Comprehensive Guide to Goods and Services Tax (GST) in India

Understanding Goods and Services Tax (GST) in India

Goods and Services Tax (GST) is an indirect tax that has superseded numerous prior indirect taxes in India, such as excise duty and Value Added Tax (VAT). The Goods and Services Tax Act was approved by Parliament on March 29, 2017, and became effective nationwide on July 1, 2017.

Essentially, GST is levied on the supply of both goods and services. India's GST law is a comprehensive, multi-stage, and destination-based tax system applied to every instance of value addition. Following the subsumption of most indirect taxes, GST now serves as a single domestic indirect tax framework for the entire country.

Before GST's implementation, the indirect tax framework for goods in India was complex. Under the current GST system, tax is imposed at each point of sale. For sales within a state, Central GST (CGST) and State GST (SGST) are charged. Integrated GST (IGST) applies to all inter-state sales.

Let us delve into the details of the Goods and Services Tax definition.

Multi-Stage Taxation

A product typically undergoes multiple transitions through its supply chain, from its initial manufacturing to its eventual sale to the final consumer.

These stages often include:

• Acquisition of raw materials
• Manufacturing or production
• Storage of finished goods in warehouses
• Sales to wholesalers
• Sales to retailers
• Sales to end consumers

GST is applied at each of these stages, making it a multi-stage tax.

Value Addition Principle

Consider a manufacturer who produces biscuits by purchasing flour, sugar, and other ingredients. The value of these inputs increases significantly when they are combined and baked into biscuits.

Subsequently, the manufacturer sells these biscuits to a warehousing agent, who then packs them in larger cartons and labels them, adding further value. The warehousing agent then sells them to a retailer.

Finally, the retailer repackages the biscuits into smaller units and invests in marketing efforts, thereby increasing their value once more. GST is levied on these value additions, specifically the monetary value added at each stage leading to the product's final sale to the customer.

Destination-Based Consumption Tax

If goods are manufactured in Maharashtra and subsequently sold to a final consumer in Karnataka, the entire tax revenue will be allocated to Karnataka, the state of consumption, rather than Maharashtra, the state of origin. This illustrates GST's destination-based nature.

The Evolution of GST in India

The journey of GST in India began in 2000 with the establishment of a committee tasked with drafting the law. It took 17 years for the legislation to fully develop. In 2017, the GST Bill successfully passed through both the Lok Sabha and Rajya Sabha, officially coming into effect on July 1, 2017.

Core Objectives of GST

1. To Realize 'One Nation, One Tax': GST replaced multiple indirect taxes under the previous regime. A single tax system ensures uniform rates for specific products or services across all states. This simplifies tax administration for the Central Government, which sets rates and policies. Common laws, such as e-way bills for goods transport and e-invoicing for transaction reporting, can be implemented. Tax compliance is also streamlined, as taxpayers avoid managing numerous return forms and deadlines, leading to a unified indirect tax compliance system.

2. To Consolidate Most Indirect Taxes: Before GST, India had several indirect taxes like service tax, VAT, and Central Excise, levied at various stages of the supply chain. These taxes were governed by both state and central authorities, lacking a unified system for goods and services. GST was introduced to subsume all major indirect taxes into one, significantly reducing compliance burdens for taxpayers and simplifying tax administration for the government.

3. To Eliminate Tax Cascading Effects: A primary goal of GST was to eradicate the cascading effect of taxes. Previously, disparate indirect tax laws prevented taxpayers from offsetting tax credits from one tax against another (e.g., excise duties couldn't be set off against VAT). This resulted in a 'tax on tax' situation. Under GST, tax is only levied on the net value added at each supply chain stage, preventing cascading and enabling seamless input tax credit flow for both goods and services.

