Introduction to Goods and Services Tax (GST)

 Goods and Services Tax (GST) 

1. Introduction to GST

• Definition: GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. It is a single tax on the supply of goods and services, right from the manufacturer to the consumer.
• Objective: To subsume various indirect taxes (like VAT, Service Tax, Excise Duty, etc.) into a single tax to create a common national market.

Goods and Services Tax (GST) is a tax that India imposes on the supply of specific products and services. The main aim of this taxation system is to curb the cascading effect of other indirect taxes.

2. What is GST in India?

Goods and Services Tax (GST) is an indirect tax that has replaced many previous indirect taxes in India, such as excise duty, VAT, and service tax. The GST Act was passed in Parliament on 29th March 2017 and came into effect on 1st July 2017.

In essence, GST is levied on the supply of goods and services. It is a comprehensive, multi-stage, destination-based tax applied at every stage of value addition. GST serves as a single domestic indirect tax law for the entire country.

Under the GST system, tax is imposed at each point of sale. For intra-state sales, both Central GST (CGST) and State GST (SGST) are charged. For inter-state sales, Integrated GST (IGST) is applied.

3.  History of Goods and Services Tax

On 1 July 2017, the Goods and Services Tax implemented in India. Given below is the history of how it came into effect:

• In 2000, Atal Bihari Vajpayee, then Prime Minister of India, set up a committee to draft the GST law.
• In 2004, a task force concluded that the new tax structure should be put in place to enhance the tax regime at the time.
• In 2006, Finance Minister proposed the introduction of GST from 1 April 2010 and
• In 2011 the Constitution Amendment Bill was passed to enable the introduction of the GST law.
• In 2012, the Standing Committee started discussions about GST, and tabled its report a year later.
• In 2014, the new Finance Minister at the time, Arun Jaitley, reintroduced the GST bill in Parliament and passed the bill in Lok Sabha in 2015. Yet, the implementation of the law was delayed as it was not passed in Rajya Sabha.
• GST went live in 2016, and the amended model GST law was passed in both the houses. The President of India also gave assent.

In 2017, 4 supplementary GST Bills in Lok Sabha was passed and the Cabinet approved the same. Rajya Sabha then passed 4 supplementary GST Bills and the new tax regime was implemented on 1 July 2017.

The following central taxes have been replaced by GST:

• Service tax
• Central excise duties
• Additional duties of excise
• Additional duty of customs
• Duties of excise
• Cess and surcharge

The state taxes subsumed by GST are as follows:

• Entry tax
• Luxury tax
• Central sales tax
• Purchase tax
• State VAT
• Entertainment tax
• State cess and surcharges
• Taxes on advertisements
• Taxes on gambling and lottery

4. Different Types of GST

There are four different components of GST such as CGST, SGST, IGST, and UTGST.

1. CGST: Central Goods and Services Tax (CGST) is charged on the intra-state supply of products and services.
2. SGST: State Goods and Services Tax (SGST) like CGST, is charged on the sale of products or services within a state.
3. IGST: Integrated Goods and Services Tax (IGST) is charged on inter-state transactions of products and services.
4. UTGST: Union Territory Goods and Services Tax 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.

Transaction	Old Tax Regime	New Tax Regime	Revenue
Sales in a particular state	VAT + Excise/Service Tax + Central Excise	State and Central GST	Divided between the state and the centre
Sales between different states	Excise/Service Tax + Central Sales	Integrated GST	Depending on where the goods reach, the centre splits the revenue

5. Key Terms in GST 

1. Supply

• Definition: Supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease, or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
• Types of Supply:
• Taxable Supply: Supply of goods or services that are subject to GST.
• Exempt Supply: Supply of goods or services that attract nil rate of tax or are fully exempt from GST.
• Zero-rated Supply: Exports and supplies to SEZs are treated as zero-rated supplies.
• Composite Supply: A supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, where one of which is a principal supply.
• Mixed Supply: A supply made by a taxable person to a recipient consisting of two or more individual supplies of goods or services or any combination thereof, which are not naturally bundled and can be supplied independently.

