GST is a relevant topic for everyone involved in business.
It doesn’t matter if you are starting out new or have had a business for years, GST is equally new and important for you.
The Goods and Services Tax, abbreviated as GST, is an ‘indirect tax’ applied in India on the supply of goods and services. It is an all-inclusive, destination-based multistage tax. It is hailed as a comprehensive tax as it has replaced many of the indirect taxes that previously existed in the Indian tax system, like central excise duty, central sales tax, service tax and many others. Goods and Services Tax came into effect from July 1, 2017, when the government implemented the 101st Amendment of the Constitution of India.
To better understand the much complex and high-octane ‘revolutionary’ tax, let us take you through the GST system step by step.
What is GST?
Simply put, Goods and Services Tax is imposed on the supply of goods and services and paid by any consumer availing these from a producer or a provider. Unlike the taxes in the previous tax system, it is a tax is that it is collected at the point of consumption and not at the point of origin. That is why it is also called a destination-based tax. In such a system, the government collects the tax at the point where goods are consumed.
It is important to note that GST is a tax regime that is modelled to cover a major sector of the goods and service industry.
Then versus Now: How is the Tax Structure Transformed?
GST is an attempt at removing multiple taxes by creating a single tax which covers all goods and services taking place in a market. But before we discuss the critical importance of GST, it is imperative to understand how the previous indirect taxes functioned, and what has changed with the new tax system.
The following figure shows the changes in the Pre-GST era versus the Post-GST era:
Turnover– Turnover, also referred to as revenue, is the sum total of all money that passes through a business each year as a result of the sale of goods and services. If you only provide services, your turnover will be the sum total of the money earned by charging customers for the services you have provided.
Tax structure prior to the new system worked on the ‘tax on tax’ model. With multiple taxes in place, goods were taxed at every stage of production. Goods were taxed till they were finally sold to the consumer. Each succeeding transfer of goods was taxed, inclusive of the taxes charged on the preceding transfer. This increased the taxes as high as roughly 25-30 per cent, ultimately increasing the end cost of the goods and services. With this tax, direct benefit is given to the common consumers by sparing them from paying ‘tax on tax’ and paying taxes directly at the point of consumption.
GST Rate Slabs
It is important to note that GST is a tax regime that is modelled to cover a major sector of the goods and service industry. Necessary services and food items are placed in the lower tax brackets of the new tax system, while luxury services and products are situated in the higher tax bracket. Government has put over 1,300 goods and 500 services within the ambit of four tax slabs under GST. Here is a look at those rate slabs:
5 per cent
12 per cent
18 per cent
28 per cent
Almost all farm produces and indigenous products like hulled grain, bangles, local jewellery, etc. are outside the purview of the GST. This is a significant measure for small farmers and indigenous businesses of the country.
Types of GST: Who Gets What
GST has three components to determine who collects the tax and how the money is shared between the Centre and the state governments. These include:
Central Goods and Services Tax (CGST): As the name suggests, it is collected by the central government whenever an ‘intra-state’ sale/business transaction takes place.
State Goods and Services Tax (SGST): It is collected by state governments when ‘intra-state’ business transactions take place.
Integrated Goods and Services Tax (IGST) is collected by the central government for any ‘inter-state’ sale.
Let’s understand the components of GST with simple examples.
Suppose Ramesh is a manufacturer in Maharashtra who sold goods worth Rs 10,000 to Suresh in Maharashtra only. The GST rate applicable is, say, 18 per cent, which includes a CGST rate of 9 per cent and SGST rate of 9 per cent. In this situation, Ramesh (the manufacturer) will collect Rs 1800 as GST from the Suresh (buyer), out of which Rs 900 (CGST) will go to the Central Government and Rs 900 (SGST) will go to the Maharashtra Government.
Now, consider that Ramesh, the manufacturer from Maharashtra, sold goods worth Rs 10,000 to Amit from Gujarat. Here also, let’s say the GST rate is 18 per cent, inclusive of 18 per cent IGST. Ramesh will charge Rs 1,800 as IGST. This IGST will then be distributed equally among the central and state government where the goods are consumed; meaning Rs 900 will go to the central government and Rs 900 will go to the Gujarat state government.
In essence, CGST and SGST are applied when a sale of goods and services happens ‘within’ a State; the revenue generated is shared equally between the Central and the State governments. When the business is done with another state, the IGST is applied as a single central tax. The Centre then shares the IGST revenue based on the destination of goods.
Tax Processing– Input Tax Credit and Stages of Deduction
Any commodity or product has to go through different stages before it reaches the end consumer. A single tax is collected at different stages, unlike the multiple taxes at multiple places earlier.
With taxation at multiple stages, you get the credit benefit called Input Tax Credit. An input tax credit means that at the time of paying tax on output (goods to be sold), you can reduce the tax which you have already paid on inputs (raw material bought for making goods). The input tax credit is the credit that manufacturers, suppliers, aggregators, or any business owner registered under the GST receive for paying taxes on the material procured during the manufacturing/ production of goods. You are also entitled to the input tax credit if you have purchased goods for reselling. You are eligible to claim input credit for tax paid by you on your Purchases.
