The introduction of GST eliminated multiple state-level and central-level taxes regulating the indirect tax system in India. It not only helped in removing state-level barriers, broadening the tax base, and reducing the cost of compliance, but it also helped to reduce the burden of taxation on consumers and producers. To help in the administration of this tax system, a common nationwide IT backbone called the GST Network (GSTN) has been created. This portal caters to all the needs of taxpayers, like registration, tax payment, and filing of returns. The invoice information captured in the system allows for verifying the input tax credits claimed by the businesses.
The GST Council, which is composed of 33 members, including the union finance minister and state finance ministers, manages the policy matters related to GST. The objectives of GST are to raise tax revenues, broaden the tax base, minimize the cascading effect of taxes, ensure uniformity in the tax rates in the country, promote transparency in the taxation system, and establish a common national market.
The two main instruments to attain the objectives of GST are the tax rate and the tax base. The tax system is designed to protect the poor by exempting consumption items like basic food items and reducing the taxation and compliance burden on firms and consumers. Further, the option for small firms within a specified threshold turnover limit to register on the portal has brought much relief to the smaller firms from the burden of complying with the GST rules.
GST model in India
GST is a comprehensive consumption tax that is levied on the supply of goods and services in the country and follows a dual model:
Central GST (CGST) at the central level
State GST (SGST) is levied at the state level, and union territory GST is levied for the union territories.
In this model, for the intra-state supply of goods and services, CGST+SGST/UGST is applicable, and for the inter-state supply of goods and services, integrated GST (IGST) is applicable. The threshold limit for registering in GST is rupees 40 lakhs aggregate turnover in a financial year, and for special category states like Jammu and Kashmir, Uttarakhand, Himachal Pradesh, and north-eastern states, the limit is rupees 20 lakhs. Small businesses with an aggregate annual turnover of up to Rs 1.5 crore in a financial year can opt for the composition scheme with a lesser fixed GST rate and a simpler compliance process.
Salient features of the GST structure in India
Concurrent taxation by the state and centre benefits both the state and the central governments.
This allows for the consumption of goods by different income groups to be taxed differently so that the burden of taxation does not affect the lower-income groups of people in the country.
The price of goods and necessities like food and clothing is either exempt or low-rated.
Exemption of items of mass consumption
Items of mass consumption like edible oil, butter, milk powder, and skimmed milk are taxed less, and items like fruits and vegetables are exempt from taxes.
Also read: Different GST Tax Rates
The Four-tier GST rate structure
At present, the GST rates in India are classified into four categories:
Nil rated: 0%
Lower rate: 5%
Standard rate (12%, 18%)
Higher rate (28%)
The rates are lower in the composition scheme; they are 1.5%, 5%, or 6%.
Nil-rated or 0% GST products.
The following are grouped under exempted or nil-rated products.
- Live animals other than horses; meat, certain dairy products like fresh milk, pasteurized milk, curd, buttermilk, and cream; eggs, natural honey, fresh vegetables and fruits, coconuts, cereals like rice, maize, barley, flour, sweets, etc.
- Lower rate (Goods with 5% GST rate)
Lower rate: 5%
The products that come under the 5% GST rate are as follows:
- Household necessities such as frozen meat and vegetables, edible oil, butter, milk powder, skimmed milk, coffee, tea, groundnuts, soy beans, bread, drugs, hearing aids, radio, app-based taxis, economy class flights and railway tickets, etc.
- Standard rate (Goods with 12 % GST rate)
Standard rate: 12%
The products categorized under the 12% GST rate are:
- Computers and mobile phones, processed food like cheese, refined sugar, spices, instant foods, packaged fruit juices, packaged ghee, nuts, spices, condensed milk, business class flight tickets, etc.
Standard rate: 18%
Goods with 18% GST
- Cornflakes, pasta, and pastries; toiletries like hair oil, mineral water, life and health insurance, toothpaste, and soaps; computer monitors; capital goods; and industrial intermediaries are included here.
- Higher rate (Goods categorized under 28% GST)
- Aerated waters containing sugar, luxury items such as premium cars and small cars, consumer electronics like air conditioners and refrigerators, cigars and cigarettes, dishwashers, cement, and high-end motorcycles are included in this slab.