2. Taxable Person

• Definition: A taxable person under GST is anyone who is registered or liable to be registered under GST. This includes individuals, companies, LLPs, partnerships, HUFs, trusts, and societies.
• Categories:
• Regular Taxpayer: Anyone whose aggregate turnover exceeds the threshold limit prescribed under the GST Act.
• Composition Dealer: A small taxpayer who can opt for the Composition Scheme to avoid the tedious formalities of GST and pay GST at a fixed rate on turnover.
• Casual Taxable Person: Someone who occasionally undertakes supply of goods or services or both in a state or union territory where he/she has no fixed place of business.
• Non-Resident Taxable Person: A person who occasionally undertakes supply of goods or services or both, but has no fixed place of business or residence in India.

3. Aggregate Turnover

• Definition: Aggregate turnover is the total value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both, and inter-state supplies of persons having the same Permanent Account Number (PAN), to be computed on an all-India basis but excludes central tax, state tax, union territory tax, integrated tax, and cess.
• Components:
• Taxable Supplies: Supplies on which GST is payable.
• Exempt Supplies: Supplies that are not subject to GST.
• Exports: Supply of goods or services outside India.
• Inter-State Supplies: Supplies between different states or union territories within India.

4. Input Tax Credit (ITC)

• Definition: ITC is the credit a business can claim for the GST paid on purchase of goods or services used in the course of business. It allows the offset of tax paid on inputs against the tax payable on outputs, thus preventing the cascading effect of taxes.
• Eligibility:
• The recipient should be in possession of a tax invoice or debit note issued by a registered supplier.
• The recipient should have received the goods or services.
• The tax charged on the supply has been actually paid to the government, either in cash or through utilization of ITC.
• The recipient has filed the necessary GST returns.
• Blocked Credits: Certain goods and services are ineligible for ITC, such as motor vehicles, food and beverages, beauty treatment, health services, etc., unless used for making a further supply of the same category.

5. Place of Supply

• Importance: The place of supply determines the type of GST (CGST, SGST, or IGST) to be levied.
• Rules for Goods:
• Domestic Supply: The location where the goods are delivered.
• Imports: The location of the importer.
• Exports: The location outside India.
• Rules for Services:
• Domestic Supply: The location of the service recipient.
• International Supply: The location of the service recipient, if outside India.
• Performance-based Services: The location where the services are actually performed.

6. Reverse Charge Mechanism (RCM)

• Definition: Under the reverse charge mechanism, the recipient of goods or services is liable to pay GST instead of the supplier.
• Applicability:
• Supply of specified goods or services.
• Supply by an unregistered dealer to a registered dealer.
• Certain notified categories of supply.

6. Understanding GST in Detail 

1. Multi-stage Taxation

An item passes through various stages along its supply chain, from manufacture to final sale to the consumer. These stages include:

• Buying of raw materials
• Manufacture or production
• Warehousing of finished goods
• Selling to wholesalers
• Sale to retailers
• Selling to end customers

GST is levied at each of these stages, ensuring that tax is collected on the value added at every point in the supply chain.

2. Value Addition in GST

Understanding Value Addition

Under the GST system, value addition occurs at multiple stages as a product moves along the supply chain. For example, consider a manufacturer who produces cookies: 

• Manufacturing Stage: The manufacturer purchases flour, sugar, and other materials. The value of these inputs increases when they are mixed and baked into cookies.
• Warehousing Stage: The manufacturer sells the biscuits to a warehousing agent, who packs them into cartons and labels them, adding further value.
• Retail Stage: The warehousing agent then sells the cartons to a retailer. The retailer packages the cookies in smaller quantities and invests in marketing, further enhancing their value.

