What is GST-Know all about GST here

Jul 10, 2019 Alankit Team GST

The Goods and Services Tax (GST) system is an indirect taxation system, introduced on 1st July 2017 by the Government of India with the objective of eliminating the cascading effects of multiple indirect taxes like VAT, Excise Duty & Service Tax. A destination-based tax, the GST is a single tax levied on value addition at each stage of the supply of goods & services. India has adopted a dual GST model wherein both the central government and state government imposes GST known as CGST and SGST, respectively, for intra-state transactions. For inter-state transactions, IGST is applicable. In a supply chain process, an item undergoes multiple stages that include raw material purchase, manufacturing, warehousing of finished goods, sale to wholesaler, sale to retailer and finally, sale to end consumer. At each stage, the monetary value of the product increases and GST is imposed on these value additions to achieve the final sale to the end customer. The ultimate aim of GST, implemented with the idea of ‘one nation, one tax’, is to reduce the tax burden experienced by the end user of products or services. It has also benefited the government by ensuring achievement of a stronger economy and better revenue generation for the government.

Who started GST in India?

The idea to reform India`s indirect tax regime was initiated in the year 1986. In 1999, a single common "Goods and Services Tax (GST)" was proposed while in 2000, a committee was set up by Prime Minister Atal Bihari Vajpayee to draft law and design a GST model. In 2004, a task force concluded that GST should be implemented to revamp the current tax structure and the Congress-led UPA government proposed a GST rollout by 1st April 2010. In 2011, Constitution Amendment Bill to enable GST law was introduced and a year later, a standing committee started discussions on GST but stalled it over clause 279B. In 2014, the GST Bill was introduced in the parliament by the Finance Minister under the Narendra Modi led government. The Lok Sabha passed the Constitution Amendment Bill in 2016 leading the way to GST. Finally, the GST Bill in 2017 was passed in the Lok Sabha and Rajya Sabha, and the Goods and Services Tax (GST) Law came into effect on 1st July 2017.

Why was GST implemented?

There were several indirect taxes that existed prior to the introduction of the Goods and Services Tax (GST). The state government mainly collected taxes in the form of Value Added Tax (VAT) with each state having a separate set of rules and regulations. On the other hand, a Central State Tax was levied by the central government on the interstate sale of goods. Moreover, there were other indirect taxes such as entertainment tax, octroi and local tax which were levied both by the state and centre. This caused a major overlapping of taxes that were imposed both by the state and the centre. The primary aim of the GST has been the removal of the cascading effect of taxes with a single tax which would be calculated only on the value-addition at each stage of the transfer of ownership. The ultimate beneficiary is the end-user as the hidden costs on commodities/services have been done away with. As a result, prices are likely to reduce leading to increased production and consumption. And with harmonization of laws, procedures and rates of tax, the Goods and Services Tax (GST) system ensures to attain a stronger economy, thereby boosting the investment climate.

How the GST systems work

Before reaching the end consumer, a product undergoes several stages and multiple taxes had been applicable throughout this process, prior to the introduction of GST. The various stages are explained below:

First stage: Manufacturing/ Production

In a shoe manufacturing process, for instance, a GST rate of 10% is applicable. The manufacturer purchases raw material amounting to INR 500 inclusive of the GST which is INR 50 (10% of 500). He adds an additional value of INR 50 to the materials as part of the manufacturing process that takes the gross value to INR 550. The total tax amount on the output of the shoe product comes out to be INR 55 (10% of 550). In the previous tax system, the manufacturer is required to pay a tax of INR 55. But, under the GST system he can set-off some of the tax as he had already paid during the raw material purchase. The final GST which the manufacturer will incur would be INR 5 (INR 55 - INR 50) which is nothing but the total tax amount till now minus the tax amount already paid.

Second stage: Wholesale

The shoe product now moves from the manufacturer to the wholesaler at a gross value of INR 550, inclusive of the GST of INR 55 (10% of 550). The wholesaler includes INR 50 as his margin to the product value which totals up to INR 600 (550 + 50). The total tax amount is INR 60 (10% of 600). The wholesaler too can set-off some of the tax which he has already paid during goods purchase. The final GST charged for the wholesaler is again INR 5 (INR 60 - INR 55).

