Goods and Services Tax: What is GST in India? Indirect Tax Law Explained

GST or Goods and Services tax is an indirect tax charged on supply of goods and services in India. GST law in India unifies indirect tax replacing VAT, excise, and service tax. It's been 8 years since the introduction of GST law in India. Continue reading to learn A-Z about GST in India.

Key takeaways

• GST is an indirect tax which has replaced many indirect taxes in India such as the excise duty, VAT, services tax, etc.
• GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
• On 1st July 2017, the GST Law came into force and popular as ‘One Nation, One Tax’.
• e-Invoicing and e-way bill are part of GST compliance.

What is GST in India?

GST is known as the Goods and Services Tax. It is an indirect tax which has replaced many indirect taxes in India such as the excise duty, VAT, services tax, etc. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017.

In other words, Goods and Service Tax (GST) is levied on the supply of goods and services. Goods and Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. After subsuming majority indirect taxes, GST is a single domestic indirect tax law for the entire country.

Before the Goods and Services Tax could be introduced, the structure of indirect tax levy on goods in India was 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. All the inter-state sales are chargeable to the Integrated GST.

Now, let us understand the definition of Goods and Service Tax, as mentioned above, in detail.

Multi-stage

An item goes through multiple change-of-hands along its supply chain: Starting from manufacture until the final sale to the consumer.

Let us consider the following stages:

• Purchase of raw materials
• Production or manufacture
• Warehousing of finished goods
• Selling to wholesalers
• Sale of the product to the retailers
• Selling to the end consumers

The Goods and Services Tax is levied on each of these stages making it a multi-stage tax.

Value Addition

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

The manufacturer then sells these biscuits to the warehousing agent who packs large quantities of biscuits in cartons and labels it. This is another addition of value to the biscuits. After this, the warehousing agent sells it to the retailer.

The retailer packages the biscuits in smaller quantities and invests in the marketing of the biscuits, thus increasing its value. GST is levied on these value additions, i.e. the monetary value added at each stage to achieve the final sale to the end customer.

Destination-Based

Consider goods manufactured in Maharashtra and sold to the final consumer in Karnataka. Since the Goods and Service Tax is levied at the point of consumption, the entire tax revenue will go to Karnataka and not Maharashtra.

The Journey of GST in India

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

Objectives Of GST

1. To achieve the ideology of ‘One Nation, One Tax’- GST has replaced multiple indirect taxes, which were existing under the previous tax regime. The advantage of having one single tax means every state follows the same rate for a particular product or service. 
2. To subsume a majority of the indirect taxes in India- GST subsumed several erstwhile indirect taxes such as service tax, Value Added Tax (VAT), Central Excise, etc., which used to be levied at multiple supply chain stages. 
3. To eliminate the cascading effect of taxes- One of the primary objectives of GST was to remove the cascading effect of taxes as tax levy is only on net alue added at each stage of supply chain. Previously, due to different indirect tax laws, taxpayers could not set off the tax credits of one tax against the other leading to a cascading effect of taxes. 
4. To curb tax evasion- Under GST, taxpayers can claim an input tax credit only on invoices uploaded by their respective suppliers. This way, the chances of claiming input tax credits on fake invoices are minimal. The introduction of e-invoicing has further reinforced this objective. 
5. To increase the taxpayer base- GST has helped in widening the tax base in India. GST is a consolidated tax levied on both goods and services both, it has increased tax-registered businesses with turnover thresholds for GST registration defined. 
6. Online procedures for ease of doing business- GST procedures are carried out almost entirely online. Everything is done with a click of a button, from registration to return filing to refunds to e-way bill/e-invoice generation. It has contributed to the overall ease of doing business in India.
7. An improved logistics and distribution system- GST minimises transportation cycle times, improves supply chain and turnaround time, and leads to warehouse consolidation, among other benefits. 
8. To promote competitive pricing and increase consumption- Introducing GST has also led to an increase in consumption and indirect tax revenues. Due to the cascading effect of taxes under the previous regime, the prices of goods in India were higher than in global markets. 

Advantages of GST

GST has mainly removed the cascading effect on the sale of goods and services. Removal of the cascading effect has impacted the cost of goods. Let's look at some key advantages of GST:

1. Removing the cascading effect of tax
2. Higher threshold for GST registration
3. Composition scheme for small businesses
4. Simpler online facilities for GST compliance
5. Relatively lesser compliances under GST
6. Defined treatment for e-commerce activities
7. Increased efficiency in logistics
8. Regulating the unorganised sector

What are the components of GST?

There are three taxes applicable under this system: CGST, SGST/UTGST & IGST.

• CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra)
• SGST/UTGST: It is the tax collected by the state government/Union Territories on an intra-state sale (e.g., a transaction happening within Maharashtra)
• IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)

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

Illustration:

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

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

• The same dealer sells goods to a consumer in Gujarat worth Rs. 50,000. The GST rate on goods is 12%. This rate comprises CGST at 6% and SGST at 6%.

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

GST Rates in India

GST rates refer to the percentage rates of tax imposed on the sale of goods or services under the CGST, SGST and IGST Acts. A business registered under the GST law must issue invoices with GST amounts charged on the value of supply.

The GST rates in CGST and SGST (For intrastate transactions) are approximately the same. Whereas, the GST rate in the case of IGST (For interstate transactions) is approximately the sum total of CGST and SGST rate.
The primary GST slabs for any regular taxpayers are presently pegged at 0% (nil-rated), 5%, 12%, 18% & 28%. There are a few lesser-used GST rates such as 3% and 0.25%.

Tax Laws before GST

In the earlier indirect tax regime, there were many indirect taxes levied by both the state and the centre. States mainly collected taxes in the form of Value Added Tax (VAT). Every state had a different set of rules and regulations.

Inter-state sale of goods was taxed by the centre. CST (Central State Tax) was applicable in case of inter-state sale of goods. The indirect taxes such as the entertainment tax, octroi and local tax were levied together by state and centre. These led to a lot of overlapping of taxes levied by both the state and the centre.

For example, when goods were manufactured and sold, excise duty was charged by the centre. Over and above the excise duty, VAT was also charged by the state. It led to a tax on tax effect, also known as the cascading effect of taxes.

The following table list down the taxes in pre-GST regime:

*Certain taxes such as the GST levied for the inter-state purchase at a concessional rate of 2% by the issue and utilisation of ‘Form C’ is still prevalent.

It applies to certain non-GST goods such as:

1. Petroleum crude;
2. High-speed diesel
3. Motor spirit (commonly known as petrol);
4. Natural gas;
5. Aviation turbine fuel; and
6. Alcoholic liquor for human consumption.

It applies to the following transactions only:

• Resale
• Use in manufacturing or processing
• Use in certain sectors such as the telecommunication network, mining, the generation or distribution of electricity or any other power sector

How Has GST Helped in Price Reduction?

During the pre-GST regime, every purchaser, including the final consumer paid tax on tax. This condition of tax on tax is known as the cascading effect of taxes.

GST has removed the cascading effect. Tax is calculated only on the value-addition at each stage of the transfer of ownership. Understand what the cascading effect is and how GST helps by watching this simple video:

The indirect tax system under GST will integrate the country with a uniform tax rate. It will improve the collection of taxes as well as boost the development of the Indian economy by removing the indirect tax barriers between states.

Illustration:

Based on the above example of the biscuit manufacturer, let’s take some actual figures to see what happens to the cost of goods and the taxes, by comparing the earlier GST regimes.

Tax calculations in earlier regime:

The tax liability was passed on at every stage of the transaction, and the final liability comes to a rest with the customer. This condition is known as the cascading effect of taxes, and the value of the item keeps increasing every time this happens.

Tax calculations in current regime:

In the case of Goods and Services Tax, there is a way to claim the credit for tax paid in acquiring input. The individual who has already paid a tax can claim credit for this tax when he submits his GST returns.

In the end, every time an individual is able to claims 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.

What are the New Compliances Under GST?

Apart from online filing of the GST returns, the GST regime has introduced several new systems along with it.

e-Way Bills

GST introduced 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 and transporters can 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 benefited as this system has reduced time at check -posts and helps reduce tax evasion.

E-invoicing

The e-invoicing system was made applicable from 1st October 2020 for businesses in a phased manner. Currently, from 1st August 2023, this system was extended to those with an annual aggregate turnover of more than Rs.5 crore in any preceding financial years since 2017-18.

These businesses must obtain a unique invoice reference number for every business-to-business invoice by uploading on the GSTN’s invoice registration portal. The portal verifies the correctness and genuineness of the invoice. Thereafter, it authorises using the digital signature along with a QR code.

e-Invoicing allows interoperability of invoices and helps reduce data entry errors. It is designed to pass the invoice information directly from the IRP to the GST portal and the e-way bill portal. It will, therefore, eliminate the requirement for manual data entry while filing GSTR-1 and helps in the generation of e-way bills too.

For further reading and understanding, check out our articles:

• Know about gst.gov.in
• GST Council
• EWay Bill Guide for rules
• Guide on How to login to GSTN
• GST registration
• Best GST Software in India
• GST Return
• New GST returns
• e-Invoicing