What is GST and How does it work?

In India, GST stands for Goods and Services Tax (GST) and it is an indirect tax that has replaced many indirect taxes, such as excise duty, VAT, service tax, taxes on goods, etc. The GST act was passed by the Indian Parliament on 29th March 2017 and came into effect on 1st July 2017.

There are two levels of GST at every point of sale: the central GST and the state GST for intra-state sales, and the integrated GST for inter-state sales.

GST created a common market across states not only to address the inefficiency of indirect taxes, but also improve tax compliance. This will make exporters more competitive. The enactment of GST is a positive development for both the Indian economy and corporations.

Why GST

GST implemented in India to abolish:

  • Multiple taxation i.e tax on tax.
  • Different tax rates between states.

GST Council in India

The members of the GST Council are:

  • Chairperson: Union Finance Minister.
  • State Union Minister in charge of Finance and Revenue
  • Finance and Taxation in-charge Minister
  • Other state governments nominated ministers as members of the GST Council
  • The GST Council Secretariat manages the GST Council. It includes officers taken on deputation from the Indian central and state governments.

How Goods and Service Tax (GST) Work in India

The first one is multi-Stage

It is common for a product to undergo multiple changes of hands through its supply chain. This happens from the manufacturing process to final sale to the customer.

Following are the stages to consider

  1. Raw Material Purchase.
  2. Manufacture or Production
  3. Warehouses for finished goods.
  4. Providing Wholesales services.
  5. Product sale to retailers
  6. End-User sales

Each of these stages is taxed by the Goods and Services Tax, India. (GST-India)

The Second is Value Addition

When flour, sugar, and other ingredients are combined and baked into biscuits, the input’s value increases.

In order to add value to the biscuits, the manufacturers sell the biscuits to the warehouse agents who pack and label large quantities of biscuits in cartons. The warehouse agents sell them to the retailers.

GST is levied on value additions at each stage during the sales process, i.e. the purchase price added when the biscuits are packaged and marketed, thereby increasing their value.

The third one is Destination-Based

If goods are manufactured in Tamil-Nadu and sold to a final consumer in Gujarat, the Goods and Services Tax will be assessed only at the point of consumption, resulting in Gujarat receiving the entire tax revenue.

GST in India: Tax Laws Before and After

GST replaced the indirect tax regime under which states and the center levied indirect taxes.

Value-added tax (VAT) was collected on goods sold within one state. For goods sold interstate, central state tax (CST) was collected. And, on services, service as is levied.

Before GST, here is a list of indirect taxes

  • Central Sales Tax
  • State VAT
  • Service Tax
  • Luxury Tax
  • Entertainment Tax
  • Entry Tax
  • Taxes on advertisements
  • Taxes on lotteries, betting, and gambling

Comparison of GST Tax with Old Tax Structure

Goods and Services Tax (GST) Value Added Tax (VAT)
Supplies of good and services is subject to GST. Sales of goods were the only items subject to VAT.
Across all Indian states, GST rates are the same. Depending on the state, different tax rates applied.
Both the center and state collect SGST and CGST on every sale. State governments collected VAT and used it to fund their operations.
Since GST has been introduced, all indirect taxes on goods and services are no longer levied on a state and central level. However, petroleum, natural gas, motor spirit, and high-speed diesel are exempt from GST. On the state level, various taxes were charged, including VAT, luxury tax, entertainment tax, various cesses, sales tax. The central government imposed several taxes, making the whole system highly complex.

 

The Types of GST in India

A dual GST system is in place in India, which allows the central government to levy GST concurrently with the states. The central government and states share the same tax base.

CGST: Any goods and services being transferred within the state are subject to this tax.

SGST: For goods and services manufactured within a state or union territory and sold within the state, i.e., intrastate transactions.

A concurrent CGST and SGST is levied and all GST revenue is shared between the state and central governments in a predetermined proportion, subject only to the GST act establishing a maximum tax rate.

IGST: IGST is paid by states and the center in case of interstate transactions, which are transactions between two states.

What is the impact of GST on price reduction?

The cascading effect of taxes was widespread during the pre-GST era, as every purchaser, including the final consumer, paid tax on tax.

Cascading has been eliminated by GST and tax is only calculated based on value-added each time ownership is transferred.

As a result of GST’s uniform indirect tax rate, the country will be integrated into the global economy by improving tax collection and removing obstacles between the states.

