What is GST in India? Guide on Goods & Services Tax Law _{Last Updated : 16 Oct 2019}

GST - Goods and Services Tax

In 29 March 2019 saw the passing of the GST Act in the Parliament, and the same was implemented on 1 July 2017. GST is a comprehensive, destination-based and multi-stage tax charged on each value addition.  

Each item goes through change-of-hands from the time it leaves the manufacturer till it reaches the final consumer. For instance, raw materials are purchased first, after which there is the manufacturing/production process. Then comes the warehousing of the goods before they are sold to a wholesaler. The product is then sold to the retailer before it is finally made available to the final consumer. GST is charged on each of the aforementioned stages, making it a multi-stage tax.  

Get to know more about GST Rates, GST Calculator, GST Return and GST Registration from our other pages.

Goods are usually manufactured or produced in one state and sold to consumers in other states. GST is charged at the point of consumption, so if a product is manufactured in Karnataka and sold in Tamil Nadu, the whole tax revenue will go to Tamil Nadu, thus making GST a destination-based tax. 

History of GST in India 

The Goods and Services Tax was implemented in India on 1 July 2017. However, the process of implementing the new tax regime commenced a long time ago. In 2000, Atal Bihari Vajpayee, then Prime Minister of India, set up a committee to draft the GST law. In 2004, a task force came to the conclusion that the new tax structure should be implemented to enhance the tax regime at the time.  

In 2006, P. Chidambaram, then Finance Minister of India, proposed the introduction of GST on 1 April 2010, and the Constitution Amendment Bill was passed in 2011 to enable the introduction of the GST law. In 2012, the Standing Committee started discussions regarding GST, and tabled its report on GST a year later. In 2014, the new Finance Minister at the time, Arun Jaitley, reintroduced the GST Bill in Parliament, and the bill was passed in Lok Sabha in 2015. However, the implementation of the law was delayed as it was not passed in Rajya Sabha.  

GSTN went live in 2016, and the amended model GST law was passed in both the Lok Sabha as well as the Rajya Sabha. The President of India also gave assent to the law in 2016. 2017 saw the passing of 4 supplementary GST Bills in Lok Sabha as well as the approval of the same by the Cabinet. Rajya Sabha then passed 4 supplementary GST Bills and the new tax regime was implemented on 1 July, 2017.  

What are the different types of GST?

Based on the kind of transaction, there are four types of GST, viz. Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST), Integrated Goods and Services Tax (IGST), and Union Territory Goods and Services Tax (UTGST).  

• Central Goods and Services Tax 

CGST is charged on the intra state supply of products and services. The Central Government levies CGST and it is governed by the Central Goods and Services Tax Act. CGST has effectively replaced all the previous Central taxes such as Central Excise Duty, Customs Duty, Service Tax, SAD, CST, etc. It is charged to taxpayers along with SGST. The rate at which CGST is charged is usually the same as the SGST rate, and the revenue collected under CGST is remitted to the Central Government.  

• State Goods and Services Tax 

SGST, like CGST, is charged on the sale of products or services within a state. The State Government is responsible for the levy of SGST. This tax replaces all the previous taxes such as Entry Tax, Value Added Tax, Entertainment Tax, State Sales Tax, cesses, and surcharges. The revenue collected under SGST is remitted to the State Government.  

• Integrated Goods and Services Tax

IGST is charged on inter-state transactions of products and services. It is also levied on imports. The Central Government collects IGST and distributes it among states. IGST is levied when goods or services are transferred from one state to another. The tax was implemented so that states would only have to deal with the Union Government rather than dealing with each state.  

• Union Territory Goods and Services Tax

UTGST is levied on the supply of products and services in any of the Union Territories in the country, viz. Andaman and Nicobar Islands, Daman and Diu, Dadra and Nagar Haveli, Lakshadweep, and Chandigarh. UTGST is levied along with CGST.  