Third stage: Retailer

The shoe product is finally purchased from the wholesaler by the retailer at a gross value of INR 600, inclusive of the GST of INR 60 (10% of 600). A margin of INR 50 takes the total product value up to INR 650. The applicable GST rate is INR 65 (10% of 650). Some of tax can be set-off as the retailer already pays during the purchase of goods. The final GST charged will be INR 5 (65 - 60). Finally the consumer purchases the shoe at INR 650 with a GST of INR 65(10% of 650) only.

Components of GST

Here is an explainer on the various GST Components. Both the central and the state government would levy the GST on goods & services on a common base.

Central GST (CGST) :

It is the GST which is imposed by the central government.

State GST (SGST):

It is the GST which is imposed by the states and Union Territories with legislature.

Union Territory GST (UTGST) :

It is the GST levied by the Union Territories without legislature.

Integrated GST (IGST) :

It is the GST levied by the central government on inter-state supply of goods and services with an objective to ensure the credit chain is not disrupted. Moreover, import of goods and services are treated as inter-state supplies and are subject to IGST, besides the applicable custom duties.

The GST Council (GSTC) is the authority which is responsible for setting the rates of CGST, IGST and SGST/UTGST with mutual agreement of the states and the centre. Taxes like Central Excise Duty, Special Additional Duty of Customs (SAD), Service Tax, etc. imposed by the central government are removed with the implementation of the GST.

Similarly, the taxes imposed by the state government are removed with the implementation of the GST, for instance, Central Sales Tax, State VAT, Purchase Tax, Entry Tax (All forms), Luxury Tax, Entertainment Tax (except those levied by the local bodies), state cesses and surcharges applicable so far related to supply of goods or services, etc.

What is GST rate in India?

The Government has proposed a 4-tier structure with all goods/services categorised into four slabs as explained below. Certain items are considered as tax-free.

5%: This slab includes household items like edible oil, sweets, sugar, spices, tea, coffee, life-saving drugs and coal.

12%: This slab includes computers and processed food like cheese, ghee, fruit juices, etc., ayurvedic medicines, apparel above Rs 1,000, cellphones, fertilisers, etc. It also includes services like non-ac hotels, state-run lotteries, work contracts and business-class air tickets.

18%: This slab includes hair oil, toothpaste & soaps as well as capital goods and industrial intermediaries. Restaurants inside five-star hotels, room tariffs between Rs 2,500 and Rs 7,500, IT & telecom services and financial services also attract 18% GST.

28%: This slab includes luxury items viz. automobiles viz. premium cars and consumer durables viz. AC & Refrigerators, cigarettes, etc. Services like hotels with room tariffs above Rs 7,500, 5-star hotels, cinema, etc. also attract 28% GST.

How is GST calculated?

Taxpayers can easily find out the tax charged at different stages for various goods and services under GST. To calculate the GST, a taxpayer should be aware of the applicable GST rate across various categories and about different slabs. For instance, a taxpayer purchases an item or service available at Rs. 1,000. Suppose, the item or service falls under the slab with applicable GST rate of 18%.

Then, the net price is calculated as:

1,000 + (1,000 X (18/100)) = 1,000 + 180 = Rs 1,180.

The below given formula can be used for calculating the GST:

To add GST to base amount

Add GST

GST Amount = (Original cost * GST rate % ) / 100

Net Price = Original cost + GST Amount

To remove GST from base amount

Remove GST

GST Amount = Original Cost – (Original Cost * (100 / (100 + GST rate %) ) )

Net Price = Original Cost – GST Amount

Who is responsible to pay GST?

The persons who are liable to pay GST are:

Individuals or entities that are registered under GST and are making taxable supplies under GST.

Persons, registered under GST, who are required to make payment of tax under reverse charge mechanism.

E-Commerce operators registered under GST and through whom certain categories of notified supplies are made.

Persons, registered under GST, who are required to deduct Tax (TDS).

E-Commerce Operators registered under GST and required to collect tax (TCS).

In fact, registered suppliers of goods or services are required to pay GST. But in certain cases like imports and other notified supplies, the liability lies on the recipient under the reverse charge mechanism. Reverse Charge refers to the liability on the recipient of taxable supplies to pay tax, instead of the supplier. A registered person receiving goods/ services from an un-registered person is liable to pay tax on reverse charge basis on receipt of such supply.

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