What is GST (Goods & Services Tax)?
GST (Goods & Services Tax) is a complete, multi-stage, destination-based tax on the supply of goods and services in India. It was launched on July 1, 2017, under the GST Act to replace a complex system of indirect taxes such as VAT, excise duty, and service tax. The purpose of GST is to make the taxation system easy by stopping layered taxes (tax-on-tax), reducing the compliance burden of businesses and encouraging a single national market. GST aims to form a uniform tax system in the country. Its applicability extends to nearly all goods & services, except petroleum products, alcohol for human use and electricity, which are separately taxed.
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Meaning of GST : Multi-Stage, Value Addition and Destination-Based Tax
GST (Goods & Services Tax) is an indirect tax system designed to simplify taxation by combining various taxes into a single unified system. It aims to create a transparent and efficient tax structure that benefits businesses and consumers.
- Multi-Stage Tax: GST is charged at each step in the supply chain, from production to retail. Unlike a single-point tax, GST is charged at several points, but the tax burden is only on value addition at every step.
- Value Addition: Tax is charged only on the additional value added to the product or service at every stage. Firms can claim an Input Tax Credit (ITC) for the GST paid on inputs so that tax is not charged on the total value repeatedly.
- Destination-Based Tax: GST is imposed by the state where the goods or services are consumed, not where they are manufactured. This ensures that tax revenue goes to the consuming state, ensuring fairness and economic integration.
Example of GST
Consider the case of a shirt produced and sold at an 18% GST rate:
| Stage | Transaction Value (₹) | GST @18% (₹) | Input Tax Credit (₹) | Net GST Paid (₹) |
| Raw Material | 1,000 | 180 | 0 | 180 |
| Manufacturer | 1,500 (includes raw) | 270 | 180 | 90 |
| Wholesaler | 2,000 | 360 | 270 | 90 |
| Retailer | 2,500 | 450 | 360 | 90 |
| Total GST | - | - | - | 450 |
- The consumer pays ₹2,950 (₹2,500 + ₹450 GST).
- Each business pays GST only on the value it adds.
How does Goods and Services Tax (GST) work?
The flow of input tax credit (ITC) moves through the supply chain, starting from the supplier and continuing through the manufacturer, wholesaler and retailer. Each business in the chain can claim ITC on the GST paid at the previous stage. The final consumer ultimately bears the tax cost without the ability to claim ITC.
Supplier → Manufacturer
The supplier charges GST on raw materials purchased by the manufacturer. The manufacturer is entitled to claim ITC of the GST paid on these goods, reducing the amount of taxes paid at subsequent stages.
Manufacturer → Wholesaler
The manufacturer sells finished products to the wholesaler, and he charges GST on the selling price (value added). The manufacturer is eligible to claim ITC on GST paid on raw materials. The wholesaler can claim ITC on GST paid to the manufacturer as well.
Wholesaler → Retailer
The wholesaler sells to the retailer at the retail price and charges GST. The wholesaler avails ITC of the GST when the goods are bought from the manufacturer, and the retailer can avail ITC of the GST paid to the wholesaler.
Retailer → Consumer
The trader sells to the customer, passing on GST to the sale value. The trader avails ITC of GST paid while acquiring goods from the wholesaler. The customer pays the end price but is not eligible for any ITC.
What are the Types of GST?
- CGST (Central Goods and Services Tax): Charged by the Central Government on intra-state supply of goods and services. The revenue accrues to the central government.
- SGST (State Goods and Services Tax): Charged by the State Governments on the same intra-state transactions as CGST. The concerned state government collects the revenue.
- IGST (Integrated Goods and Services Tax): Charged by the Central Government on the supply of goods and services between states and imports. The Centre and the destination state share the revenue.
- UTGST (Union Territory Goods and Services Tax): The Central Government charges this tax on intra-UT supply of goods and services in Union Territories that lack a legislature (such as Chandigarh or Lakshadweep). It is levied alongside CGST, and the revenue accrues to the Union Territory administration.
History of GST in India: A Comprehensive Timeline
The path towards GST in India was initiated in 2000 by constituting the Kelkar Task Force on Goods and Services Tax to draw up the design of the GST framework. The idea was then put forth formally in the 2006 Budget Speech, with the 2011 Constitution Amendment Bill to enable the government to introduce GST.
