Essential Concepts of Goods and Services Tax
The Goods and Services Tax (GST) in India, introduced in 2017, unified various indirect taxes into a single, multi-stage, destination-based levy. This article elucidates the fundamental GST framework, detailing its application for intra-state and inter-state transactions, including CGST, SGST, and IGST. It highlights how GST effectively eliminates the cascading effect of taxes, ensuring that tax is applied only on value addition, and clarifies the mechanisms for setting off Input Tax Credit (ITC) for businesses.
The Goods and Services Tax (GST), implemented in India in 2017, is an indirect tax designed to streamline the country's taxation system. It replaced numerous prior taxes like excise duty, VAT, and service tax with a single, unified levy. GST operates as a comprehensive, multi-stage, and destination-based tax, applied at each stage where value is added.
Entities Required to Comply with GST
- Individuals supplying goods or services with an annual turnover exceeding ₹20 lakh (or ₹10 lakh in specific states).
- Businesses involved in inter-state taxable supply of goods or services.
- All e-commerce operators.
- Suppliers of goods or services, excluding branded services, through e-commerce platforms.
- Aggregators who provide services under their own brand.
- Casual Taxable Persons.
- Non-Resident Taxable Persons.
- Individuals obligated to deduct or collect tax at source (TDS / TCS).
- Input Service Distributors.
- Providers of online information and database access services from outside India to unregistered persons in India.
- Individuals required to remit tax under the Reverse Charge Mechanism.
- Agents supplying goods on behalf of other taxable persons.
Exemptions:
- Agriculturists are exempt from GST.
- Persons exclusively supplying goods or services that are either not taxable or fully exempt under the GST Act are also not subject to GST.
The GST Framework Under Current Legislation
The GST framework consolidated numerous prior indirect taxes, including VAT, customs duty, excise, Central Sales Tax (CST), service tax, and entertainment tax, into a singular Goods and Services Tax.
In India, GST is primarily structured into two forms:
- Intra-state transactions: For movement of goods or services within the same state, both CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax) are applied.
- Inter-state transactions: When goods or services move between different states, IGST (Integrated Goods and Services Tax) is levied.
Additionally:
- Imports are categorized as inter-state supplies.
- Exports are considered zero-rated supplies.
- Deliveries to Special Economic Zones (SEZs) also qualify as zero-rated supplies.
Eliminating the Cascading Effect of Taxes with GST
Previously, indirect taxes such as service tax and VAT often resulted in a cascading tax effect, where taxpayers could not claim credit for taxes paid on their inputs. For instance, excise duties incurred during manufacturing could not be offset against the Value Added Tax (VAT) due at the point of sale, leading to a compounding tax burden. GST addresses this by imposing tax solely on the net value added at each stage of the supply chain. This fundamental shift has successfully eliminated the cascading impact of taxes and facilitated a smooth transfer of input tax credits across both goods and services.
Understanding Input Tax Credit (ITC) Set-Off Under GST
The mechanism for setting off Input Tax Credit (ITC) under GST operates as follows:
- IGST (Integrated Goods and Services Tax) paid can be offset against IGST, CGST, and SGST liabilities on inputs.
- CGST (Central Goods and Services Tax) paid can be offset against IGST and CGST liabilities on inputs.
- SGST (State Goods and Services Tax) paid can be offset against IGST and SGST liabilities on inputs.