This article clarifies fundamental Goods and Services Tax (GST) concepts, offering essential insights for businesses regarding its structure and advantages.

What is Goods and Services Tax (GST)?

The Goods and Services Tax (GST) represents a unified indirect tax framework implemented to supersede various Central and State indirect levies like VAT and CENVAT. This significant tax reform establishes a uniform tax system across India, applicable to all businesses regardless of size. As its name implies, GST encompasses both goods and services. India operates a dual GST system, ensuring fiscal autonomy for both the Central and State governments. The GST Council, chaired by the Union Finance Minister and comprising State Finance Ministers, oversees the tax structure. It features a four-tiered system with rates of 5%, 12%, 18%, and 28% for different goods and services, while essential commodities such as rice and wheat are often zero-rated.

Replaced Indirect Taxes

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

• Central Taxes Replaced:
• Central Excise Duty
• Additional Duties of Customs (CVD)
• Special Additional Duty of Customs (SAD)
• Service Tax
• State Taxes Replaced:
• State Value Added Tax (VAT)
• Central Sales Tax
• Entertainment and Amusement Tax (excluding those imposed by local authorities)
• Taxes on lotteries, betting, and gambling

GST Framework

Mirroring systems in nations like Canada and Brazil, India adopts a dual GST structure. For transactions occurring within a single state (intra-state sales), both Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) are applied. Conversely, when goods and services are sold across state borders (inter-state sales), Integrated Goods and Services Tax (IGST) is charged. Imports are also categorized as inter-state supplies and thus attract IGST, in addition to basic customs duty. However, exports and supplies to Special Economic Zones (SEZs) are subject to a zero-rate.

Benefits of GST

A primary advantage of GST is the harmonization of the national taxation system. This unification eradicates the cascading effect, where tax is levied on previously taxed amounts. With GST, the indirect tax structure operates under a single framework, eliminating this issue. Furthermore, GST allows for input tax credit (ITC) on both goods and services, further combating the cascading impact. It also simplifies compliance by consolidating various returns, removing the need for separate VAT and service tax filings. For comprehensive details, explore the various benefits of GST.

Who is a Taxable Person Under GST?

In essence, a taxable person under GST is an individual or entity conducting business anywhere in India who is either registered or legally obligated to register under the GST Act. Key instances where GST registration becomes compulsory include:

• Businesses with an annual turnover exceeding INR 20 lakhs (INR 10 lakhs for specific North Eastern and hilly states).
• Input Service Distributors.
• E-commerce operators or aggregators.
• Individuals supplying goods or services through an e-commerce aggregator. A comprehensive list of taxable persons under GST is available here.

What is a GSTIN?

A GSTIN is a distinct 15-digit Goods and Services Taxpayer Identification Number assigned to every registered business. This PAN-based identification number is unique to each state. Possessing a Permanent Account Number (PAN) is a prerequisite for GST registration. The process of registering under GST is straightforward.

Understanding Reverse Charge

Typically, the supplier is responsible for paying tax on goods supplied. However, under specific circumstances, the tax liability shifts to the buyer; this mechanism is known as reverse charge. While reverse charge existed for services under the previous VAT system, GST extends its applicability to include goods as well.

Mixed and Composite Supplies Under GST

GST has introduced the distinct concepts of mixed supply and composite supply, encompassing various bundled transactions. While reminiscent of older bundled service definitions, the mixed supply concept is particularly novel.

• Composite Supply: This involves two or more goods or services naturally bundled and supplied together, where one item constitutes the principal supply, and the components cannot be independently supplied. For instance, if goods are supplied with packaging, transportation, and insurance, the goods themselves represent the primary supply, as the other services are dependent on their existence.
• Mixed Supply: This occurs when a taxable person supplies two or more independent goods or services together for a single price. Unlike composite supplies, each item in a mixed supply can be sold separately. An example is a gift hamper containing various items like canned foods, chocolates, and fruit juices. In such a scenario, the item attracting the highest GST rate (e.g., aerated drinks at 28%) determines the tax rate for the entire mixed supply. For a deeper understanding, refer to our article on mixed and composite supply.

What is Continuous Supply?

A continuous supply refers to the provision of goods or services over an extended period, with recurring payments. This often involves services delivered on a regular schedule, such as fortnightly or monthly. For example, a telecommunications or internet service provider offers continuous supply through ongoing service provision and periodic billing.

Understanding Compliance Rating

The GST compliance rating serves as a performance metric for all registered taxpayers, indicating their adherence to GST regulations. This system is intended to enable buyers to select suppliers based on their compliance scores. It is envisioned to operate on a scale, possibly from 1 to 10, reflecting the level of compliance.

Please note: The formal implementation of the compliance rating system is still pending.