4. To Combat Tax Evasion: GST laws in India are considerably stricter than previous indirect tax regulations. Taxpayers can claim input tax credit only for invoices uploaded by their suppliers, minimizing claims based on fraudulent invoices. E-invoicing further reinforces this objective. With GST being a national tax and supported by a centralized surveillance system, identifying and addressing defaulters is quicker and more efficient, thus largely curbing tax evasion and fraud.

5. To Broaden the Taxpayer Base: GST has expanded India's tax base. Previously, each tax law had different registration threshold limits based on turnover. As GST is a consolidated tax on both goods and services, it has led to an increase in tax-registered businesses. Moreover, stringent input tax credit rules have brought previously unorganized sectors, such as the construction industry, into the tax net.

6. Online Procedures for Business Ease: Taxpayers once faced challenges dealing with various tax authorities under different tax laws. While return filing was online, many assessment and refund processes were offline. Now, nearly all GST procedures are conducted online, from registration and return filing to refunds and e-way bill generation. This has greatly enhanced the ease of doing business in India and simplified taxpayer compliance. The government also plans a centralized portal for all indirect tax compliance activities.

7. Improved Logistics and Distribution: A single indirect tax system reduces the need for extensive documentation for goods movement. GST helps minimize transportation times, optimize supply chains, improve turnaround times, and facilitate warehouse consolidation. The e-way bill system under GST, by removing inter-state checkpoints, particularly benefits the logistics sector by enhancing transit and destination efficiency, ultimately reducing high logistics and warehousing costs.

8. Promoting Competitive Pricing and Higher Consumption: The introduction of GST has also led to increased consumption and indirect tax revenues. The cascading effect of taxes under the old regime made Indian goods more expensive than global market prices. Disparate VAT rates across states also caused purchasing imbalances. Uniform GST rates have fostered competitive pricing throughout India and internationally, boosting consumption and revenue.

Key Advantages of GST

GST's primary benefit is the elimination of the cascading effect on goods and services, which in turn reduces the overall cost of goods. By removing the 'tax on tax' scenario, products become more affordable.

Furthermore, GST is largely technology-driven. All essential activities, including registration, return filing, refund applications, and responses to notices, are processed online via the GST portal, accelerating these procedures. Here are some key advantages of GST:

• Elimination of the cascading effect of taxes
• Higher registration threshold for GST
• Availability of a composition scheme for small businesses
• Simplified online facilities for GST compliance
• Relatively fewer compliance requirements under GST
• Clearly defined treatment for e-commerce activities
• Enhanced efficiency in logistics
• Better regulation of the unorganized sector

Components of GST

Three types of taxes are applicable under this system: Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST)/Union Territory Goods and Services Tax (UTGST), and Integrated Goods and Services Tax (IGST).

• CGST: This is the tax collected by the Central Government on an intra-state sale (e.g., a transaction occurring within Maharashtra).
• SGST/UTGST: This is the tax collected by the respective state government or Union Territory on an intra-state sale (e.g., a transaction occurring within Maharashtra).
• IGST: This tax is collected by the Central Government for an inter-state sale (e.g., a sale from Maharashtra to Tamil Nadu).

Typically, the tax structure under the new GST regime is as follows:

Example Scenarios:

• A dealer in Gujarat sells goods worth Rs. 50,000 to a dealer in Punjab. If the tax rate is 18%, comprising only IGST, the Gujarat dealer must charge IGST of Rs. 9,000. This entire revenue goes to the Central Government.
• The same Gujarat dealer sells goods worth Rs. 50,000 to a consumer within Gujarat. If the GST rate on these goods is 12% (comprising 6% CGST and 6% SGST), the dealer collects Rs. 6,000 as GST. Rs. 3,000 will go to the Central Government, and Rs. 3,000 will go to the Gujarat government, as it is an intra-state sale.

GST Rates in India

GST rates represent the percentage of tax applied to the sale of goods or services under the CGST, SGST, and IGST Acts. Businesses registered under GST are required to issue invoices reflecting the GST amounts charged on the value of supply.

