Taxes, often referred to as the price of civilisation, have existed since ancient times, dating back to 3000–2800 BC. They have played a major role in the development of civilisations, shaping societies and funding essential services. However, as the modern world emerged, taxes encountered multiple challenges.
Many individuals sought loopholes to evade them, leading to corruption and inefficiencies. In India, before 2017, various indirect taxes complicated the economic landscape. The introduction of the GST marked a positive shift, streamlining the taxation system. This article will provide a comprehensive overview and services of GST, exploring its impact on India’s tax structure.
What is GST?
Goods and Services Tax (GST) is a comprehensive tax system introduced in India to reform the country’s indirect tax structure. It replaced multiple indirect taxes with a destination-based, multi-stage tax levied at each stage of value addition.
Under GST, taxes are applied to goods and services sold within India for consumption. The tax is calculated based on the final market price of goods and services, and it is collected by the seller. Customers pay this tax as part of the final price, and the collected amount is then remitted to the government.
The implementation of GST aimed to simplify the indirect taxation structure and achieve the goal of ‘One Nation One Tax.’ The Central Board of Indirect Taxes and Customs (CBIC) oversees and governs changes and amendments related to GST.
GST History: An Overview
The history of GST is indeed interesting, marked by the search for a more efficient and unified taxation system. Here’s a detailed overview of it:
1. 1954 – France Introduces GST
GST was first implemented in 1954 in France as a Value Added Tax (VAT) to streamline the taxation system.
2. Global Adoption
Several countries, including Australia, South Korea, Vietnam, Monaco, etc., adopted variations of the GST.
3. Year 2000 – Inception in India
In India, the idea of GST was first introduced in the year 2000. A committee was set up by then Prime Minister Atal Bihari Vajpayee, and it was headed by the finance ministry’s advisor, Vijay L. Kelkar.
4. 2006 – Proposal for GST Introduction
The Union Ministry of Finance proposed the introduction of GST on April 1, 2010.
2011 – Constitutional Amendment Bill
The Constitution Amendment Bill to facilitate the introduction of the GST law was introduced in 2011.
5. 2017 – GST Implementation
Four supplementary GST bills were passed in the Lok Sabha and approved by the cabinet. GST finally came into force on July 1, 2017, marking a significant shift in India’s indirect tax sphere.
Upon implementation, GST replaced various central taxes, including Service Tax, Duties of Excise, Central Excise Duties, Cess and Surcharge, Additional Duties of Excise, and Additional Duties of Customs.
How Does GST Work?
Here’s a simple example to explain how GST works:
Stage 1: The Manufacturer
Imagine a manufacturer produces a gadget and purchases raw materials, including electronic components, worth ₹120 (inclusive of a tax of ₹20). The manufacturer adds value during the production process, contributing ₹40.
The gross value of the gadget is then ₹160 (₹120 + ₹40). With a GST rate of 12%, the tax on the gadget’s output is ₹19.20. By offsetting the tax (₹19.20) against the tax paid on raw materials and inputs (₹20), the effective GST incidence on the manufacturer is ₹0.80 (₹19.20 – ₹20).
Stage 2: The Distributor or Service Provider
The gadget moves to a distributor who purchases it for ₹160. The distributor adds a margin of ₹25, making the gross value of the gadget ₹185 (₹160 + ₹25). Applying a 12% tax on this amount results in ₹22.20.
The distributor can offset the tax on output (₹22.20) against the tax paid on the purchased goods from the manufacturer (₹19.20). Consequently, the effective GST incidence on the distributor is ₹3 (₹22.20 – ₹19.20).
Stage 3: The Consumer
A retailer buys the gadget from the distributor, adding a margin of ₹15 to his purchase of ₹185. The gross value of the gadget at this stage is ₹200 (₹185 + ₹15). With a 12% tax, the consumer pays ₹24.
By offsetting this tax (₹24) against the tax paid on the purchase from the distributor (₹22.20), the retailer brings down the effective GST incidence on himself to ₹1.80 (₹24 – ₹22.20). In conclusion, the total GST across the entire value chain, from raw material to the consumer, is ₹20 + ₹0.80 + ₹3 + ₹1.80 = ₹25.60, which is ultimately borne by the consumer.
What are the GST tax Rates?
