GST stands for Goods and Services Tax. It was first introduced in the Budget Speech on 28th February 2006, which laid the groundwork for a thorough overhaul of India’s indirect tax system. The Goods and Services Tax Act was finally implemented on 1st July 2017, marking a significant reform in India’s indirect taxation structure.
With the introduction of this tax reform, GST replaced various indirect taxes previously imposed on different goods and services. The Central Board of Indirect Taxes and Customs (CBIC) is the regulatory body responsible for overseeing changes and amendments related to this tax.
Understanding GST and Its Scope
The definition of GST is quite simple. It is a destination-based, multi-stage, all-encompassing tax applied at every stage of value addition. By replacing several indirect taxes, it has helped the Indian Government achieve its vision of ‘One Nation, One Tax’.
GST is imposed on goods and services that are sold for consumption within India’s borders. It has been adopted by many nations worldwide with their own specific adaptations and has succeeded in streamlining the indirect taxation system in India.
GST is applied to the final market price of goods and services produced locally, which corresponds to the maximum retail price. Customers must pay this tax when purchasing goods or services, which is included in the total price. The seller collects the tax and is then obligated to remit it to the government, reflecting the indirect nature of this tax.
The GST rates are consistently applied across the country for various goods and services. However, different slab rates have been established for tax purposes. Luxury and comfort items fall under higher rates, while essential goods are taxed at lower or zero rates. This categorization aims to ensure a fair distribution of wealth across India’s population.
History and Overview of GST
The concept of Goods and Services Tax was introduced in 2000 by the then Prime Minister of India. A committee was also formed to draft the new indirect tax law.
However, its actual implementation took 17 more years, during which the bill went through numerous revisions, introductions, and delays.
- 2000 – Committee formed by the Prime Minister to draft the Goods and Service Tax law.
- 2004 – A task force highlighted the need for this law to improve the indirect tax system in India.
- 2006 – GST was scheduled to be introduced on 1st April 2010 by the Finance Minister.
- 2007 – Decision to phase out Central Sales Tax (CST).
- Subsequently, CST rates were reduced from 4% to 3%.
- 2008 – GST’s dual structure was finalized by the Empowered Committee for separate legislation and levy.
- 2010 – GST introduction postponed due to structural and implementation challenges. A project was launched for the computerization of commercial taxes.
- 2011 – Introduction of the Constitution Amendment Bill to enable the Goods and Services Tax Law.
- 2012 – Standing Committee initiated discussions, but the process was stalled due to ambiguity in Clause 279B.
- 2013 – GST report presented by the Standing Committee.
- 2014 – The Finance Minister reintroduced the Goods and Services Tax Bill in Parliament.
- 2015 – The Lok Sabha approved the bill, but it was delayed in the Rajya Sabha.
- 2016 – GST Network (GSTN) went live, and the amended law passed both Houses of Parliament and was approved by the President of India.
- 2017 – The Cabinet approved four supplementary GST bills that were cleared by both the Lok Sabha and Rajya Sabha. The Goods and Services Tax Law came into effect on 1st July 2017.
Taxes Subsumed by GST
Goods and Services Tax was introduced to provide a comprehensive indirect tax system. It consolidated all indirect taxes under one structure.
Except for customs duties levied on the import of goods, GST replaced several indirect taxes, overcoming the inefficiencies of the previous tax system.
The following indirect taxes were subsumed by Goods and Service Tax:
-
Indirect Taxes Imposed by the Central Government
- Central Sales Tax
- Service Tax
- Central Excise Duty
- Excise Duty (Additional)
- Countervailing Duty or Additional Customs Duty
- Special Additional Customs Duties
-
Indirect Taxes Imposed by the State Government
- State VAT
- Entry Tax and Octroi Duty
- Luxury Tax
- Amusement and Entertainment Tax
- Advertisement Taxes
- Cess and surcharges on goods and services
- Purchase Tax
- Tax on gambling, betting, and lotteries.
Key Objectives of GST
The main goals of GST are as follows:
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'One Nation, One Tax’
GST replaced various indirect taxes that were in place before its introduction. The fundamental aim behind it was to implement the 'One Nation, One Tax' policy, which ensures that the same tax rate applies to a particular service or product across all states. This policy simplified the administration of taxes and the compliance process.
-
To Integrate Indirect Taxes in India
The introduction of GST in India was aimed at creating a consolidated and standardized tax system for goods and services. By combining multiple indirect taxes into a single system, GST simplified tax administration across the country.
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To Control Tax Evasion
Prior to GST, the country faced a significant amount of tax evasion. To address this issue and establish a more centralized tax monitoring system, GST was introduced. Its implementation has played a crucial role in reducing the rate of tax defaulters.
