What is GST in India?
Goods and Services Tax (GST) is an indirect tax that has revolutionized the taxation landscape in India. Replacing various former indirect taxes such as excise duty, VAT, and service tax, GST was enacted by the Parliament on 29th March 2017 and came into effect on 1st July 2017. GST is a comprehensive, multi-stage, destination-based tax levied on the supply of goods and services at every stage of value addition.
Serving as a single domestic indirect tax law, GST aims to eliminate the cascading effect of multiple taxes, thereby simplifying the taxation system in India. It is imposed at each point of sale, with Central GST (CGST) and State GST (SGST) applied for intra-state sales, and Integrated GST (IGST) for inter-state sales. While GST is paid by consumers, it is remitted to the government by the businesses selling the goods and services, making it a value-added tax on domestic consumption.
Advantages of Goods and Services Tax (GST)
- Uniform Tax Rate Across the Country: GST ensures uniformity of indirect tax rates, promoting the motto of “One Nation, One Market.”
- Simplified Taxation Process: GST subsumes various indirect taxes such as Central Excise Duty, Service Tax, VAT, Central Sales Tax, and others, integrating multiple tax layers into a single system. This reduces the compliance burden and enhances ease of doing business.
- Effective Indirect Tax Management: With GST, both the Central and State Governments now administer one primary indirect tax, making tax management more efficient and reducing tax evasion.
- Removal of Cascading Effect: GST eliminates the cascading effect of taxes by taxing only the net value added, making goods and services cheaper for consumers due to the input tax credit mechanism.
- Enhanced Productivity of Logistics: Abolition of octroi and entry tax has improved the efficiency of logistics companies by reducing inter-state movement restrictions.
- Attraction of Foreign Direct Investment (FDI): Simplified tax processes under GST improve the business environment, attracting more FDI.
- Simple and Easy Online Procedure: GST returns are filed online, simplifying the process and making tax administration more transparent and corruption-free.
- Composition Scheme for Small Businesses: Small businesses with a turnover below a specified limit can opt for a simplified GST scheme, paying tax at a fixed rate of turnover.
- Creation of a Common National Market: GST has boosted India’s tax-to-GDP ratio, promoting economic efficiency and long-term growth through a uniform tax law.
- Regulation of Unorganized Sectors: GST brings unregulated and unorganized sectors, such as textiles and construction, under formal regulation, streamlining compliance and payments.
- Lower Cost of Goods: By replacing 17 indirect taxes with a single tax, GST reduces the cost of goods, increases demand, and generates more revenue for both central and state governments.
Objectives of Goods and Services Tax (GST)
- Unified Tax Framework: Replace multiple indirect taxes with a single, consistent tax to simplify administration and improve compliance through standardized laws like e-way bills and e-invoicing.
- Consolidation of Indirect Taxes: Combine major indirect taxes such as service tax, VAT, and Central Excise into one tax to ease compliance burdens and streamline administration.
- Abolition of Cascading Taxation: Eliminate the tax-on-tax effect by taxing only the net value added at each stage, ensuring seamless input tax credits across goods and services.
- Enhanced Tax Enforcement: Implement stringent regulations and centralized monitoring to reduce fraudulent claims and tax evasion, supported by e-invoicing and input tax credit systems.
- Broadened Tax Base: Increase the number of registered businesses and include unorganized sectors under the tax net with a unified tax structure.
- Improved Business Environment: Simplify compliance through primarily online GST procedures, facilitating smoother operations from registration to return filing and refunds.
- Streamlined Logistics: Reduce documentation requirements, transportation times, and logistics costs with the e-way bill system and removal of interstate checkpoints.
- Competitive Pricing and Increased Consumption: Foster competitive pricing and boost consumption with uniform GST rates, enhancing indirect tax revenues and economic growth.
- Enhanced Business Productivity: Boost overall business productivity by removing logistical barriers and subsuming entry taxes.
- Transparency and Corruption Reduction: Increase transparency in the tax system to minimize false input tax credits and reduce tax evasion.
