The Goods and Services Tax (GST) represents a unified indirect taxation system implemented across India, aiming to create a cohesive national market. This singular tax applies throughout the entire lifecycle of goods and services. India's GST framework includes three main categories: Central GST (CGST), State GST (SGST), and Integrated GST (IGST). CGST is levied by the Central government, while SGST is imposed by state governments on supplies within a state (intrastate). For transactions occurring between states or Union Territories (interstate supplies), the Central government levies IGST. Revenue from IGST is shared between the Centre and the destination state based on consumption. This article explores the ten most important features of the GST system.

Understanding the Key Characteristics of India's Goods and Services Tax

Single Indirect Tax

One of the primary aspects of GST is its nature as a consolidated tax. This means that numerous previous taxes, such as Value Added Tax (VAT), excise duty, and service tax, have been absorbed into a single framework. This integration has streamlined tax compliance for businesses and contributed to lowering the costs of various products and services. The GST system applies uniform tax rates to goods and services, categorized using the Harmonized System of Nomenclature (HSN), with rates generally ranging from 0% to 28%.

Registration Exemptions for Small Businesses

Businesses must register under GST if their total annual turnover exceeds Rs. 40 lakhs. For specific 'special category' states and Telangana, this threshold is Rs. 20 lakhs. Service providers generally have lower thresholds: Rs. 20 lakhs for normal category states and Rs. 10 lakhs for special category states. Small enterprises falling below these limits are not obligated to register under GST or collect and remit taxes. For precise state-wise registration thresholds, an article on GST registration limits provides further details.

Four-Tier Tax Structure

The GST framework in India utilizes a four-tier rate structure:

• 5%: Applies to essential items like certain food products and life-saving medications.
• 12%: Covers goods such as specific apparel, packaged foods, nuts, and some medicines.
• 18%: Encompasses electronic devices, consumer durables, and the majority of services.
• 28%: Imposed on luxury items and 'sin goods,' including automobiles, tobacco products, and aerated beverages.

Additionally, numerous essential goods, such as food grains, are subject to a nil rate. Special rates of 0.25% and 3% are applied to certain luxury goods, like precious stones and jewelry. There are also distinct rates for taxpayers under the composition scheme. This multi-tiered structure aims to standardize taxation nationwide, mitigate the cascading effect of taxes, and foster easier business operations. However, some critics argue that these multiple rates can complicate compliance and increase business expenses.

GST Composition Scheme

The GST composition scheme offers eligible businesses the option to pay GST at a reduced rate based on their taxable turnover, while also simplifying their compliance obligations. Manufacturers with an annual turnover up to Rs. 1.5 crore can choose this scheme, with a lower limit of Rs. 75 lakhs for North-Eastern states and Himachal Pradesh. A separate composition scheme exists for service providers with a turnover up to Rs. 50 lakhs. However, businesses participating in the composition scheme are unable to claim input tax credit (ITC).

Input Tax Credit System

The Input Tax Credit (ITC) mechanism allows a GST-registered taxpayer to claim credit for GST paid on inputs—raw materials, capital goods, and services—used in the production or supply of goods and services. Under GST, tax is applied at each stage of the supply chain, ultimately passed to the final consumer. The tax paid at preceding stages can be claimed as ITC at subsequent stages, with the exception of businesses opting for the composition scheme. For instance, if a manufacturer pays Rs. 5,000 in GST for acquiring car parts (e.g., tires), this amount can be claimed as ITC when paying GST on the sale of the finished car. If the GST liability on the car's sale is Rs. 36,000, claiming Rs. 5,000 ITC reduces the payable amount to Rs. 31,000. This system effectively prevents the cascading of taxes that was prevalent under prior tax regimes.

Invoice Matching

The GST system incorporates a process of invoice matching, where the details submitted by a supplier are cross-verified with those provided by the recipient. For example, a supplier files their GSTR-1 return for outward supplies, which then populate the recipient's GSTR-2B statement, reflecting their purchases and available input tax credit. The GSTR-2B serves as a reference for filing GSTR-3B. When the recipient files their summary return and pays taxes via Form GSTR-3B, the ITC details are automatically compared with the supplier’s submissions. A match confirms accurate reporting by both parties. Any inconsistencies or differences are flagged by the system, triggering automated reminders to the taxpayer. These mismatches must be resolved by the involved parties; otherwise, the input tax credit may be denied.

Consumption-Based Tax

GST functions as a destination-based consumption tax. This means the GST collected on goods and services is received by the state where the supplies are consumed, rather than the state of origin for the manufacturer. Although GST is levied at every stage where value is added, suppliers can offset this by claiming input tax credit for GST paid in earlier stages. Consequently, the final dealer transfers the GST burden to the ultimate consumer. This structure helps mitigate tax evasion, as tax collection occurs at each step of the supply chain and is reconciled through the return filing process.

Anti-Profiteering Measures

Under the GST framework, businesses are mandated to pass on the advantages of reduced tax rates or input tax credits to consumers by lowering the prices of their goods or services. The GST law includes specific anti-profiteering provisions designed to verify that these benefits are indeed transferred to consumers.

Competitive Advantage

The elimination of the cascading tax effect and the introduction of the Input Tax Credit mechanism have significantly reduced compliance costs and production expenses for Indian businesses. This development has enhanced India's competitive standing in the international market, making it a more appealing prospect for foreign purchasers and investors.

Digital Compliance and Payments

GST compliance is largely digital, with taxpayers completing registration, return filings, and payments online via the unified GST portal. Online payment options include internet banking, NEFT, RTGS, and debit or credit cards. Refund applications can also be submitted electronically. In cases of identified discrepancies, taxpayers receive automated notices, providing an opportunity to respond and correct issues.

Conclusion

The GST system has streamlined India’s tax framework, making it more transparent and accountable through its digitization and enforcement of tax law compliance for businesses.