Goods and Services Tax popularly called GST is a value-added tax, at each stage of the supply of goods and services. This tax is added precisely on the amount of value addition achieved. GST was launched across India on 1st July 2017. One Nation One Tax is how GST can be defined in a few words. The GST regime is believed to be paving a path towards a better economy.
The aim of GST is to eliminate ‘tax on tax’ also called cascading of taxes. GST is a single tax for the whole Nation. GST is a multi-stage destination based tax, charged on the manufacture, sale and consumption of all goods and services within India.
GST will replace taxes like Central Excise Duty, Additional Excise Duty, Countervailing Duty, Special Additional Customs Duty, Service Tax, Central Cess and Surcharge, VAT, Central sales tax on inter-state trade of goods, luxury tax, entertainment tax except those levied by local bodies, taxes on advertisements, taxes on betting and gambling and state cesses and surcharges on supply of goods and services
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Simply speaking GST is a comprehensive, multi-stage, destination and consumption based tax, charged on each and every value addition.
Let’s consider the following process.
GST will be charged on each one of these stages and so it is called a multi-stage tax.
Let’s take the example of a manufacturer of cakes. Cake manufacture requires eggs, all purpose flour, baking powder, sugar and so on. These raw materials are mixed and the cake is baked. The value of the raw materials increases as the cake is baked by mixing sugar, flour, eggs and so on.
The manufacturer of the cake sells them to a warehousing agent. This warehousing agent then packs the cake and labels them. This is a value addition.
This cake is then sold by the warehouse/warehouse agent to the retailer. Cakes are then packed in smaller quantities and money is spent on marketing the cake. This is a further value addition before the cake is sold to you, the final customer.
See also: GST advantages and disadvantages
GST is charged on each value addition.
Let’s consider goods manufactured in Gujarat and sold in Rajasthan. Now, GST is a destination-based tax. So, SGST is charged at the point of consumption/destination. The entire SGST revenue goes to Rajasthan.
Please Note: SGST is State Goods and Services Tax.
SEE ALSO: GST Tax Rates In India
Let’s take a look at the calculation of tax before GST Regime:
Let’s take a look at the calculation of tax after GST Regime:
GST has something unique called input tax credit. It’s really simple. Input tax credit means at the time of paying tax on the output, you (manufacturer) are allowed to deduct the taxes already paid on inputs. You just have to pay the balance amount.
Let’s say you (manufacturer) have to pay a tax of Rs 500 on the final product. You have already paid a tax of Rs 150 at the input stage. Under input tax credit, you have to pay only Rs 350 in taxes.
GST v/s Earlier Tax Regime: Now let us see the sharp difference between GST and the previous tax regime (VAT-Service Tax-Excise):
1. Broad scope: Before GST was introduced each indirect tax had separate laws. You had the Central Excise Act, 1944, State VAT laws, and so on. In the GST regime, there is only one such law because GST will subsume many indirect taxes.
2. Tax rates: The previous tax regime had separate rates like Excise @12.36% and Service Tax @14%. In GST regime, there is a single CGST rate and a uniform SGST rate across states.
3. Cascading effect: Credit of Central Sales Tax and various other indirect taxes wasn’t allowed in the previous tax structure, whereas under GST the entire concept of CST has been eliminated with the introduction of IGST.
4. Tax burden on the taxpayer: Tax burden on taxpayers has reduced significantly because all taxes are integrated and the burden is split between manufacturing and services.
5. Cost burden on consumers: Under the previous tax regime, some taxes formed part of costs due to the cascading effect. But now the cost burden on consumers has reduced.
6. Concurrent power: The previous tax regime did not give power to both Centre and States on the same tax matter. Centre and State, both have the concurrent power to make laws when it comes to goods and services tax as proposed in Article 246A of the Constitution.
7. Compliance: Due to the multiplicity of laws and their provisions, pre-GST compliance was difficult. In GST, tax compliance is much easier.
8. Transparent tax administration: Previously, the tax was levied at two stages: production and consumption. Now, GST is levied only at the final destination of consumption. This has brought transparency and corruption-free tax administration.
GST has something unique called input tax credit. It’s really simple. Input tax credit means the manufacturers are allowed to deduct the taxes already paid on inputs at the time of paying tax on the output. They just have to pay the balance amount.
Let’s say you have to pay a tax of Rs 500 on the final product and that you have already paid a tax of Rs 150 at the input stage. Under input tax credit, you have to pay only Rs 350 (Rs 500- Rs 150) in taxes.
SEE ALSO: GST: Everything You Need To Know
Anti-profiteering rules are laid down to prevent businesses from making excessive profits due to GST. It is expected that GST and its most beneficial feature, input tax credit, will eventually bring down prices. To ensure that entities pass on such benefits arising from GST to customers, a National Anti-profiteering Authority (NAA) has been set up. NAA will also keep a check on entities that hike rates unreasonably in the name of GST.