You are also entitled to input tax credit if you have purchased goods for reselling.
Here’s a use case to help you understand the working of GST and the tax credit process.
Consider the GST Slab Rate used- 5 per cent, Base Price – Rs 500.
At Manufacturing Stage
Consider a manufacturing unit which has to pay 5 per cent as the GST applicable. Here, the manufacturer procures raw material worth Rs 500. This price of the raw material includes GST, in this case, Rs 25 (5 percent of 500).
The manufacturer then adds her/his own value of Rs 50 to the materials during the manufacturing process. This brings the total value of the product to Rs 550. Now, the total tax amount of the product comes to Rs 27.5 (5 percent of 550). In the previous tax system, the manufacturer would have paid a tax of Rs 27.5.
However, with GST, s/he can claim input tax credit as s/he has already paid it while purchasing the raw materials. Therefore, the final GST that the manufacturer will incur will be of Rs total tax amount till now minus the tax s/he has already paid, which is Rs 2.5 (27.5-25).
At Wholesale Stage
Here, the product is passed from the manufacturer to the wholesaler at Rs 550 that is inclusive of the GST of Rs 27.5 (5 percent of 550). The wholesaler then adds her/his value of Rs 50, making the total Rs 600 (550 + 50). This brings the tax amount to Rs 30 (5 percent of 600).
Like the manufacturer, the wholesaler too can claim input tax credit on account of the tax that s/he has already paid while purchasing the goods from the manufacturer. Thus, the final GST for the wholesaler would be Rs 2.5 (30- 27.5).
At Retail Stage
The retailer buys the product from the wholesaler at Rs 600, inclusive of the GST Rs 30 (5 percent of 600). S/he then adds her/his value of Rs 50 making the total cost of the goods Rs 650. The tax applicable here is Rs 32.5 (5 percent of 650).
Since the retailer has already paid tax while purchasing the goods, s/he can claim input tax credit and set off this amount. Thus, the final GST amount for the retailer would be Rs 2.5 (32.5- 30).
Finally, as the retailer sells the product at Rs 650, the tax paid by the end consumer will be Rs 32.5 (10 percent of 650).
How to claim an input tax credit under GST?
To claim input credit-
You must have a tax invoice (of purchase) or debit note issued by a registered dealer.
You should have received the goods/services.
The tax charged on your purchases has been deposited/paid to the government by the supplier in cash or via claiming input credit.
The supplier has filed GST returns.
The most important point to be remembered here is that you can claim the input credit ONLY if your supplier/predecessor has deposited the tax s/he collected from you. Thus, every input credit has to be matched and validated before it can be claimed. For checking the GST compliance of your predecessor in the GST input tax credit chain, you can use the e-Ledger. It is an electronic passbook for GST and is available to all GST registrants on the GST Portal.
An e-ledger can tell you the following details:
Amount of GST deposited in cash to the government in Electronic Cash Ledger.
Balance of Input Tax Credit available (ITC) in Electronic Credit Ledger.
Manner of Setoff of GST liability and balance liability Electronic Liability Ledger.
In the case of a wrongly claimed input tax credit, or tax liability on the part of your predecessor in the tax chain, you have to return the credit by making a reverse payment of that amount in the next tax payment month. This is called ITC reversal.
As GST is levied on the sale of goods and services, it is applicable to a business whose annual turnover exceeds:
Rs 40 lakh in goods production/manufacturing sector, and
Rs 20 lakh in the service/labour sector,
in a financial year. There is no requirement for re-registration or renewal under GST as it has no expiration date.
The following documents are required for GST Registration:
PAN of the Applicant
Proof of business registration or Incorporation certificate
Identity and Address proof of Promoters/Director with Photographs
Address proof of the place of business
Bank Account statement/Cancelled cheque
Letter of Authorization/Board Resolution for Authorized Signatory
Upon registration on the GST Network portal, you will be given a GSTIN (Goods and Services Tax Identification Number) which will be used in the future for all the activities related to GST.
What is GST Return?
A GST return is a document containing details of your income which you are required to file with the government. It is similar to filing income tax returns and serves the same purpose- to calculate your tax liability. To file GST returns, GST compliant sales and purchase invoices are required. Under GST, a business registered with the government has to file GST returns that include the record of their:
Output GST (On sales)
Input tax credit (GST paid on purchases)
Any regular business has to file two returns in a month and one annual return. This amounts to a total of 26 returns a year. Quarterly filers have to file their GST returns 17 times in a year.
In a nutshell, GST proposes a tax environment that is transparent and corruption-free, removing the shortcomings in the indirect tax structure. Despite these utopian promises, GST must be amended and worked upon further to make it truly business as well as consumer-friendly.
A well-formulated and well-implemented GST will allow India to better negotiate its terms in the international trade forums as the business thrives in the country. The aim of increasing the taxpayer base by bringing SMEs and the unorganized sector under its compliance will only be achieved by the extremely precise implementation and a top to down simplification.
Learn about other legal and regulatory measures like GST including EPFO, Copyrights, PAN, Professional Tax, and much more on our website.