Tax Laws before the implementation of GST 

The main of implementing the GST was to implement a much simpler tax structure in the country. The concept of Goods and Service Tax was to implement the concept of one tax across all parts of the country.  

There was a lot of speculation at the time of implementation as some of the previous tax systems did not work out as well as it was anticipated. Listed below are some of the important difference between Goods and Service Tax and the tax system that was followed prior to the implementation of GST: 

• The tax system before the GST had separate rates for different services. There was a separate rate for service tax and excise duty. With the implementation of GST, there is uniform SGST across all the states and one common CGST rate. 
• Central Sales Tax (CST) and a number of indirect taxes were levied in the previous tax structure. After the implementation of GST, the entire concept of CST was eliminated. A new concept of IGST was introduced to replace the previous system. 
• There were a number of indirect taxes that were levied by both the centre and the state. This resulted in the collection of tax by both the centre and the state. This concept of tax levied on tax is called as the cascading effect of taxes. The implementation of GST negated the overlapping of taxes collected by the centre and the state. 
• In the previous tax rules, there was a separate tax levied both at the time of consumption and production. With the implementation of GST, tax will be levied only at the final point of consumption and not during different parts of manufacturing and selling a product. This has helped bring some transparency to the tax collection process. 

GST Rates in India

The GST Council has assigned GST rates to different goods and services. While some products can be purchased without any GST, there are others that come at 5% GST, 12% GST, 18% GST, and 28% GST. GST rates for goods and services have been changed a few time since the new tax regime was implemented in July 2017. The last GST council meeting was held in February this year and was chaired by then Finance Minister Mr. Arun Jaitley. 

GST Registration  

Here is the GST Registration procedure for taxpayers:  

• Keep your GSTIN and your registered mobile number on hand.  
• Visit ewaybill.nic.in. 
• If you are first-time taxpayer, you will have to click on ‘E-way bill registration’ to register. 
• You will then have to enter your GSTIN number and hit ‘Go’ to submit your request. 
• You will then be redirected to a new screen where certain details such as the name of the applicant, the Trade name, the mobile number and address of the applicant will be auto-populated. You will then have to select ‘Send OTP’ and enter the OTP you receive on your registered mobile number and verify the same. 
• Once the OTP is verified, you will have to provide your preferred User ID through which you can operate your account.  
• You will then have to create a password for your account after which your registration on the GST portal will be complete.  

GST Return

A GST Return is basically a document that contains information regarding the income that a taxpayer must file with the authorities. This information is used to compute the taxpayer’s tax liability. Under the Goods and Services Tax, registered dealers must file their GST returns with details regarding their purchases, sales, input tax credit and output GST. Businesses are expected to file 2 monthly returns as well as an annual return.  

GST Calculator

Calculating the amount that needs to be paid as GST when filing your returns can be quite tedious. A number of aspects and factors must be taken into consideration, such as ITC, exempted supplies, reverse charge, etc. Failure to pay the entire GST amount can see you slapped with an 18% interest on the shortfall, thereby making it necessary to ensure that you pay the right amount towards GST.  

The GST Calculator makes it relatively simple for taxpayers to calculate the amount that needs to paid as GST. You will have to enter all the required details such as the month for which you are calculating GST, the due date for filing returns for the particular month, the actual date on which the returns are filed, the tax liability for the month, the purchases that attract Reverse Charge Mechanism, the opening balance of your cash ledger as well as your credit ledger and the eligible ITC.  

Here is an example showing how you can calculate your GST liability: 

What are the Benefits of Goods and Services Tax?

The following are the benefits of the Goods and Services Tax: 

• Elimination of the cascading tax effect 

Following the implementation of the Goods and Services Tax, all the taxes have been brought under a single umbrella. What this essentially means is that the cascading tax effect has been eliminated. For instance, before the GST law was introduced, if a consultant offered his services for an amount of Rs.40,000 and levied a service tax of 14% (Rs.5,600), and then purchased office supplies worth Rs.15,000 and paid VAT at 5% (Rs.750), his total outflow would be Rs.5,600 + Rs.750 = Rs.6,350.  