For intra-state transactions, the CGST and SGST rates are generally identical. For inter-state transactions, the IGST rate is typically the combined total of the CGST and SGST rates.

The primary GST slabs for regular taxpayers are currently 0% (nil-rated), 5%, 12%, 18%, and 28%. Additionally, there are less common GST rates such as 3% and 0.25%.

Pre-GST Tax Laws

Before the implementation of GST, India's indirect tax system involved multiple taxes levied by both state and central governments. States primarily collected taxes through Value Added Tax (VAT), with varying rules across different states.

Inter-state sales of goods were taxed by the central government via Central Sales Tax (CST). Various indirect taxes like entertainment tax, octroi, and local taxes were also jointly imposed by state and central authorities. This led to significant tax overlaps, creating a burden where tax was levied on tax, known as the cascading effect.

For instance, when goods were manufactured and sold, the central government charged excise duty, and on top of that, the state government charged VAT. This created a tax-on-tax scenario. The table below outlines taxes under the pre-GST regime:

It is important to note that certain taxes, such as the GST levied for inter-state purchases at a concessional rate of 2% through 'Form C', continue to be prevalent. This applies to specific non-GST goods, including:

• Petroleum crude
• High-speed diesel
• Motor spirit (petrol)
• Natural gas
• Aviation turbine fuel
• Alcoholic liquor for human consumption

This also applies to transactions involving:

• Resale
• Use in manufacturing or processing
• Use in specific sectors like telecommunication networks, mining, or power generation/distribution

How GST Has Contributed to Price Reduction

In the pre-GST era, every purchaser, including the final consumer, paid tax on tax, a phenomenon known as the cascading effect. GST has successfully eliminated this cascading effect. Now, tax is calculated solely on the value-addition at each stage of ownership transfer.

The GST indirect tax system aims to integrate the country with a uniform tax rate, improving tax collection and fostering the development of the Indian economy by removing inter-state indirect tax barriers.

Price Reduction Example:

Let's use the earlier biscuit manufacturer example with actual figures to compare costs and taxes between the old and current GST regimes.

Tax Calculations in the Earlier Regime:

Under the old system, tax liability was passed on at every transaction stage, with the final burden resting on the customer. This cascading effect caused the item's value to continually increase.

Tax Calculations in the Current Regime (GST):

With Goods and Services Tax, there is a mechanism to claim credit for tax paid on inputs. Individuals who have already paid tax can claim this credit when filing their GST returns. Consequently, each time input tax credit is claimed, the sale price is reduced, lowering the cost price for the buyer due to decreased tax liability. In this example, the final value of the biscuits decreases from Rs. 2,244 to Rs. 1,980, thereby reducing the tax burden on the end customer.

New Compliances Introduced Under GST

Beyond online GST return filing, the GST regime has brought forth several new systems.

e-Way Bills

GST introduced a centralized e-way bill system, launched on April 1, 2018, for inter-state movement of goods, and on April 15, 2018, for intra-state movement, implemented in a phased manner.

This system allows manufacturers, traders, and transporters to easily generate e-way bills on a common portal for goods transported from origin to destination. Tax authorities also benefit from reduced checkpoint delays and improved tax evasion prevention.

E-invoicing

The e-invoicing system became effective from October 1, 2020, for businesses, rolled out in phases. As of August 1, 2023, it applies to businesses with an annual aggregate turnover exceeding Rs. 5 crore in any preceding financial year since 2017-18.

These businesses must obtain a unique invoice reference number for every business-to-business invoice by uploading it to the GSTN's invoice registration portal. The portal verifies the invoice's accuracy and authenticity, then authorizes it with a digital signature and a QR code.

E-invoicing enables invoice interoperability and minimizes data entry errors. It is designed to transmit invoice information directly from the IRP to the GST portal and the e-way bill portal, eliminating manual data entry for filing GSTR-1 and assisting in e-way bill generation.