GST is levied on the value added at each of these stages, capturing the monetary value added from the purchase of raw materials to the final sale to the consumer. 

3. Destination-Based Tax

GST is a destination-based tax, meaning it is levied at the point of consumption. For instance, if goods are manufactured in Karnataka and sold to a consumer in West Bengal, the tax revenue from GST will be allocated to West Bengal, where the goods are consumed, rather than Karnataka, where they were produced.

7. GST Objectives

The objectives of GST are given below:

1. Simplification and Standardisation:

GST replaced multiple indirect taxes that existed under the previous tax regime. By implementing a single tax, it ensures uniform rates across states for the same product or service. This simplifies tax administration, with the Central Government setting the rates and policies. Common laws, such as e-way bills for goods transport and e-invoicing for transaction reporting, streamline the process. Tax compliance is also improved as taxpayers are no longer burdened with multiple return forms and deadlines, creating a unified system of indirect tax compliance.

1. Including Principal Indirect Taxes:

Prior to GST, India had numerous indirect taxes like service tax, VAT, and Central Excise, levied at various stages of the supply chain. These taxes were governed either by the states or the Centre, leading to a fragmented system. GST consolidated these major indirect taxes into one, significantly reducing the compliance burden on taxpayers and simplifying tax administration for the government.

1. Removing the Cascading Effect of Taxes:

One key objective of GST was to eliminate the cascading effect of taxes. Previously, taxpayers could not offset tax credits from one tax against another, such as excise duties against VAT, leading to a tax-on-tax scenario. Under GST, tax is levied only on the net value added at each stage of the supply chain, facilitating the seamless flow of input tax credits across both goods and services.

1. Reducing Tax Evasion:

GST laws are more stringent than previous indirect tax laws. Taxpayers can claim an input tax credit only on invoices uploaded by their suppliers, minimizing the chances of fraudulent claims. The introduction of e-invoicing further supports this goal. With GST being a nationwide tax and having a centralized surveillance system, defaulters are identified and dealt with more efficiently, thereby reducing tax evasion and fraud.

1. Expanding the Taxpayer Base:

GST has widened the tax base in India. Previously, different tax laws had varied threshold limits for registration based on turnover. As a consolidated tax on both goods and services, GST has increased the number of tax-registered businesses. Stricter input tax credit laws have also brought certain unorganized sectors, like the construction industry, under the tax net.

1. Enhancing Ease of Doing Business:

Under the previous regime, taxpayers faced difficulties dealing with different tax authorities. Although return filing was online, most assessments and refunds were handled offline. GST procedures are now almost entirely online, from registration to return filing, refunds, and e-way bill generation. This shift has significantly simplified compliance and improved the ease of doing business in India. The government plans to introduce a centralized portal for all indirect tax compliance, further streamlining processes.

7. Improving Logistics and Distribution:

A single indirect tax system reduces the need for multiple documentation for goods supply. GST minimizes transportation cycle times, enhances supply chain efficiency, and leads to warehouse consolidation. The e-way bill system and the removal of interstate checkpoints have improved transit and destination efficiency, reducing logistics and warehousing costs.

8. Promoting Competitive Pricing and Increasing Consumption:

GST has led to increased consumption and higher indirect tax revenues. The previous cascading tax regime made goods in India more expensive than in global markets. Uniform GST rates have promoted competitive pricing across India and on the global front. This has increased consumption, contributing to higher revenues and achieving another important objective of GST.

8.  Features or Characteristics of GST with Explanations

1. Comprehensive Tax

GST is a comprehensive tax that covers all goods and services except those specifically exempted. It replaces multiple indirect taxes previously levied by both the Central and State Governments.

2. Multi-Stage Tax

GST is levied at every stage of the production process, but is designed to be paid by the final consumer. Each stage of production and distribution chain from the manufacturer to the retailer pays GST on the value added to the product.