Let’s take a closer look at the cost of goods and the taxes using the biscuit manufacturer’s example above.

Calculations under the old GST regime:

Department Cost (Rs) Tax rate at 10% (Rs) Invoice Total (Rs)
Manufacturer 200 20 220/-
Warehouse adds a label and replace at Rs. 100 320 32 352/-
Retailer advertise at Rs. 500 852 85.2 937.2/-
Total 800 137.2 937.2/-

 

A cascading effect of taxes occurs each time the tax liability is passed from one party to another, ultimately resulting in the final tax liability resting with the customer.

Calculations of GST under the current tax regime:

Department Cost (Rs) Tax rate at 10% (Rs) Tax liability to be deposited (Rs) Invoice Total (Rs)
Manufacturer 200 20 20 220/-
Warehouse adds a label and replace at Rs. 100 300 30 10 330/-
Retailer advertise at Rs. 500 800 80 50 880/-
Total 800 80 880/-

 

GST allows individuals to claim the credit for tax paid on acquiring inputs by submitting their GST returns after having already paid the tax and accumulated input costs.

A lower tax liability then results in a lower sale price for the seller, and therefore a lower cost price for the buyer as well. Therefore, the biscuits final value is reduced to Rs. 880 instead of Rs. 937.2, reducing the final customer’s tax burden.

GST Advantages in Indian Businesses

  1. After the introduction of GST, goods have become cheaper for end cosnumers, eliminating the cascading effect of tax, logistics costs, interstate taxation, and unified markets.
  2. Business compliances costs have been eliminated due to the replacement of 17 indirect taxes.
  3. Registrars, returns, tax payments, refund applications, and responses to notices related to GST must be completed online through the GST portal. Digitalizing GST compliance has sped up the processes and reduced manual labour.
  4. A huge decline in the cost of goods has led to a unified market across state lines after a period of fragmention.

What are the eligibility requirements for GST?

In all other states, except for north-eastern states, J&K, Himachal Pradesh, and Uttarakhand, businesses supplying goods with a turnover exceeding INR 40 lakhs in a financial year are required to register with the government as a normal taxable person.

Service providers are required to register for GST irrespective of their turnover, and special category states are required for GST accordingly.

  • Persons who are casual, taxable or input service distributors.
  • Taxpayer who are non-residents.
  • TDS/TCS deductor.
  • Services and goods supplied between states.
  • An e-commerce retailer who sells goods online.
  • Services from any provider.
  • Tax liability under reverse charge.
  • Services for accessing or retrieving data online.

Registrar of GST  

The Goods and Services Tax Identification Number (GSTIN) is an unique number allocated to each business once it has been successfully registered under GST.

Those who do business in more than one state will have to register separately for each state they operate in. The central government assigns this 15-digit number after the taxpayers obtain registration.

Identification number for GST

A GSTIN, a unique 15-digit identification number provided to businesses that register under GST, is crucial to businesses that wish to exploit GST benefits. The GSTIN can be used to claim a refund if your GST liability exceeds the amount you paid. GSTINs can also help in authentication, verification, and fraud prevention.

GST Certificate for Indian Business

Every Indian Business with a turnover exceeding the GST threshold limit must obtain a GST registration certificate as a proof of GST registration. Business owners, such as casual taxpayers or non-resident taxpayers, are also required to register themselves under GST.

Filing GST returns in India

There are different types of GST returns those different businesses have to file, depending on whether they are GST-registered or not.

Businesses in India are required to file GST returns to the tax authorities, who use the same information to calculate their tax liability. GST returns typically contain details about purchases, sales, taxes paid and input tax credits (ITCs).

A GST-compliant invoice is required for filling GST returns, and automated invoicing solutions like Easebuzz Smart billing make it easy for businesses to generate GST-compliant invoices.

In case you are regular taxpayer who is required to file a GSTR-1 every month, with the details of outward supplies of goods or services, there are different types of returns you have to submit every month or quarter, depending on the type of registration your business holds.

Businesses registered under the composition scheme are required to file GSTR-4 as a quarterly return.

GST rate Slabs for Indian Business

In India the GST is divided into five slabs – 0%, 5%, 12%, 18% and 28%.

Products and services like petroleum products, diesel fuel, motor spirit, natural gas, and aircraft turbine fuel are not subject to GST rates. Each state imposes taxes on these products and services according to its own tax policy.

