GST in India – GST Stands for Goods and Service Tax. It is a value-added tax (VAT) collectively levied on goods and services by the Central and State Governments during purchases and sales. It is an indirect tax imposed on supply of goods and services. It is a multi-stage destination-oriented tax imposed on every value addition, replacing multiple indirect taxes like excise duty, vat, service tax and many more.

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GST in India – Definition

GST is widely used in many countries, including India, Canada, Australia, and the European Union, though the structure and rates may vary from one country to another. In Indian market GST is single point of tax.

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GST is a comprehensive tax system that is designed to streamline and simplify the taxation process by replacing multiple indirect taxes with a single, unified tax.

Types of GST in India

CGST (Central GST): Tax collected by the central government on intra-state sales.
SGST (State GST): Tax collected by state governments on intra-state sales.
IGST (Integrated GST): Tax collected by the central government on inter-state sales or imports.
UTGST: Union Territory Goods and Services Tax and. It is is the equivalent of SGST for Union Territories. While SGST is levied by state governments on intra-state transactions, UTGST is imposed by Union Territory governments on the supply of goods and services within their respective territories.

Example:
Intra-State Transaction (within the same state):

A manufacturer in Mumbai sells goods worth ₹100,000 to a retailer in Mumbai.
The GST rate on the goods is 18%. The manufacturer charges ₹18,000 (18% of ₹100,000) as GST.
The total amount the retailer will pay is ₹118,000.
The retailer can claim ₹18,000 as input tax credit on their GST returns. The GST amount split equally into CGST and SGST, i.e., ₹9,000 each.

Inter-State Transaction (between two different states):

A seller in Delhi sells goods worth ₹100,000 to a buyer in Mumbai.
The GST rate is 18%, but instead of CGST and SGST, the seller charges ₹18,000 as IGST (18% of ₹100,000).
The total amount paid by the buyer in Mumbai is ₹118,000.
The buyer in Mumbai can claim ₹18,000 as input tax credit on their GST returns.

Why is GST important in India?

GST reduces the overall tax burden on consumers by eliminating cascading taxes, leading to potentially lower prices for goods and services. It brings uniformity in tax rates across the country, enhances product transparency, and promotes a competitive market, benefiting consumers with better quality and pricing.

Key Features of GST in India:

Single Tax System: It consolidates various state and central taxes such as VAT, service tax, excise duty, and others into a single tax.

Multi-Stage Tax: GST is levied at every stage of the supply chain (from production to consumption), with the tax being refunded for the previous stage’s tax paid.

Destination-Based Tax: GST is charged based on the location of the consumer, not the producer. This helps eliminate the cascading effect of taxes (tax on tax).

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Input Tax Credit (ITC): Businesses can claim credit for taxes paid on inputs (goods or services used for producing the final product), making it easier for businesses to recover the tax paid on raw materials or services. By claiming credit on the tax paid for inputs used in the production and provision of goods and services, one can avoid double taxation and lower the overall tax liability.

Example: If a manufacturer buys raw materials worth ₹100 and pays ₹18 as GST (18%) and later sells the product to a retailer for ₹200, charging ₹36 as GST, the manufacturer can claim ₹18 as input tax credit, and the net GST payable to the government will be ₹18 (36 – 18).

Dual GST Model: Many countries, including India, have a dual GST structure, where both the Central Government (CGST) and State Government (SGST) collect tax on the same transaction. In some cases, a Integrated GST (IGST) is levied on interstate transactions.

Threshold Exemption: Businesses that have a low turnover get GST exemption, reducing compliance burden on smaller businesses.

Composition Scheme: Taxpayers below the prescribed limit turnover in special category states can pay a fixed percentage of GST from their turnover simplifying their compliance requirement.

Online Compliance: The online portal Goods and Services Tax Network (GSTN), streamlines taxpayers to meet tax obligations.

Anti-Profiteering Measures: This ensures businesses do not practice unfair pricing and the benefits of GST are passed on to consumers, National Anti-Profiteering Authority (NAA) monitors the activities of businesses.

Increased Compliance and Transparency: Bringing businesses into a formal economy, GST has enhanced tax compliance through transparency, digitalization and maintenance of electronic records.