3. Destination-Based Taxation

GST is collected at the point of consumption rather than at the point of origin. This means the tax revenue goes to the state where the goods or services are consumed, not where they are produced.

4. Dual GST Model

In India, GST is implemented in a dual model where both the central and state governments levy GST on a common tax base. The components are:

• Central GST (CGST): Collected by the Central Government on intra-state sales.
• State GST (SGST): Collected by the State Government on intra-state sales.
• Integrated GST (IGST): Collected by the Central Government on inter-state sales and imports.

5. Subsuming Multiple Taxes

GST has replaced several indirect taxes that were previously levied by both the central and state governments, including:

• Central Excise Duty
• Service Tax
• VAT/Sales Tax
• Central Sales Tax (CST)
• Entertainment Tax
• Luxury Tax

6. Input Tax Credit (ITC)

Businesses can claim credit for the tax paid on purchases (inputs), which can be used to offset the tax liability on sales (outputs). This helps in avoiding the cascading effect of taxes, where tax is levied on tax.

7. Tax Rates Structure

GST has multiple tax rates to accommodate various types of goods and services:

• 0%: Essential goods like fresh fruits, vegetables, milk, etc.
• 5%: Mass consumption goods like spices, tea, coffee, etc.
• 12%: Standard goods like computers, processed foods, etc.
• 18%: Consumer durables like soaps, capital goods, etc.
• 28%: Luxury items like ACs, refrigerators, premium cars, etc.

8. Simplified Tax Compliance

GST aims to simplify tax compliance with uniform procedures for registration, tax payment, return filing, and refund processing through a unified IT system, the GST Network (GSTN).

9. E-Way Bill System

To ensure smooth movement of goods across states, GST introduced the E-Way Bill system, which is an electronic document required for the movement of goods above a certain value.

10. GST Council

The GST Council is the governing body for GST implementation and regulation. It consists of the Union Finance Minister, the Union Minister of State for Finance, and the Finance Ministers of all states. The Council makes recommendations on tax rates, exemptions, and other key aspects of GST.

11. Anti-Profiteering Measures

GST includes provisions to ensure that the reduction in tax rates or the benefit of input tax credits is passed on to consumers by way of a commensurate reduction in prices.

12. Composition Scheme

To reduce the compliance burden for small taxpayers, the Composition Scheme allows them to pay tax at a fixed rate on turnover and file quarterly returns instead of monthly returns. This scheme is available for businesses with an annual turnover up to a specified limit.

13. Reverse Charge Mechanism (RCM)

Under certain circumstances, the recipient of goods or services is liable to pay GST instead of the supplier. This mechanism is used to tax unregistered dealers and specified categories of supply.

9.  Advantages of GST

The following are the advantages of goods and services tax in India:

1. Elimination of the Cascading Tax Effect: The introduction of GST has removed the need for filing several tax returns. This has eliminated the cascading effect. For instance, before the introduction of GST, entities had to file separate returns and comply with regulations for service tax and VAT. This simplified the process for filing input tax credit claims, as only one return is required.

2. Regulation of the Unorganised Sector: The online compliance, payment, and claim processes are all streamlined by the GST bill. Additionally, it benefits the unorganised sector by directly regulating it under rules governing goods and services taxes.

3. A Uniform Tax System: GST has unified the tax system across the nation. It makes it easier for laws, procedures, and tax rates to be consistent throughout India. The GST composition scheme is now available to all small businesses. Small businesses having an annual turnover of up to Rs.1.5 crore (or Rs.75 lakh in special category states) can apply for benefits under this scheme. Businesses can lower their taxes through the GST composition scheme.

4. Streamlined GST Online Process: GSTR filing and registration are among the procedures that can be done online. This has greatly streamlined the procedure and allowed startups to easily register for GST services in one location. In addition to these advantages, the GST bill replaced 17 different indirect taxes with a single, unified tax. Both the central and state governments have received more revenue as a result of the reduced price of goods and increased demand for them.