The Goods and Services Tax (GST) rates in India vary based on the type of supply and the nature of the goods or services. The primary GST slabs for regular taxpayers are as follows:
1. 0% (Nil-Rated)
Certain essential goods and services fall under this category, meaning they are not subject to GST. Examples include grains, fresh vegetables, educational services, and healthcare services.
Goods like household necessities, essential goods, and services such as transportation services fall under this category.
Items like processed foods and certain goods and services fall under this slab.
Goods and services falling under this category include items like electronics, restaurant services, and certain other goods and services.
The highest GST slab is for luxury items and services, including automobiles, high-end electronics, and other luxury goods.
Also Read: Different GST Tax Rates
What are the Features Of the GST Regime?
GST has numerous features that have made it the ultimate solution to India’s taxation problem. Some of its prominent features are:
1. Single Indirect Tax
GST serves as a unified, single tax applicable throughout the life cycle of goods and services. This consolidation eliminates the complexities associated with multiple taxes, such as value-added tax, excise duty, and service tax.
By unifying the tax system, GST significantly simplifies tax compliance for businesses and concurrently reduces the overall cost of goods and services.
2. Registration Exemptions for Small Businesses
A noteworthy feature of the GST regime is the flexibility in registration requirements, which is particularly beneficial for small businesses. Entities with turnovers below specified thresholds are exempt from mandatory GST registration.
This not only reduces the administrative burden for smaller businesses but also encourages their participation in the formal economy.
3. Four-Tier Tax Structure
The GST tax structure is organised into four distinct slabs – 5%, 12%, 18%, and 28%. Essential goods fall under the 5% category, while luxury items and sin goods attract a higher rate of 28%.
The inclusion of specific rates for various categories aims to bring about uniformity in taxation, although there are debates on its impact on compliance.
4. GST Composition Scheme
The GST Composition Scheme offers eligible businesses the opportunity to pay tax at a reduced rate on their taxable turnover. This scheme is particularly beneficial for smaller enterprises, allowing them to lower their compliance burden. However, businesses opting for this scheme forego the ability to claim input tax credits.
4. Input Tax Credit System
The Input Tax Credit (ITC) system is a crucial component of GST. Registered taxpayers can claim credit for the GST paid on inputs used in the production or supply of goods and services.
This mechanism prevents the cascading effect of taxes by allowing businesses to offset the tax paid at each stage of the supply chain against their final tax liability.
5. Invoice Matching
GST incorporates a robust invoice matching system that verifies whether the details of invoices filed by suppliers align with those filed by recipients.
This automated process enhances accuracy in reporting, with any discrepancies flagged for correction. The invoice matching mechanism promotes transparency and accountability in the GST return filing process.
Also Read: Tax Implications Of The New GST Regime
Who is Eligible for GST?
The eligibility for Goods and Services Tax (GST) registration in India is determined by various factors related to business roles and activities.
The following individuals and businesses must mandatorily register for GST:
- Businesses exceeding ₹40 lakhs (goods) or ₹20 lakhs (services) within a state
- Any business engaged in inter-state supplies, irrespective of turnover
- Occasional suppliers exceeding turnover thresholds in a financial year
- Businesses without a fixed place in India supplying goods or services
- Persons deducting or collecting tax at source
- Businesses operating in a state different from their location, including branches of companies in different states
- Companies previously registered under VAT, excise duty, or service tax
- Individuals and businesses involved in import-export
- Businesses aggregating services, like Uber or Swiggy
- Entities distributing input services to multiple recipients
Businesses and professionals below turnover thresholds can voluntarily register.
Exempt from GST
Certain products and services like agricultural goods, education, healthcare, and non-profit activities are exempt.
What are the Benefits of GST Implementation?
GST has brought a major positive change in the nation’s taxation system. Some of its valuable benefits are:
1. Easy Online Process
GST registration, return filing, and refund applications can be made seamlessly online, simplifying the entire process.
2. Higher Threshold
The turnover threshold for mandatory registration has increased to ₹20 lakhs, benefiting small traders and service providers.
3. Efficient E-commerce Transportation
GST has streamlined provisions for e-commerce companies, easing the movement of goods across the country.
4. Systematised Processes
Industries like construction and textiles now experience more regulated taxation and simplified compliance procedures.
