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Essential Goods and Services Tax Terminology

This article elucidates fundamental Goods and Services Tax (GST) terminology crucial for businesses in India. It covers the definition of GST, the various indirect taxes it replaced, and the dual GST framework comprising CGST, SGST, and IGST. Key benefits like the elimination of cascading tax effects are discussed, alongside detailed explanations of taxable persons, GSTIN, reverse charge, and the distinctions between mixed and composite supplies. The article also touches upon continuous supply and the proposed GST compliance rating system.

📖 4 min read read🏷️ Basic GST Concepts

Essential Goods and Services Tax Terminology

This article aims to clarify crucial Goods and Services Tax (GST) terms beneficial for businesses, alongside providing insights into GST's overall structure and advantages.

Understanding Goods and Services Tax (GST)

GST represents a unified indirect tax system, implemented to supersede various central and state indirect taxes like VAT and CENVAT. It applies to businesses of all sizes, marking a significant tax reform for the nation by establishing a consistent tax framework across India. As its name implies, GST encompasses both goods and services. India employs a dual GST system, ensuring the financial autonomy of both the Central and State governments. The Union Finance Minister chairs the GST Council, which also comprises various State Finance Ministers. GST operates under a four-tiered structure, featuring tax slabs of 5%, 12%, 18%, and 28% for different goods and services categories. Essential commodities such as rice and wheat are assigned a 0% tax rate.

Indirect Taxes Replaced by GST

Introduced as a harmonized tax for the entire country, GST superseded several indirect taxes previously imposed by both the Central and State governments:

  • Taxes levied and collected by the Centre:
    • Central Excise duty
    • Additional Duties of Customs (CVD)
    • Special Additional Duty of Customs (SAD)
    • Service Tax
  • Taxes levied and collected by the State:
    • State VAT
    • Central Sales Tax
    • Entertainment and Amusement Tax (excluding those levied by local bodies)
    • Taxes on lotteries, betting, and gambling

GST's Structural Framework

Following the model of countries like Canada and Brazil, India adopts a dual GST structure. For transactions occurring within a state (intra-state sales), both Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) are applied. When goods and services are sold across different states (inter-state sales), Integrated Goods and Services Tax (IGST) is levied. Imports of goods are also subject to IGST, as they are classified as inter-state supplies, in addition to basic customs duty. Conversely, exports and supplies to Special Economic Zones (SEZ) are zero-rated.

Advantages of GST

As previously noted, GST streamlines the national taxation system, thereby eliminating the cascading effect of taxes. The cascading effect refers to a scenario where tax is levied on an already taxed amount. Under GST, this issue is resolved as the unified tax system integrates all indirect taxes. Another key advantage is the availability of input tax credit for both goods and services under GST, further mitigating the cascading impact. GST also simplifies return filings and compliances, removing the need for separate VAT and service tax procedures.

Defining Taxable Persons Under GST

Simply put, a taxable person under GST is an individual or entity conducting business anywhere in India who is either registered or legally required to register under the GST Act.

Mandatory GST registration applies to:

  • Businesses with an annual turnover exceeding Rs 20 lakhs in a financial year (or Rs 10 lakhs for North Eastern and hill states).
  • Input service distributors.
  • E-commerce operators or aggregators.
  • Individuals supplying goods or services through e-commerce aggregators.

A comprehensive list of taxable persons under GST is available here.

What is a GSTIN?

A GSTIN is the unique Goods and Services Taxpayer Identification Number assigned to every registered business. Each taxpayer receives a 15-digit, PAN-based GSTIN, specific to their state. It is crucial to note that possessing a Permanent Account Number (PAN) is a prerequisite for GST registration. The process for registering under GST is straightforward.

Understanding Reverse Charge

Typically, when a supplier provides goods, the tax liability falls on the supplier. However, in certain specific situations, the tax obligation shifts to the buyer of the goods. This mechanism is known as reverse charge, as it reverses the usual tax chargeability. This concept is not new under GST; it existed under the previous VAT regime, though only for services. Now, under GST, it also extends to goods.

Mixed Supply and Composite Supply in GST

GST introduces the concepts of mixed supply and composite supply, which encompass all supplies provided together, regardless of whether they are inherently related. This framework is somewhat similar to the earlier bundled services, with mixed supply being an entirely new concept.

Let's explore these in detail:

  • Composite Supply: This refers to a supply comprising two or more goods or services bundled and provided together, where one item is the principal supply, and the others cannot be supplied independently. For example, when goods are packaged, transported, and insured, the supply of goods, packing materials, transport, and insurance constitutes a composite supply. Insurance and transport are not feasible without the goods, making the supply of goods the principal element.
  • Mixed Supply: This occurs when a taxable person provides two or more individual supplies of goods or services together for a single price. Each of these items can be supplied separately and is not reliant on any other. For instance, a package containing canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks, and fruit juices, sold for a single price, represents a mixed supply. All these items can be sold individually. Since aerated drinks often have the highest GST rate (e.g., 28%), they would be considered the principal supply for tax purposes in this mixed bundle. Further details on mixed and composite supply are available.

Continuous Supply Explained

When goods and services are consistently provided over a period (e.g., fortnightly or monthly), with corresponding periodic payments, this is termed a continuous supply. For example, a telecommunications or internet service provider offers continuous supply as services are delivered over an extended duration, and payments are typically made monthly or quarterly.

What is a Compliance Rating?

The GST compliance rating is a performance score assigned to all registered taxpayers. This rating indicates a supplier's adherence to GST provisions, offering buyers a criterion to select sellers based on their GST compliance performance. This rating system might be structured on a scale, perhaps 1 to 10, tailored to the business type, with 10 denoting the highest compliance and 1 the lowest.

Please note that the actual compliance rating system has not yet been implemented.

Frequently Asked Questions

What is the primary objective of implementing GST in India?
The primary objective of implementing GST in India was to unify the indirect tax system across the country, replacing multiple central and state taxes with a single, comprehensive tax structure. This aims to simplify taxation, reduce the cascading effect of taxes, and create a common national market.
How does the dual GST system function in India?
India's dual GST system involves both the Central and State governments simultaneously levying tax on supplies. For intra-state transactions, Central GST (CGST) and State GST (SGST) are applied. For inter-state transactions, Integrated GST (IGST) is levied, which includes both central and state components.
What are the main advantages of GST for businesses and consumers?
For businesses, GST offers benefits such as simplified tax compliance, improved input tax credit availability, reduced tax burden due to the elimination of cascading effects, and a more transparent tax administration. Consumers benefit from potentially lower prices for goods and services as tax complexities and costs are reduced, and a clearer tax structure.
Who is mandated to register for GST in India?
GST registration is mandatory for businesses exceeding a specified annual turnover threshold (e.g., Rs 20 lakhs, or Rs 10 lakhs for specific states), input service distributors, e-commerce operators, and individuals supplying goods or services through e-commerce aggregators, among others.
Can you explain the difference between CGST, SGST, and IGST?
CGST (Central GST) and SGST (State GST) are levied concurrently on transactions occurring within a single state. IGST (Integrated GST) is levied on inter-state transactions, including imports. IGST is designed to ensure a seamless flow of credit across states and is collected by the Central Government, with a portion later transferred to the destination state.