Categories of GST and GST Regulations
GST is classified into four categories based on the type of transaction involved. Before calculating your GST obligations, it’s important to understand the table below regarding the Components of GST.
|
GST Components |
Explanation |
|
State Goods and Services Tax (SGST) |
SGST refers to the tax payable on transactions within a state. It replaces earlier taxes like Value Added Tax, Entry Tax, State Sales Tax, Entertainment Tax, and various surcharges and cesses. |
|
Central Goods and Services Tax (CGST) |
CGST is applied to intra-state supplies of goods and services and is collected by the Central Government. It replaced multiple central taxes, including Service Tax, Central Excise Duty, CST, SAD, and Customs Duty. |
|
Union Territory Goods and Services Tax (UTGST) |
UTGST applies to the sale of goods and services within Union Territories such as Andaman and Nicobar, Dadra and Nagar Haveli, Chandigarh, and others. |
|
Integrated Goods and Services Tax (IGST) |
IGST is levied on transactions involving the transfer of goods and services between states. When businesses move products or services across state borders, IGST is charged. |
The collection of tax is structured as follows for both intra-state and inter-state transactions:
|
GST Taxation and Revenue Distribution |
Intra-State Transactions |
Inter-State Transactions |
|
Goods and Services Tax |
SGST + CGST |
IGST |
|
Revenue Sharing |
The collected revenue is shared equally between the state and central governments. |
The central government collects the revenue, which is then distributed based on the destination of the goods. |
Illustrative Example
Consider the following example to understand the process of levying, collecting, and sharing revenue between the central and state governments:
A seller in Maharashtra sells goods worth Rs. 1 lakh to a buyer within the same state. The applicable tax rate is 12%, with 6% of CGST and 6% of SGST. The total GST of Rs. 12,000 is shared equally, with Rs. 6,000 allocated to both the state and central governments, as the sale is intra-state.
However, when the same seller sells goods worth Rs. 50,000 from Maharashtra to Karnataka, the tax rate is 18%. The seller charges IGST of Rs. 9,000 due to the inter-state transaction. The tax collected is submitted to the central government, which will later share it with the respective state based on the goods' destination.
To facilitate the process, the entire GST payment system is managed online.
Understanding the Dual Structure of Goods and Services Tax
Unlike a federal system where taxes are collected by the central government and distributed to states, a dual tax system allows both the central and state governments to levy and collect taxes.
In India, Goods and Services Tax follows a similar dual structure, with both central and state levies. This structure applies to all transactions related to goods and services.
Core Principles of GST Levy – Multi-Stage, Destination-Based, and Value Addition
The Goods and Services Tax is a comprehensive levy that taxes each stage of manufacture where an item's value is increased. Additionally, the destination of the product also triggers GST application.
The key stages of GST application are outlined below:
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What Does Multi-Stage Levy Mean?
An item moves from production to consumption, passing through various links in the supply chain, with a tax imposed at each stage. Ultimately, the consumer bears the cost of these indirect taxes.
Generally, the steps involved in the production and sale of a final product are as follows:
- Purchasing raw materials
- Manufacturing raw materials into finished goods
- Storing finished goods in a warehouse
- Selling goods to wholesalers
- Selling goods to retailers
- Selling to the final consumer
GST is levied at each stage of this supply chain, making it a multi-stage tax.
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What is Destination-Based Levy?
A destination-based levy means that the tax is applied at the location where the item is consumed, rather than where it is produced. The place of consumption is where the tax is collected.
Here, it's crucial to distinguish between 'supply' and 'place of supply'. This helps determine whether a transaction is intrastate or interstate.
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What Does Taxation on Value Addition Mean?
The concept of GST on value addition means that each enhancement made to a product, increasing its saleable value, is taxed. Let's illustrate with an example.
For instance, Britannia Industries Limited in Chennai, Tamil Nadu manufactures biscuits. During the production process, value is added at each stage:
- Processing flour, sugar, and other ingredients into dough and baking them into biscuits increases the value of the raw materials, making them saleable.
- The biscuits are then sent to a warehouse, where they are packed into sets of 10 for further sale. This adds more value, making them ready for sale.
- The biscuits are branded with Britannia’s logo, which adds another layer of value.
- Finally, the biscuits are repacked in smaller cartons for transportation to retailers, adding further value.
GST is applied at each stage of value addition, thus making it a tax on the added value.
GST Composition Scheme
The GST composition scheme simplifies the indirect tax process for small taxpayers. According to CBIC guidelines, businesses with an annual turnover under Rs. 1 Crore can opt for this scheme. In the North-Eastern states, the turnover threshold is Rs. 75 Lakh. This registration is voluntary.
The applicable rates under this scheme are as follows:
|
Business Type |
CGST Rate |
SGST Rate |
Total GST Rate |
|
Goods traders and manufacturers |
0.5% |
0.5% |
1% |
|
Restaurants excluding alcohol |
2.5% |
2.5% |
5% |
To opt for the scheme, businesses must file GST CMP-02 on the GST online portal.
Input Tax Credit (ITC) Concept under GST in India
Input Tax Credit (ITC) allows businesses to reduce the tax paid on inputs from the tax payable on outputs.
For example, if a manufacturer pays Rs. 300 as input tax when purchasing raw materials, and the output tax is Rs. 450, the manufacturer can claim Rs. 300 as ITC. The manufacturer then pays only the difference of Rs. 150 to the government.
ITC is available only to businesses registered under the Goods and Services Tax Act, and all suppliers must also be registered for ITC to be eligible.
Therefore, if you're eligible and not yet registered, it's beneficial to register under GST. Additionally, ensure timely filing of GST returns and tax payments to avoid any issues.