Components of Goods and Services Tax (GST)
- CGST (Central Goods and Services Tax): CGST is levied by the Central Government on intra-state transactions of goods and services. It replaces multiple central taxes like central excise duty and service tax. Revenue collected is shared between the Centre and the state where the transaction occurs, ensuring a unified tax structure.
- SGST (State Goods and Services Tax): SGST is imposed by state governments on intra-state transactions of goods and services. It consolidates earlier state taxes such as VAT, luxury tax, and octroi. Revenue from SGST stays with the state where the transaction takes place, fostering state-level financial autonomy.
- IGST (Integrated Goods and Services Tax): IGST is applied to inter-state transactions of goods and services, including imports and exports. It ensures seamless credit flow between states and simplifies tax compliance for businesses operating across state borders. Revenue collected through IGST is shared between the Central and State Governments.
- UTGST (Union Territory Goods and Services Tax): UTGST is levied on the supply of goods and services in Union Territories without a legislature, such as Chandigarh and Andaman & Nicobar Islands. It mirrors SGST and is collected alongside CGST, ensuring a consistent tax regime across all parts of India, including Union Territories.
| Transaction | Old Tax Regime | New Tax Regime | Revenue |
| Sale within a particular state | VAT + Excise/Service Tax + Central Excise | Central GST (CGST) & State GST (SGST) | Shared between the state and the centre |
| Sale between different states | Excise/Service Tax + Central Sales Tax | Integrated GST (IGST) | The centre shares the revenue based on the destination of goods |
GST Registration procedure
- Eligibility: Businesses with an annual turnover exceeding Rs. 20 lakhs (Rs. 10 lakhs for special category states) must register for GST. Certain businesses, like those involved in interstate supply, must register regardless of turnover.
- Registration Process: Businesses initiate registration online on the GST portal (www.gst.gov.in) by filling Form GST REG-01. Details required include business name, address, PAN (Permanent Account Number), business constitution proof, bank account details, and authorized signatory information.
- Submission and ARN Generation: Upon submission of the application, an Application Reference Number (ARN) is generated instantly. This ARN helps track the status of the application.
- Verification and Processing: GST authorities verify the application and documents submitted. Additional information may be requested through the portal if needed.
- GSTIN Allotment: Upon successful verification, the GST registration certificate and GSTIN (a 15-digit unique identification number) are issued. Typically, businesses receive these within 3 to 7 working days from ARN generation.
- Post-registration: Registered businesses must file regular GST returns online and adhere to GST regulations for invoicing, tax payments, and compliance.
- GST registration facilitates compliance with India’s unified indirect tax system, allowing businesses to claim input tax credits and operate smoothly across states.
How Does GST Work?
GST, or Goods and Services Tax, operates on a multi-stage collection mechanism that ensures tax is levied at each stage of the supply chain. Here’s how GST works:
- Manufacturing Stage: Manufacturers purchase raw materials and pay GST on these inputs. They then add value through production processes.
- Distribution and Wholesale: Goods move to distributors or wholesalers who also pay GST on the purchase price. They may add value through packaging and labeling.
- Retail Stage: Retailers purchase goods from wholesalers, paying GST on their procurement. They further enhance value through marketing and branding.
- Consumer Purchase: Finally, consumers buy the goods from retailers, paying GST on the product’s final selling price.
GST is levied at each stage of the supply chain based on value added. Manufacturers, wholesalers, and retailers pay GST on their inputs but can claim input tax credit for taxes paid on purchases. This system ensures GST is applied only to the value added at each stage, not cumulatively on the total product value. Tax revenue is allocated to state or central governments depending on whether transactions are intra-state or inter-state. Businesses must register for GST, file returns regularly, and manage input tax credits to comply with GST regulations.
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Conclusion
The implementation of GST in India marks a significant stride towards economic reform and standardization. Despite initial challenges, understanding the necessity and benefits of GST is crucial. Looking at countries that adopted GST earlier reveals clear advantages in financial and economic stability. As India progresses on this path, embracing GST not only streamlines tax administration but also fosters economic growth. Businesses play a pivotal role by aligning with government initiatives, ensuring sustained development and prosperity in the years ahead. Embracing GST is not just a compliance requirement but a strategic move towards a more robust and integrated economy.
