-operative Society
- Local Authority
- Government
- Trust
- Artificial Juridical Person
Exemption From GST
On the basis of the kind of goods or services supplied by a person, there are some exemptions for some people from GST registration. The persons who are exempted from GST registration are:
- Agriculturists
- Persons falling under Threshold Exemption Limit
- Persons supplying goods or services that are covered under NilRated/Exempted category
- Persons supplying goods or services that are Non-Taxable/ NonGST
- Persons involved in activities other than supply of goods or services
- Persons supplying goods or services that are covered under the reverse charge
Supply of Goods
Any activity that falls under the taxable category as per GST rules is called a supply. The government considers an activity as a supply if it meets any of the following criteria:
- Supply of goods or services
- Any taxable supply
- A taxable person making the supply
- Supply that is made in a territory and is taxable
- Supply made in exchange for cash or reward
- Supply made during business course or for growing business
The supply of goods and services that fall under GST can be divided into two categories, namely Taxable supplies and Non-taxable supplies. Further, classification of these supplies can be divided into different categories on the basis of the nature of the supply.
The classifications are as follows:
- Taxable supplies: These supplies refer to the taxable goods and services under GST. Taxpayers who are registered are eligible for ITC, i.e., they can claim for refunds on the tax paid by them during their purchases. The taxable supplies are further divided into the following:
- Regular taxable supplies: The goods or services whose GST rate is greater than 0% fall under the category of regular taxable supply.
- Nil-rated supplies: The goods and services whose GST rate is by default 0% fall under this category.
- Zero-rated supplies: The supply of goods or services to a SEZ unit or exports is taken to be deemed. Whenever anything is exported, the GST rate associated with them becomes Zero. However, the GST rate for such items is greater than 0%, when supplied in India.
- Regular taxable supplies: The goods or services whose GST rate is greater than 0% fall under the category of regular taxable supply.
- Non-taxable supplies: These supplies refer to the goods and services that are not taxable under GST. Further, they can be divided into the following:
- Exempt supplies: There is no GST for the supply of goods or services even being in the purview of GST. A taxpayer who is registered cannot claim for refunds for such supplies.
- Non-GST supplies: These are the supplies of goods and services that do not fall under the purview of the GST.
- Exempt supplies: There is no GST for the supply of goods or services even being in the purview of GST. A taxpayer who is registered cannot claim for refunds for such supplies.
There are three components based on which the GST tax owed by a person is calculated for a transaction. These components are described as follows:
- Place of supply: The determination of the type of transaction, whether it is an inter-state, intra-state or an external trade is done through this component. It will determine the GST type associated with it.
- Value of supply: The value that is taxable for the supply is determined through this component. It also determines the tax amount to be paid.
- Time of supply: The date on which the taxes associated and the returns for GST are due is determined by this component.
To determine the right amount of tax that needs to be charged on the transaction of goods and services, one needs to understand the concept of ‘place of supply’. The place from where the goods are delivered becomes the place of supply. It is the place where the ownership of the goods are changed. In case, the goods are not moved from one place to another, the location of goods at the time of delivery becomes the place of supply.
In case of services, the location of the person who receives the service becomes the place of supply. If the services are provided to any unregistered dealer and the location information is not available, then the service provider’s location will become the place of supply.
The provisions specially provided to determine the place of supply are as follows:
- Services related to immovable property
- Restaurant services
- Admission to events
- Transportation of goods and passengers
- Telecom services
- Banking, financial and insurance services
If the services are associated with immovable property, then the property location becomes the place of supply. The amount of money that the seller collects for the goods and services that he supplies is considered as the value of supply.
Additionally, the amount of money that a seller collects from the buyer is also considered as value of supply. In cases, when both parties are related and the value that is reasonable may not be charged, or the transaction occurs as an exchange, the GST must be charged on the transactional value of the supplies.
The value of supply enables the parties, which are unrelated, to make transactions in the normal business course. It is responsible to ensure that GST is properly charged and collected, irrespective of the full payment of the value. The time when goods and services are supplied is considered to be the time of supply. The time of supply helps the seller to determine the due date for the tax payment. At the time of the supply of goods and services, the GST must be paid. The time of supply is identified on the basis of goods and services.
For goods, the time of supply shall be the earliest of the following dates:
- Invoice issue date
- Last invoice issuing date
- Advance or payment receipt date
For services, the time of supply shall be the earliest of the following dates:
- Invoice issue date
- Advance or payment receipt date
- The services provision date (in case the invoice is not issued within a stipulated time)
