Table of Contents
- Introduction
- What is GST?
- Brief History of GST in India
- Objectives of Implementing GST
- Key Benefits of GST
- Components of GST
- GST Tax Rates
- GST Registration
- GST Return Filing
- Input Tax Credit
- GST E-Way Bills
- GST Payment Process
- Key Differences Between Old and New Tax Regime
- Frequently Asked Questions
Introduction
Goods and Services Tax (GST) is considered one of the most significant tax reforms in India’s history. Implemented in 2017, it transformed the country’s complex and convoluted indirect tax structure into a simplified, unified system.
But what exactly is GST and how does it impact businesses and consumers in India? This comprehensive guide provides an in-depth look at everything you need to know about Goods and Services Tax in India.
What is GST?
GST stands for Goods and Services Tax. It is an indirect, multi-stage tax levied on the supply of goods and services across India. Under the GST regime, taxes are levied at every point of sale.
For intrastate transactions, Central GST (CGST) and State GST (SGST) are applicable. For interstate transactions, Integrated GST (IGST) is levied.
GST has subsumed all major indirect taxes previously applicable in India, including:
- Excise duty
- Service tax
- Value Added Tax (VAT)
- Entertainment tax
- Luxury tax
- Octroi
- CST
By combining all of these taxes into one unified tax system, GST has created a common national market across the country.
Brief History of GST in India
The introduction of a nationwide Goods and Services Tax in India has been in discussion for over a decade.
In 2000, the Vajpayee government first initiated the idea of GST by forming an empowered committee. Over the years, several committees and working groups were formed to analyze and recommend GST models.
Finally, in 2017 after extensive debate, the Indian Parliament passed four GST bills – CGST, SGST, IGST and GST Compensation Cess. The Goods and Services Tax was officially launched on 1st July 2017.
Objectives of Implementing GST
The key objectives behind introducing GST in India were to:
- Simplify the complex indirect tax structure with a single, unified tax system
- Eliminate the cascading effect of taxes
- Improve tax compliance and collection efficiency
- Reduce tax evasion by curbing black money
- Boost foreign investment and Make in India initiative
- Enhance ease of doing business in India
- Create a common national market with lower tax burden
- Reduce logistics and transportation costs
Key Benefits of GST
The implementation of GST in India has brought several benefits for businesses, consumers and the overall economy:
1. Elimination of Cascading Effect of Taxes
One of the major advantages of GST is that it has eliminated the cascading effect of taxes.
In the earlier system, taxes were levied at each stage of production and distribution. No credit was available for taxes paid in procuring inputs. This cascading of taxes ultimately increased the cost of goods and services for the end consumer.
GST removes this effect by allowing set-off and input tax credit across the entire supply chain.
2. Improved Tax Compliance and Revenue
GST has made tax compliance much easier via a single online registration and return filing system. This has brought many unorganized sectors under the tax system, widening the tax base.
According to government data, over 1.3 million businesses have registered under GST since its implementation. Tax collections have also gradually increased over the years, crossing the Rs 1 lakh crore mark.
3. Boost to ‘Make in India’ Initiative
Under the GST regime, complex customs duties have been replaced with a simple taxation system. This has facilitated the ‘Make in India’ initiative by making exports more competitive. Domestic manufacturers can now produce goods at low costs and export them worldwide at zero rating.
4. Enhanced Ease of Doing Business
With online, unified tax procedures, GST has eased processes for doing business in India. Common registration, filing, and compliance norms under CGST and SGST have reduced difficulties faced earlier in inter-state trade. Overall, it has improved the ease of doing business ranking of India globally.
5. Creation of Unified National Market
GST has dismantled inter-state trade barriers and created a common national market. Earlier, states had their own VAT rates and regulations, causing delays and costs for movement of goods across state borders. GST has eliminated this fragmentation through a pooled taxation system.
6. Lower Logistics Costs
The e-way bill system under GST has eliminated inter-state check posts. This has reduced transit times and logistics costs for transport of goods considerably across the country.
Components of GST
There are 3 main taxes under the GST regime in India:
CGST: Collected by the Central Government on an intrastate sale
SGST: Collected by the state governments on an intrastate sale
IGST: Collected by the Central Government on interstate sale
In most cases, the GST tax structure is as follows:
| Transaction | Taxes Applicable |
|---|---|
| Intrastate supply | CGST + SGST |
| Interstate supply | IGST |
The CGST and SGST are parallel taxes which run alongside each other without any tax on tax. IGST is a single consolidated tax levied on interstate supplies.
The IGST mechanism ensures proper revenue collection for both the origin and destination states in case of interstate transactions.
GST Tax Rates
There are 4 main GST tax rates applicable on goods and services in India:
- 0% – This GST rate is applicable on essential commodities and services like food grains, dairy products, books, etc.
- 5% – This lower GST slab rate is applicable on mass-use items like spices, packaged food, footwear, etc.
- 12% – The 12% GST rate applies to processed food, hair oil, soaps, apparel, etc.
- 18% – The standard 18% rate applies to most goods and services including electronics, stationery, AC restaurants, etc.
- 28% – The highest 28% GST rate applies to white goods, automobiles, tobacco products, luxury items, etc.
Besides these rates, some goods like pan masala, aerated beverages, and luxury cars attract a cess over and above the 28% GST.