Sector-specific Exemptions: Certain sectors like Health, Education and Food grain are either exempted or have reduced GST for affordability and accessibility.

GST Rates in India: India has multiple GST slabs, depending on the type of goods and services. The typical GST rates are:

0%: Exempt items (e.g., basic food items, health services, etc.)
5%: Essential goods (e.g., tea, coffee, and some household items domestic LPG, coal, edible oils, life-saving drugs)
12%: Intermediate goods (e.g., computers, processed foods butter, ghee, fruit juice, and packed coconut water)
18%: Standard goods and services (e.g., pens, Scrap and polyurethanes, Printed Materials, Packing Containers an boxes, Electronics, Services like telecom, hair oil, capital goods, toothpaste, industrial intermediaries, and toiletries)
28%: Luxury goods (e.g., high-end cars, air conditioners)
Some items, such as alcohol and petroleum products, are outside the purview of GST.

GST Registration: Any business whose turnover exceeds the prescribed threshold limit (₹40 lakh for goods or ₹20 lakh for services) must register for GST. Once registered, businesses receive a unique GSTIN (Goods and Services Tax Identification Number) and are required to comply with filing returns and paying GST.

GST Returns: GST-registered businesses must file monthly or quarterly returns, depending on their turnover. The main returns are:

GSTR-1: Details of outward supplies (sales).
GSTR-2: Details of inward supplies (purchases).
GSTR-3B: A summary return of sales, purchases, and tax liabilities.
GSTR-9: Annual return summarizing the total tax paid during the year.
Small businesses with an annual turnover of less than ₹5 crore can opt for quarterly returns.

E-Way Bill: E-Way Bill or an Electronic Waybill is required for movement of goods under GST. The e-way bill is an electronic document generated on the GST portal, which must be carried by transporters when goods are moved between states. It helps ensure smooth movement of goods and reduce tax evasion.

GST on Imports: Imports into India are subject to IGST, which is levied on the value of goods, including customs duties. The importer can claim an input tax credit for the IGST paid on imports.

Benefits of GST:
Reduction in Tax Cascading: By allowing businesses to claim input tax credit, it eliminates the tax-on-tax effect, reducing the overall tax burden.

Simplified Tax Structure: It replaces multiple taxes with one single tax, reducing complexity for businesses. This is also called One Nation, One Tax. This tax replacing multiple taxes imposed by the Central and State governments, GST is a uniform tax structure eliminating cascading taxes.

Boost to Business Growth: With uniform tax rates across states, it reduces barriers to interstate trade and encourages economic integration.

Transparency: GST promotes transparency and helps reduce tax evasion through digital records and a system of online filing and payments.

Enhanced Revenue for Governments: GST improves tax collection efficiency and reduces tax evasion.

Encouragement of Digital Transactions: GST has pushed for digitization, with businesses required to file returns and make payments online, enhancing transparency.

Example:
If a manufacturer produces a good and sells it to a retailer, the manufacturer charges GST on the sale, and the retailer can claim the input tax credit to offset the tax paid to the manufacturer when selling the product to the consumer. The consumer ultimately pays the final GST, which includes taxes from every stage of the supply chain.

How Does GST Work?

As discussed, items go through multiple value additions from the manufacturing stage to the final sale to the consumer. Tax is levied at every stage of manufacturing to sale.

The stages include:

Purchasing raw material
Production
Warehouse of finishing goods
Selling to wholesaler
Selling the produced goods to retailers
Selling to end consumers
Manufacturers buy the raw materials to prepare the product. The finished product is sold to the warehouse agent, who packs the cartons and labels it, adding value to the forefront of the product. The warehouse agent sells the finished and packed product in smaller quantities to the retailer. The retailer sells the goods in smaller quantities and invests in marketing the products by increasing their value. GST or monetary value is applied on these, value additions as applied at each stage, and the final sale made to the end consumer exacts the final stage GST.

GST is levied at the point where the product or service is consumed. If the product is being sold in Bhopal, the tax revenue will go to the state of Madhya Pradesh and not to the state where the product was manufactured. Businesses, to comply with GST, need to obtain a unique Goods and Services Tax Identification Number (GSTIN). The GST charged on sales is called output tax. Businesses claim input tax on goods and services purchased.