After long deliberations, Parliament enacted the Constitution (122nd Amendment) Bill in 2016, which was approved by most states. GST was launched nationwide on July 1, 2017, replacing a complex indirect tax system.
Since its implementation, the GST regime has undergone major changes. These involve the introduction of e-way bills to monitor the interstate movement of goods and the launch of e-invoicing to enhance compliance. Furthermore, the GST Council has now rationalised tax rates and streamlined return filing processes to ease businesses' compliance requirements.
Key Principles of GST (Goods & Services Tax)
GST is based on three fundamental principles that are the foundation of its structure and operation. The first is "One Nation, One Tax," which seeks to consolidate the tax system for all states, abolish regional variations and create one national market.
The second principle is the smooth input tax credit, which enables businesses to claim the credit on taxes paid on inputs against the output tax liability, thereby avoiding the cascading effect of taxes.
The third principle focuses on technology-enabled compliance, utilising strong IT infrastructure for online registration, filing of returns, invoice matching and tax payment. This approach increases transparency, minimises human intervention and helps prevent tax evasion.
What are GST Rates and Slabs?
GST in India is divided into five main tax slabs to accommodate the nature of goods and services, balancing affordability with revenue generation:
- 0% GST (Exempt and Essential Items): This tax slab is for essential items and services that are exempted or zero-rated to maintain their affordability. Examples include fresh vegetables and fruits, milk, health care and education services.
- 5% GST (Essential Necessities): Low rate for essential daily-use products and services that fall just above the exempt threshold. Examples include edible oils, tea, sugar, footwear costing less than ₹1,000 and public transport services.
- 12% GST (Mid-Range Goods): Charged on moderately priced goods and services used by many but not necessities. Examples include processed foods, fruit juices, mobile phones and sanitary napkins.
- 18% GST (Common Use Goods and Services): The slab is most widely used, covering bulk goods and services used in daily life. Examples include soaps, toothpaste, hair oil, restaurant services (non-AC) and IT services.
- 28% GST (Luxury and Sin Goods): The highest slab is used for non-essential luxury products and products that harm health or the environment. Examples include automobiles, tobacco products, pan masala and aerated drinks.
Advantages and Disadvantages of GST
| Advantages of GST | Disadvantages of GST |
| Simplifies the Tax Structure: Consolidates multiple taxes into one, streamlining compliance for businesses nationwide. | Initial Implementation Challenges: SMEs and other businesses experienced technical hiccups and discomfiture while implementing GST initially. |
| Reduces the Cascading Effect: Input Tax Credit (ITC) offsets taxes paid on inputs, reducing product costs. | Complexity of Multiple Tax Slabs: Five slabs (0%, 5%, 12%, 18%, 28%) create disputes, e.g., classifying packaged foods. |
| Boosts Trade Efficiency: Uniform rules remove interstate barriers like checkposts, easing goods movement. | Partial Exclusion of Key Sectors: Petroleum and alcohol remain outside GST, causing inconsistencies, though inclusion is under review (2024). |
| Increases Tax Compliance and Transparency: Digital GSTN filings enhance record-keeping and reduce tax evasion. | Technical Glitches & Portal Issues:The GSTN portal has faced several technical problems, especially during high-traffic periods, causing delays and frustrations during filing. |
Who is Eligible for GST?
In the GST (Goods & Services Tax) system, businesses are required to register under GST if their total annual turnover crosses certain threshold levels. The threshold limits for registration differ depending on the nature of the business and the location of the business.
1. Goods Suppliers
Businesses providing goods must register for GST online if their total turnover is more than ₹40 lakh in a year. In some Special Category States, the limit is reduced to ₹20 lakh.
These states are generally economically backwards or geographically remote. Special category states include Jammu & Kashmir, Himachal Pradesh, Uttarakhand and the Northeastern states.
2. Service Providers
Service providers should register for GST if their turnover is more than ₹20 lakh in a financial year. As with suppliers of goods, this limit is cut down to ₹10 lakh for Special Category States.
3. Voluntary Registration
Companies that are below the specified threshold levels can also make voluntary registration available under GST. Voluntary registration has a number of advantages:
- Input Tax Credit (ITC): Businesses can recover input tax credit on tax paid on goods and services consumed in business, thus decreasing the overall tax burden.