GST Registration
Any person, who is engaged in exclusive supply of goods and whose aggregate turnover in the financial year exceed Rs40 lakh (Rs. 20 lakhs for Northeastern states) have to register for GST. In case of service provider’s, the threshold limit is Rs 20 lakhs (Rs 10 lakh for special category) The registration can be done online via the GST portal.
The documents required for GST registration include:
- PAN Card
- Business Address Proof
- Business Bank Account Details
- Authorized Signatory Details
- Digital Signature Certificate
For small businesses, the GST composition scheme allows easy compliance by paying a flat 1-5% tax based on turnover, without input credits.
GST Return Filing
Under GST, a regular taxpayer has to file monthly, quarterly and annual returns summing up their sales and purchases.
GSTR-1: Filed monthly, it provides invoice-level details of all outward supplies, interstate transactions, and taxes collected.
GSTR-2: Filed monthly, it provides the details of all inward supply invoices on which input tax credit will be claimed. (Currently suspended)
GSTR-3: The monthly return that auto-populates values from GSTR-1 and GSTR-2 giving the overall tax liability, ITC claims and settlements.
GSTR-9: Filed annually, it is a consolidated statement providing reconciliation of sales, purchases and input tax credit for the financial year.
For composition dealers, a simple quarterly return (GSTR-4) has to be filed online.
Input Tax Credit
Input Tax Credit (ITC) is a unique feature of GST that eliminates cascading of taxes. ITC allows businesses to claim the tax already paid on inputs, and reduce this from their output GST liability.
For example, a textile firm buying yarn worth Rs. 25 lakhs plus GST at 12% (Rs 3 lakhs) can claim the Rs. 3 lakhs in its return to lower the GST burden on output supplies.
ITC can be claimed on invoices uploaded by vendors as long as the goods or services are used for taxable business purposes. This incentivizes B2B buyers to only source inputs from GST-registered suppliers.
GST E-Way Bills
E-way bills serve as a tax compliance and track and trace mechanism under GST for interstate and intrastate movement of goods.
For consignments above Rs. 50,000 in value, e-way bills must be generated online prior to transit. It contains key details of the shipment, transporter, and vehicle for easy identification by tax officials during transit.
E-way bills have improved efficiencies in logistics by reducing delays and overhead costs of physical verification of goods at state borders.
GST Payment Process
The government has introduced several digital options to make GST payment convenient:
- NEFT/RTGS: Online payment of GST using internet banking facility from any bank.
- Net Banking: Over 55 banks allow direct payment of GST from the taxpayer’s account.
- Credit/Debit Card: Payment can be made using credit or debit cards of Visa, Mastercard, American Express or RuPay.
- UPI/BHIM: GST can also be paid via BHIM app or other UPI apps like Google Pay, PhonePe, etc.
- Cash Ledger: Cash or leftover credit in the taxpayer’s ledger account can be utilized for making GST payments.
- TReDS: Corporates can settle GST dues through Trade Receivables Discounting System (TReDS).
Taxpayers also get MSG alerts via SMS and email whenever any payment is made to their GSTIN.
Key Differences Between Old and New Tax Regime
The transition from previous indirect taxes to GST has brought several crucial changes to the tax and compliance landscape:
- Wide range of taxes subsumed into a single tax
- No differentiation between goods and services
- Credit setoff is available across the entire supply chain
- Online procedures replace manual processes
- E-way bills and e-invoicing enhance tracking of goods
- No Entry Tax or Octroi on state borders
- Exports are zero-rated under GST
- Refunds are directly deposited to bank accounts
- Unified tax slabs across the country
While GST compliance has become much simpler, taxpayers must cautiously manage their working capital by monitoring invoice-level credits and vendor payments. Overall, it is a win-win reform for all stakeholders creating one unified common market.
Frequently Asked Questions
Q. What are the benefits of GST for consumers?
GST has reduced the overall tax burden on consumers by eliminating the cascading effect of taxes. Unified tax rates have also decreased costs of many categories of goods and services. Consumers also benefit from simpler tax-inclusive pricing.
Q. How is GST advantageous for traders?
GST provides traders a simplified way of doing business with availability of input tax credit, online procedures, lowered logistics costs, and a unified tax structure across the country. Traders also benefit from widened market reach.
Q. How is interstate trade of goods operated under GST?
Interstate trade and movement of goods is facilitated through the e-way bill and IGST mechanism under GST. IGST levied on interstate supply can be claimed as input credit to ease the cash flow.
Q. Can input credit be claimed on all business expenses under GST?
No, input tax credit can only be claimed on inputs, capital goods and services used in the course or furtherance of taxable business operations. Credit is not available on ineligible expenses.
Q. How is GST beneficial for the economy?
GST has made India a unified, common market by merging all states into one tax base. It has increased tax revenues, boosted international trade, improved compliance and eased business operations across the country.
Conclusion
The implementation of GST in India has successfully overhauled the convoluted indirect tax structure with a simple, transparent, and technology-driven tax regime. Despite initial transition challenges, it has widened the tax base, removed inter-state barriers, ended the cascading effect of taxes, and enhanced the ease of doing business. With each passing year, the government is taking steps to fine-tune GST rates and compliance procedures based on feedback from taxpayers and experts. Most agree that GST is one of the most progressive policy reforms that has set the stage for a competitive, single unified Indian market.
