What is GST?

What is GST?

  • June 06, 2019

GST is an Indirect Tax which has replaced many IndirectTaxes in India. The Goods and Service Tax Act was passedin the Parliament on 29th March 2017. The Act came into effect on 1stJuly 2017; Goods & Services Tax Law in India is a comprehensive, multi-stage,destination-based tax that is levied on every value addition.

In simple words, Goods And Service Tax (GST) is anindirect tax levied on the supply of goods and services. This law hasreplaced many indirect tax laws that previously existed in India.

GST is one indirect tax for the entire country.

So, before Goods and Service Tax, the pattern of tax levywas as follows:

Under the GST regime, the tax is levied at every point of sale.In the case of intra-state sales, Central GST and State GST are charged.Inter-state sales are chargeable to Integrated GST.

Now let us try to understand the definition of Goods andService Tax – “GST is a comprehensive, multi-stage, destination-basedtax that is levied on every value addition.”

Multi-stage

There are multiple change-of-hands an item goes throughalong its supply chain: from manufacture to final sale to the consumer.

Let us consider the following case:

Purchase of raw materials

Production or manufacture

Warehousing of finished goods

Sale to wholesaler

Sale of the product to theretailer

Sale to the end consumer 

Goods and Services Tax is leviedon each of these stages which makes it a multi-stage tax.

Value Addition

The manufacturer who makes biscuits buys flour, sugarand other material. The value of the inputs increases when the sugar and flourare mixed and baked into biscuits.

The manufacturer then sells the biscuits to the warehousingagent who packs large quantities of biscuits and labels it. That is anotheraddition of value after which the warehouse sells it to the retailer.

The retailer packages the biscuits in smaller quantities andinvests in the marketing of the biscuits thus increasing its value.

GST is levied on these value additions i.e. the monetaryvalue added at each stage to achieve the final sale to the end customer.

Destination-Based

Consider goods manufactured in Maharashtra and are soldto the final consumer in Karnataka. Since Goods & Service Tax is levied at thepoint of consumption. So, the entire tax revenue will go to Karnataka andnot Maharashtra.

2. Journey of GST in India

The GST journey began in the year 2000 when a committeewas set up to draft law. It took 17 years from then for the Law to evolve. In 2017the GST Bill was passed in the Lok Sabha and Rajya Sabha. On 1st July 2017the GST Law came into force.

History of  GST

Advantages Of GST

GST has mainly removed the Cascading effect on the sale ofgoods and services. Removal of cascading effect has impacted the cost ofgoods. Since the GST regime eliminates the tax on tax, the cost of goodsdecreases. GST is also mainly technologically driven. All activities likeregistration, return filing, application for refund and response to noticeneeds to be done online on the GST Portal; this accelerates the processes.

4. What arethe components of GST?

There are 3 taxes applicable under this system: CGST,SGST,IGST.

CGST: Collected by the Central Government on anintra-state sale (Eg: transaction happening within Maharashtra)

SGST: Collected by the State Government on an intra-statesale (Eg: transaction happening within Maharashtra)

IGST: Collected by the Central Government forinter-state sale (Eg: Maharashtra to Tamil Nadu)

In most cases, the tax structure under the new regime willbe as follows:

Transaction New Regime Old Regime
Sale within the State CGST + SGST VAT + Central
Excise/Service
tax
Revenue will be shared equally between the Centre and the State
Sale to another State IGST Central Sales
Tax + Excise/Service Tax
There will only be one type of tax (central) in case of inter-state sales. The Centre will then share the IGST revenue based on the destination of goods.

Illustration: 

Let us assume that a dealer in Gujarat had sold the goods toa dealer in Punjab worth Rs. 50,000. The tax rate is 18% comprisingof only IGST.

In such case, the dealer has to charge Rs. 9,000 asIGST. This revenue will go to the Central Government.

The same dealer sells goods to a consumer in Gujarat worthRs. 50,000. The GST rate on the good is 12%. This rate comprises of CGST at 6% and SGST at 6%.

The dealer has to collect Rs. 6,000 as Goods andService Tax. Rs. 3,000 will go to the Central Government and Rs. 3,000 will goto the Gujarat government as the sale is within the state.