A few commodities’ rates are listed below:

Items (Product List) GST Range
Handmade matches 12%
State owned lotteries 28%
Mobile Phones 18%
Caffeinated Beverages 28% + 12%
Almond Milk 18%
Electric vehicles 5%
Movie Tickets worth more than Rs.100 28%
Colour Television Sets & monitors up to “32 Inches” 28%
Digital & Video Camera recorders 28%
Processed foods 12%

 

How GST is Calculated in India:

GST can easily be calculated for busyness, manufacturers, wholesalers, and retailers using the following formula:

As an example, suppose a good or service is sold for Rs. 1,000 and the GST rate applies is 18% the net price would be = 1,000+(1,000 x (18/100)) = 1,000+180 = Rs 1,180.

Scheme for Composition of GST

When it comes to paying taxes, taxpayers have some flexibility under GST’s composition scheme.

Those with small turnovers can avoid tedious formalities and pay tax at a fixed rate of turnover under the scheme. The threshold for North-Eastern States and Himachal Pradesh is INR 75 lakh.

As a composition dealer, you will be charged the following rates.

Business Type CGST SGST Total
Goods Manufacturers and Traders 0.5% 0.5% 1.0%
Restaurants not Serving Alcohol 2.5% 2.5% 5.0%
Service Providers 3.0% 3.0% 6.0%

 

As a result of the GST composition scheme, you can benefit from a number of advantages, including:

  1. Start-ups and smaller businesses in India tend to experience cash crunches frequently, and this scheme provides them with a tax break that can reduce their tax liability significantly. The government has ensured more starts up are able to flourish in a thriving market with the composition scheme. Start-ups that do not have revenues exceeding INR 1.5 crore rupee are less likely to have extra cash to pay taxes.
  2. Taxes are set at a lower rate, allowing businesses to enjoy much higher liquidity.
  3. In addition to having fewer compliance requitrements (Keeping recorsd, filling returns, issuing invoices, etc.), businesses will also be able to run their operations more frequently since they will not have to spare resources for filing returns.

Codes for GST’s HSN and SAC

As the global standard of naming goods, the Harmonized System of Nomenclature (HSN) was developed by the World Customs Organization (WCO) to facilitate the systematic classification of goods.

In India, HSN is now being used under a 3-tiered system under the GST, a six-digit uniform code that can easily over 5,000 products and can also be used to classify for tax purposes.

As part of GST, there is a reverse charge mechanism:

GST is normally paid by suppliers of goods and services, but when reverse charging is applied, the receiver is responsible for paying GST.

Businesses and consumers may find it helpful to understand the reverse charge mechanism in a comprehensive way, since the government has clearly outlined a few instances when it is used.

Under GST, Inout Tax credits are available:

GST input tax credits reduce the amount of taxes due to purchases (inputs) by the amount due to sales (outputs).

Before GST, taxpayers couldn’t claim refunds for central sales tax, entry tax, luxury tax, or other indirect taxes, and manufacturers and service providers couldn’t claim excise tax.

GST has consolidated many indirect taxes, such as Value added tax (VAT), Central sales tax (CST), and excise duty, and claiming tax paid on purchases in now possible.

How’s India GST Payment

GST payment processes vary by category of taxpayers, as follows:

  • Regular Tax payer in India: In the case of regular taxpayer, a Challan PMT-06 is required to make payments to the cash ledger. It’s required when filing the GSTR-3B. The Challan must also be generated, and a payment made either before or after logging in, as well as during the filing of the GSTR-3B.
  • Quarterly taxpayer in India: The PMT06 Challan should be used to deposit tax for the first two months of the quarter for taxpayers who have chosen the QRMP Scheme. For the first and second quarters, the tax must be paid by the 25th of the month following the quarter when the GSTR-3B is filed. For the April-June quarter, the tax is due by the 25th of April and June.
  • Nil GST return taxpayer in India: Whether they owe tax or purchases or sales, they do not have to make a payment for the respective period. Therefore, they do not have to generate a Chalan or make any payment.
  • A taxpayer under the composition scheme in India: The Composition Scheme requires taxpayers to sum up their turnover or sales during a quarter and prepare a CMP-08 Challan for paying tax.

What’s GST e-Way Bill in India?

E-way Bills, or electronic ways bills, provide proof of goods’ movement. About two months after the introduction of e-Way bills, their use became mandatory for intra-state goods movement as well.

The GST e-Way Bill must be carried by every GST-registered trader who transfers goods worth over Rupees. 50,000/. Therefore, the person responsible for conveyance must have a copy of the GST e-Way bill.