Following the implementation of GST, the GST rate applicable to the service would be 18%. If the service was offered for Rs.40,000, the GST on it would be Rs.7,200. The Rs.750 spent on office supplies would be deductible, which makes the total outflow Rs.7,200 – Rs.750 = Rs.6,450. 

• Higher threshold 

In the previous tax structure when VAT was charged, businesses that generated turnovers in excess of Rs.5 lakh were liable to pay VAT. It is also important to note that service providers who generated a turnover of up to Rs.10 lakh were exempt from Service Tax. However, the threshold for registration under GST is Rs.20 lakh, which means that many small service providers and traders need not register.  

• Simple procedure 

The whole GST process, starting from registration and ending with filing returns, is done online. It is a simple procedure that can be followed even by individuals with minimal technical know-how. Registering under GST is especially simple because there is no need to run around for multiple registrations like Service Tax, Excise Duty, VAT, etc.  

• Composition scheme 

Small businesses that earn turnovers between Rs.20 lakh and Rs.75 lakh can benefit under the new tax regime as the Composition Scheme can help in lowering their taxes. The compliance as well as tax burden on small businesses has significantly reduced thanks to the implementation of GST.  

• Fewer complications 

The previous tax regime had Service Tax and Value Added Tax, and each of these taxes had their own compliances and returns. For instance, Excise Duty return filing had to be done on a monthly basis, while Service Tax return filing had to be done on a monthly basis for companies and LLPs, and on a quarterly basis for partnerships and proprietorships. Value Added Tax was different in different states, which resulted in inconsistencies across the country. The implementation of GST has ensured that all businesses pay a uniform tax for the supply of goods and services. 

• E-Commerce operators no longer suffer from differential treatment  

Prior to the implementation of the Goods and Services Tax, there was no proper definition for the supply of good via an e-commerce portal. There were multiple VAT laws. For instance, deliveries though online portals such as Amazon and Flipkart to states like Uttar Pradesh required the filing of a VAT declaration. The registration number of the vehicle that was delivering the product would also have to be mentioned, and tax authorities had the power to seize products in case proper documents were not produced.  

GST has effectively done away with such confusing compliances and differential treatments. The e-commerce sector now has clearly defined provisions that make it easier to engage in the supply of products across states.  

• Regulation of the unorganised sector 

Before GST was implemented, some of the industries such as textile and construction were highly unorganised and unregulated. The implementation of GST has seen the inclusion of provisions for online payments and compliances. Even the availing of input credit has been clearly defined to avoid confusion, thus bringing in regulation and accountability to these sectors.  

Frequently Asked Questions

1. Is it necessary for all traders to register under the Goods and Services Tax?

All traders who earn turnovers in excess of Rs.20 lakh in a financial year will have to register under the Goods and Services Tax.

2. Do small traders have a separate scheme to pay taxes?

Yes, small traders can make the most of the composition levy in case their turnover is less than Rs.75 lakh. For certain special states, this limit is Rs.50 lakh.

3. What are the states with a turnover limit at Rs.50 lakh for composition levy?

Arunachal Pradesh, Tripura, Manipur, Nagaland, Meghalaya, Assam, Himachal Pradesh, Sikkim and Mizoram.

4. What is the composition levy tax rate?

The rate of tax applicable under the composition levy is 1% of the turnover earned in the state, with 0.5% going towards Central Goods and Services Tax and 0.5% going towards State Goods and Services Tax.

5. Who is not eligible for the composition scheme?
• Establishment that supply services, apart from restaurants.
• Those involved with making inter-state outward supplies of products.
• Those involved in making supply of products that are not chargeable to GST.
• Suppliers who make supply of products via e-commerce operators and are mandated to collect tax at source.