Countries like Singapore and Australia witnessed a spurt in inflation after the implementation of GST. Retail inflation in Australia increased from 1.9% to 5.8%. Malaysia curbed retail inflation due to GST by implementing anti-profiteering rules.
Consumers can file a complaint if they are being over charged in the name of GST.
The Government wants to prevent businesses and companies from gaining at the cost of the customers. This is why GST has the anti-profiteering clause.
Yes, GST is a game changer in India. It will hasten the progress of the Nation towards economic prosperity.
GST tax slab rates are as follows:
1. GST has eliminated the cascading effect of tax as it is a comprehensive indirect tax subsuming many other indirect taxes.
2. Under GST only businesses with a turnover of more than Rs 20 Lakh have to get registered. Many small traders and service providers are exempt from GST.
Tax thresholds under various tax regimes are:
3. GST has introduced Composition Scheme for small businesses (turnover of Rs 20 to 75 Lakhs). It is a simple and easy scheme where small taxpayers pay GST at a fixed rate of turnover without getting involved in any kind of formalities. This scheme is only available to taxpayers with turnover less than Rs 1 Crore.
4. Under GST, right from registration to filing returns, everything is online. Hence, it is simple.
5. In the pre-GST era, construction and textile industries were highly unregulated and unorganized. Now, they will have to comply with GST in order to avail input tax credit.
6. GST brings down prices which will benefit the consumer. Also, with an increase in consumption, companies will benefit too.
7. GST will reduce administration and compliance costs. The pre-GST regimes taxed goods and services separately. Supply values were divided into the value of goods and services.
8. The tax burden is split equally between manufacturing and services.
9. GST is only levied at the final destination of consumption. This will bring about a common national market.
10. GST builds a corruption free tax administration.
1. Businesses have to invest in GST software. They can update existing accounting or ERP software to GST-compliant software. Also, acquisition of the software alone is not enough. Training employees to use it is equally important.
2. GST has increased operational costs of small businesses as they have to employ tax professionals to be GST-complaint.
3. Some smaller businesses may find it difficult to adapt to filing returns and make payments online.
4. Economists were of the opinion that GST would have a negative impact on the real estate market. Cost of new homes would go up by 8% and demand would reduce by about 12%.
5. There is no significant reduction in the tax layers. CGST (Central GST), and SGST (State GST) are like the counterparts of Central Excise/Service Tax, VAT and CST.
6. Earlier, retail products like garments and clothes had only 4% tax on them. With the introduction of GST, they have become costlier.
7. The service tax on airfares has increased.
GST replaced the following taxes:
While there were multiple taxes such as Central Excise, Service Tax, State VAT, and so on in the pre-GST regime, under GST, there is a single tax. However, GST itself is categorized into CGST, SGST and IGST depending on the type of transactions, be it Intra-State or Inter-State.
When goods/services are supplied and bought in the same location/state, it is called as an intra-state supply. Sellers have to collect both CGST and SGST from the buyer. CGST is deposited with the Central Government and SGST with State Government.
When goods/services are supplied and bought in different locations/state, it is called as an intra-state supply. In case of export/import of goods/services or an SEZ supplying goods/services, the supply is assumed to be Inter-State. The seller has to collect IGST from the buyer.
Now, let us see what’s CGST, SGST and IGST:
CGST stands for Central Goods and Services Tax. CGST and SGST are both levied on Intra-State supplies of both goods and services by the Central Government. CGST is governed by the CGST Act. SGST will be governed by the State Government.
Both the Central and the State governments combine their levies and share the revenue in an appropriate proportion. However, Section 8 of the GST Act makes it clear that the rate of tax should not exceed 14% each.
SGST is levied on Intra-State supplies of both goods and services by the State Government. It is governed by the SGST Act. As mentioned, CGST will also be levied on, but will be governed by the Central Government.
Tax liability incurred under SGST can be set off against SGST or IGST input tax credit only.
Example for CGST and SGST:
Let’s say M is a dealer in Kerala. He sells goods worth Rs 25,000. The GST rate of 18% comprises of CGST rate of 9% and SGST rate of 9%.
Dealer collects: Rs 25,000*18% = Rs 4,500.
Central Government share: Rs 25,000*9% = Rs 2,250
State Government share: Rs 25,000*9% = Rs 2,250
IGST is levied on Inter-State supplies of goods/services. It is governed by the IGST Act. IGST is applicable to the supply of goods and services on both, import and export.
Under IGST, exports are zero-rated. IGST Tax will be shared between the Central and State Government.
Example of IGST:
Consider that N from Kerala sold goods worth Rs 50,000 to M from Gujarat. The GST rate is 18% which only comprises of IGST. N charges Rs 9,000 as IGST which will go to the Centre.
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