With GST, you can generate an e-Way bill via GST mobile app, via SMS, or via the API-facilitated site-to-site integration. Once the bill is generated, you will receive an e-Way Bill number that is unique to each transporter, supplier, and recipient.

How GST Network Managed in India?

GST Network: In addition to managing the GST portal, the Goods and Service Tax Network (or GSTN) is the central database for all things GST. It is a non-profit, non-government organization.

What Features does GSTIN offer in India?

  1. Trusted National Information Utility – GSTIN.

GSTN provides an effective, reliable, and efficient IT infrastructure, which is essential to the smooth operation of GST across the country.

  1. Transacts Complex Business Transactions.

IGST (for inter-state trade) is a destination-based tax. Since there are a large number of transactions all over India, the adjustment of IGST will be extremely complex. It is only when the IT infrastructure and the service backbone are strong that a rapid settlement mechanism is possible between the states and the Centre.

  1. Secure Storage of all Information.

Keeping the information of taxpayers confidential and secure is a crucial component of the GSTN, which is under the strategic control of the Indian government. In Addition to the composition of the GSTN Board, the government will have control over the mechanisms of special resolution and shareholder agreements. Government of India shareholdings are so large that no signal private institution has a shareholding greater than 49%.

  1. Shared expenses are planned.

All users will be charged equally in proportion (50:50) by the Central Government and the State Governments. Each state will receive each quarter’s share proportionately to its taxpayers.

Expenses Volume Types of Expenses
Max Limit Infosys Designed the IT system.
2nd Thing The outsourced functions of fraud analytics and security audits will be determined according to the tender.
3rd Thing Costs associated with running the office, such as salary, rent and IT equipment.

 

What’s the process to apply for GSTN in India?

The following step can be used to apply for GSTIN if you have your business’ mobile number, email address, and PAN on hand.

Now after having requirments follow these steps.

Step 1: Click Here – https://www.gst.gov.in/

Step 2: GST registration can be found under the “services” tab.

Step 3: Click on “New Registration” and fill out the requested information.

Step 4: Press ‘proceed’ to continue.

What functions does GSTN offers in India?

GSTN’s main function are listed below:

From registration to return filing, the entire GST process takes place online through GSTN, the portal that serves as the interface between taxpayers and the government.

Invoices involving about 3 billion taxpayers must be processed every month, with returns filed for about 70 to 80 lakh taxpayers following. The GSTN is expected to perform the following tasks:

  • Invoices
  • Various Returns
  • Registrations
  • Payments and Refunds

GST Helpline in India & App info

Through the GST Helpline, individuals can contact the concerned authority if they have any questions or concerns regarding their tax filing.

You can reach out at GST Helpdesk

CBICMITRA HELPDESK. Toll free Helpline:1800-1200-232. Email: cbicmitra.helpdesk@icegate.gov.in.

GSTN HELPDESK. Helpline: 0124-4688999. Email: helpdesk@gst.gov.in.

For More: https://www.gst.gov.in/contact

GST Benefits for Small Business/ Start-ups

Starting a business in India can benefit from several new taxation mechanisms. Here are a few of them:

  1. Streamlined Taxation:

Start-ups and small businesses can’t always afford to spare resources to oversee a myriad of tax compliances like VAT, excise taxes, service taxes, and CST. GST eliminates most of these taxes, enabling start-ups to file their taxes more easily and efficiently. Furthermore, start-ups or small business that deal with both services and goods need only file one tax return instead of many.

  1. Online processes that are seamless:

Now small business or start-ups don’t have to spend the entire day waiting in lines at tax offices, only to be asked to return the next day. With the advent of the internet, the procedure is now not only quick,but also exceptionally simple. As long as you maintain a good record-keeping system, filing your taxes is no longer a complicated process.

  1. Ease of doing business on e-commerce websites:

The implementation of GST has been a huge boon for the e-commerce sector in India, which is a major sector of the economy. Suppose you operate an online marketplace that delivers goods across the country. As each state has its own VAT law, it was necessary to file different tax documents on time and accurately. With GST, this issue is completely dealt with.

Read our Blog to gain a deeper understanding of GST rules for small businesses.

Author

The author writes about fintech, banking, and future of SAAS services. He works as an SEO analyst at Easebuzz, so if you're looking for an account that tracks India's fintech scene, you should check out his Easebuzz blog.

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