- Improved Credibility: Voluntary registration may increase the business's credibility among customers and suppliers since it reflects that the business is tax-compliant.
4. Mandatory Registration for Certain Types
Some businesses are mandatorily required to register for GST irrespective of turnover, such as:
- E-commerce Operators: Online stores and e-commerce websites that enable the sale of goods and services, like Amazon, Flipkart, etc.
- Casual Taxable Persons: This includes businesses that occasionally carry on taxable activities but do not possess a fixed place of business, like vendors at trade fairs or exhibitions.
- Non-Resident Taxable Persons: Foreign companies or individuals selling goods or services in India on a temporary basis are also required to register for GST online.
- Agents of Input Service Distributors: Any business acting as an intermediary between the supplier and the customer.
Note: Some specifically designated kinds of businesses, such as aggregators, real estate developers, and travel agents, may also have to register.
How to Register for GST Online?
GST registration is a fully online procedure that can be done using the official GST portal.
Following is a step-by-step, detailed guide to assist you with the registration procedure:
1. Give Basic Information
- Begin the Registration Process: Go to the official GST portal (https://www.gst.gov.in) and go to the Registration section. Click on New Registration.
- Enter Basic Information: First, you will be required to enter some basic information regarding your business, like your business PAN (Permanent Account Number) or applicant PAN, mobile number and email address for verification.
After submitting these details, the system will provide a One-Time Password (OTP) for verification to both your email and mobile number. On successful verification, a Temporary Reference Number (TRN) is produced. This TRN will be required for the proceeding steps.
2. Fill in the Registration Form
- Fill in Detailed Business Information: Now that you have the TRN, return it to the GST portal and fill it out so you can proceed with the registration process. You will now be prompted to fill in the registration form by providing more information regarding your business, such as promoter/partner details, such as name, PAN, address, and other personal information of the business owners, promoters, or directors.
- Principal Place of Business: Complete address of the main place of business. This must have the name of the business place, address and the state where the business is based.
- Additional Places of Business (if any): If you have additional places of business, you will also have to provide their details.
- Bank Account Details: Details of the business's bank account, such as account number, IFSC code and bank branch details.
3. Upload Required Documents
You will have to upload some mandatory documents for verification. These documents validate the authenticity of your business and assist in processing your registration smoothly.
The mandatory documents are PAN card, Aadhaar card, business registration certificate, proof of address like a rent agreement, electricity bill or property tax receipt and bank account details. Ensure that all documents are clear and legible to avoid any issues during verification.
4. Verification and GSTIN Issuance
- Submission and Verification: Once you've completed the form and uploaded all necessary documents, apply. The GST system will verify the details provided by cross-checking them with your uploaded documents.
- GSTIN Issuance: If your application is successfully verified, you will get your GST Identification Number (GSTIN) and GST Registration Certificate. It generally takes 3 to 7 working days.
After registration, your GSTIN will allow you to initiate business transactions under the GST regime, file GST returns, and take advantage of input tax credits.
What is the GST Registration Fee?
GST registration charges on the government portal are free of cost, making it easy and compliant for businesses. There is no GST registration fee.
What Are the New Compliances Under GST?
Recent changes to GST compliance requirements are focused on making it easier and more transparent to reduce tax evasion. Some of the major changes include:
- E-invoicing: Companies with a turnover of over a certain amount need to create invoices electronically. Such invoices are reported to the GST system in real time, thereby ensuring genuineness.
- E-way Bills: E-way bills are required for the transportation of goods worth more than ₹50,000. This system aids in tracking and authenticating goods in transit.
- Return Filings (GSTR-1, GSTR-3B, etc.): Businesses need to file periodic returns monthly or quarterly, depending on their turnover. GSTR-1 are Outward supplies (sales), and GSTR-3B is a summary of inward and outward supplies (purchases and sales).
A robust IT infrastructure supports these new compliance requirements, which facilitates reporting and GST reconciliation accuracy.
Conclusion
GST (Goods & Services Tax) is one of India's most important tax reforms, consolidating several taxes into one destination-based tax, thereby boosting economic growth. Even though it was challenged in the beginning, policy reforms and technological improvements have increased its efficiency, transparency and fairness. GST is a simple, technology-driven tax system that focuses on input credits and plays a key role in India's financial structure.
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