5. Enhanced Logistics
GST has removed restrictions on the state movement of goods, leading to more efficient logistics operations.
6. Elimination of “Tax on Tax”
Under GST, the cascading effect of taxes is eliminated, resulting in more straightforward taxation.
7. Composition Scheme for Small Companies
The Composition Scheme allows small businesses to pay GST at a fixed rate, reducing complexities for them.
8. Reduced Compliances
The number of returns to be filed has significantly decreased under GST, bringing down the compliance burden.
9. Corruption-Free Tax Administration
GST aims to reduce corruption through measures like syncing registration and PAN, invoice-level reporting, and e-way bill generation.
What are the Challenges and Issues Associated with GST?
Now that you know the benefits of GST, you should understand that no system is without its challenges. This also applies to GST. So, some of its challenges and issues are:
1. Non-compliance in Scrutiny
Improper issuance of prescribed forms in scrutiny proceedings leads to non-compliance with GST rules.
2. Mismatch in Show Cause Notice Grounds
Discrepancies between grounds alleged in show cause notices and those considered for tax demand result in a violation of the GST Act.
3. Incorrect Penalty Sections
Initiating penalty proceedings under the wrong section, such as using Section 129 for penalties, creates legal issues for taxpayers.
4. Simultaneous Proceedings by Different Authorities
CGST and SGST authorities conducting simultaneous investigations for the same matter and financial year cause undue harassment to taxpayers.
5. Non-acknowledgment of Tax Payments
Failure to issue acknowledgements (FORM GST DRC-04) for voluntarily paid tax liabilities does not align with GST provisions.
6. Unresolved Transitional Credit Issues
Problems faced by taxpayers during the transitional period, especially related to claiming transitional credits, remain unresolved.
7. Registration Restoration Challenges
IT system limitations on the common portal make the restoration of cancelled registrations a cumbersome process.
8. Restrictions on Availing ITC
Changes in eligibility conditions and time limits for claiming ITC pose challenges for taxpayers.
9. Tax Recovery During Investigation
Challenges arise when tax recovery is initiated during investigations, raising concerns about due process and legality.
Goods and Services Tax is a transformative tax system in India, simplifying the otherwise complex indirect tax structure. Introduced in 2017, it replaced multiple central taxes, aiming for a unified ‘One Nation One Tax’ approach. The four-tier tax structure, input tax credit, and Composition Scheme are key features.
A comprehensive grasp of GST is imperative, ensuring timely returns and getting various credit returns. Even if not immediately necessary, understanding GST becomes crucial at later life stages. So, always stay informed and keep updating your GST knowledge.
Frequently Asked Questions
Q1. Which Country Implemented GST in 1954?
France took the lead in implementing GST in 1954, making it the first country to adopt this tax system.
Q2. Does GST get Refunded?
You can get a GST refund if you’ve overpaid taxes, exported goods or services, made zero-rated supplies, reported lower income, or have unused input tax credits.
Q3. Do I Have to Pay GST Every Month?
Every registered regular taxpayer must submit monthly GST returns and pay the due tax by the 20th of each month as per guidelines.
Q4. Can One Person Have 2 GST?
Indeed, a person can hold multiple GSTINs, particularly if engaged in various businesses or conducting operations across multiple states.
Q5. Are GST and PAN Numbers the Same?
GSTIN is connected to PAN, given that the 10 digits in GSTIN represent the taxpayer’s PAN.
Q6. Can I Sell on Flipkart Without GST?
To sell products on Flipkart or any other e-commerce platform, it is necessary to register for GST and acquire a GST Identification Number (GSTIN).
Q7. What is the Cash Limit for GST per day?
The cash limit for GST transactions per day is set at ₹10,000. Therefore, any cash transaction exceeding ₹10,000 in a day must be conducted through electronic payment methods like bank transfers.
Q8. Can I pay GST in Cash?
Yes, GST payments can be made online or offline.
Q9. What is the 1% GST Rule?
The 1% GST rule mandates that at least 1% of the tax liability must be paid in cash. This applies to taxpayers with monthly taxable supplies exceeding ₹50 lakh, excluding exempt or zero-rated supplies.
Q10. Can we Claim ITC on the Car Purchase?
A registered individual involved in the passenger transportation business is eligible to claim ITC for the GST paid on vehicle purchases, such as cars.