Tax Laws before GST

In the earlier indirect tax regime, there were many indirecttaxes levied by both state and centre. States mainly collected taxes in theform of Value Added Tax (VAT). Every state had a different set of rules andregulations. Interstate sale of goods was taxed by the Centre. CST(Central State Tax) was applicable in case of interstate sale ofgoods.  Other than above there were many indirect taxes likeentertainment tax, octroi and local tax that was levied by state and centre.This led to a lot of overlapping of taxes levied by both state and centre. Forexample, when goods were manufactured and sold, excise duty was charged by thecentre. Over and above Excise Duty, VAT was also charged by the State. Thislead to a tax on tax also known as the cascading effect of taxes. The followingis the list of indirect taxes in the pre-GST regime:

Central Excise Duty

Duties of Excise

Additional Duties of Excise

Additional Duties of Customs

Special Additional Duty of Customs

Cess

State VAT

Central Sales Tax

Purchase Tax

Luxury Tax

Entertainment Tax

Entry Tax

Taxes on advertisements

Taxes on lotteries, betting, and gambling

CGST, SGST, and IGST has replaced all the above taxes.However, the chargeability of CST for Inter-state purchase at a concessionalrate of 2%, by issue and utilisation of c-Form is still prevalent for certainNon-GST goods such as: (i) Petroleum crude; (ii) High-speed diesel; (iii) Motorspirit (commonly known as petrol); (iv) Natural gas; (v) Aviation turbine fuel;and (vi) Alcoholic liquor for human consumption. in respect of followingtransactions only:

Resale

Use in manufacturing or processing

Use in the telecommunication network or in mining or in thegeneration or distribution of electricity or any other power

What changes has GST brought in?

In the pre-GST regime, every purchaser including thefinal consumer paid tax on tax. This tax on tax is called Cascading Effectof Taxes.

GST has removed this cascading effect as the tax iscalculated only on the value-addition at each stage of the transfer ofownership. Understand what the cascading effect is and how GST helps bywatching this simple video:

This indirect tax system under GST has improved thecollection of taxes as well as boosted the development of Indian economy byremoving the indirect tax barriers between states and integrating the countrythrough a uniform tax rate.

Illustration:

Based on the above example of biscuit manufacturer alongwith some numbers, let’s see what happens to the cost of goods and the taxes inthe earlier and GST regimes. Tax calculations in earlierregime:

Action Cost 10% Tax Total
Manufacturer 1,000 100 1,100
Warehouse adds a label and repacks @ 300 1,400 140 1,540
Retailer advertises @ 500 2,040 204 2,244
Total 1,800 444 2,244

Along the way, the tax liability was passed on at everystage of the transaction and the final liability comes to rest with thecustomer. This is called the Cascading Effect of Taxes where a tax ispaid on tax and the value of the item keeps increasing every time this happens.Tax calculations in current regime: 

Action Cost 10% Tax Actual Liability Total
Manufacturer 1,000 100 100 1,100
Warehouse adds label and repacks @ 300 1,300 130 30 1,430
Retailer advertises @ 500 1,800 180 50 1,980
Total 1,800 180 1,980

In the case of Goods and Services Tax, there is a way to claim credit for tax paid in acquiring input. What happens in this case is, the individual who has paid a tax already can claim credit for this tax when he submits his taxes. In the end, every time an individual is able to claim the input tax credit, the sale price is reduced and the cost price for the buyer is reduced because of lower tax liability. The final value of the biscuits is therefore reduced from Rs. 2,244 to Rs. 1,980, thus reducing the tax burden on the final customer. GST regime also brought a centralised system of waybills by the introduction of “E-way bills”. This system was launched on 1st April 2018 for Inter-state movement of goods and on 15th April 2018 for intra-state movement of goods in a staggered manner. Under the e-way bill system, manufacturers, traders & transporters are now able to generate e-way bills for the goods transported from the place of its origin to its destination on a common portal with ease. Tax authorities are also benefitted as this system has reduced time at check –p

Importance of GST in Indian Economy:

GST Regime:

GST is one of the biggest indirect tax reforms in thecountry. GST is expected to bring together state economies and improve overalleconomic growth of the nation.

GST is a comprehensive indirect tax levy on manufacture,sale and consumption of goods as well as services at the national level. Itwill replace all indirect taxes levied on goods and services by states andCentral.

There are around 160 countries in the world that have GST inplace. GST is a destination based taxed where the tax is collected by the Statewhere goods are consumed. India is going to implement the GST from July 1, 2017and it has adopted the Dual GST model in which both States and Central levies taxon Goods or Services or both.

 SGST – State GST,collected by the State Govt.

CGST – Central GST, collected by the Central Govt.

IGST – Integrated GST, collected by the Central Govt.

Need for GST in India:

Introduction of GST is considered to be a significant stepin the reform of indirect taxation in India. Amalgamating of various Centraland State taxes into a single tax would help mitigate the double taxation,cascading, multiplicity of taxes, classification issues, taxable event, and etc.,and leading to a common national market.

VAT rates and regulations differ from state to state. On theother hand, GST brings in uniform tax system across all the states. Here, thetaxes would be divided between the Central and State government.

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