Types of Exemptions in GST
As per the CGST Act, the exemptions must be in the public interest and issued through notifications on the recommendations of the GST council employing special orders, mentioning the reasons:
The exemptions are irrespective of the kind of supplier or whether the supply is interstate or intrastate.
Examples: transmission or distribution of electricity; services of the Reserve Bank of India; services of veterinary clinics.
The exemptions are based on certain conditions under the GST Act.
Example: Services in a hotel, inn, or guest house having a tariff of less than Rs. 1000 per unit per day are exempt.
Conditional or partial exemption
Intra-state supplies of goods or services offered by a registered person to an unregistered person are exempt from tax under the reverse charge mechanism. This is applicable only when the aggregate value of goods or services received by the registered person from all or any of the supplies does not exceed Rs. 5,000 in a day.
Importance of GST rates
In India, the GST rates are uniform, and the same rates are applicable throughout the country. The important benefits of having a uniform tax rate across the country are:
- GST is considered a progressive tax, as essential items, goods, and services used regularly by common people are taxed at a lower rate while luxury goods are taxed at higher rates.
- With a uniform tax structure across the country, replacing numerous state and central taxes promotes economic integration, making inter-state trade easier and more beneficial to traders.
- There has been a substantial increase in tax revenue due to the expansion of the tax base, improved compliance, and a growing economy.
- GST allows businesses to claim credit for taxes paid on inputs used in the business, thereby eliminating the cascading effect of taxes, which is beneficial both for consumers and manufacturers.
- The new tax rates have made our goods competitive in international markets, leading to an increase in exports.
- The consolidation of various indirect taxes like service tax, excise duty, and VAT promotes simplicity, reducing the tax burden.
- The government has been rationalizing GST rates through consultations with trade and industry experts, resulting in an upward trend in revenue collection and enormous growth in the economy of our country.
- The significant increase in the taxpayer base and more small businesses moving into the formal economy is an indication of the beneficial GST rate structure.
GST rates on Loans and Advances
Previously, service tax was levied on loans. GST has replaced it now. The tax is levied on the processing charges or any other charges that the financial institutions charge. It is not levied on the principal or interest repayment. Due to this, the impact of GST on loans is less.
GST on car loans
GST on all personal-use vehicles is applicable at 28%. An additional composition applies to luxury cars. However, vehicles with environmentally friendly technology and electric cars are charged a lower rate of tax.
GST on real estate
Building materials used for the construction of houses and flats are taxable at 5% to 28%, depending on the nature of the materials. GST is also applicable for properties under development. It is 12% until March 31, 2019, and from April 1, 2019, the GST on residential real estate is applicable at 5% for non-affordable housing properties and 1% for affordable housing properties. This rate is applicable both for residential and commercial properties.
GST has simplified the indirect tax system and created a uniform taxation system across the whole of India, leading to a common market. The GST rate structure in India is people-friendly, as the government strives to protect its citizens by charging less or by exempting necessities and items of mass consumption and charging luxury items more. Understanding the GST rate slabs, the categorization of items, and the applicable tax rate is important for businesses for accurate GST calculation to ensure compliance. Consumers also need to be aware of the rates to know the tax implications of their purchases. The increasing revenue and taxpayer base in GST is an indicator of the success of the tax rate structure in India.
Frequently asked questions
How are the GST rates decided in India?
Answer: The GST council, consisting of 33 members, including the union finance minister and the finance ministers of the states, decides on the GST rates.
How can we calculate GST?
Answer: GST can be calculated by multiplying the cost of the goods by the applicable GST rate. The formula for calculating GST is as follows: GST = cost of the goods x GST rate / 100.
Who pays the GST?
Answer: The seller must collect the GST from the buyer at the applicable rate and remit it to the government. If he fails to collect the tax, he is liable to pay on his account.
Is GST applicable for foreigners?
Answer: Foreigners who supply goods and services in India are categorized as non-resident taxpayers and must register compulsorily in GST and follow the compliance process as specified under the act.