Understanding Goods and Services Tax (GST)

It’s one of the biggest indirect tax reforms in post independence India. In simplification, it aims to simplify the complex indirect tax structure by subsuming multiple taxes into one and annihilating the cascading effect of taxes. According to experts, it’s going to turn around the business model on a small or large scale and turn around the economy.

This guide gives a clear understanding of the basics of GST, key concepts, and how it may impact your business over time. This is very useful for students, business professionals, entrepreneurs, tax practitioners, and accountants aiming to understand the details about GST.

Key Features of GST:

1. Comprehensive Tax Structure – GST sums up most of the indirect taxes and therefore becomes a uniform tax throughout the country. It eliminates the distortion of varying tax rates and also abolishes disproportionate taxation at different levels.

2. Multi Stage Taxation – GST is levied at every stage of the supply chain at which the transaction takes place from production to the final sale.

3. Focus on Value Addition – In GST, tax is collected only at each point of value addition in the process of making or supplying services. It does not include original costs; thus, it makes taxation efficient.

4. Destination Based Tax – GST is a tax on consumption rather than origin. The revenues from tax would go to the state wherein the goods or services are consumed ultimately.

For example, take cotton clothes made in Karnataka and sold in Maharashtra. There is where Karnataka will not collect the tax and Maharashtra, being a consumer state, will collect the tax.

Here, in case of exports, the consumption is outside India, so exports are nontaxable. Imports are taxable as the goods consumed within India. So, the tax system would be correct to the domestic businesses as imported and domestically produced products would be at par with each other.

Type of GST: SGST, CGST and IGST

GST is classified into three types based on the nature of the transaction:

Intrastate sale that is sale made within a single state attracts two GSTs. These are Central GST and State GST.

IGST, or Integrated GST refers to the amount charged on interstate sale, that is, sale between two states. Example below:

• A manufacturer (A) in Maharashtra sells to a dealer (B) in Maharashtra an amount of ₹ 10,000.
• Dealer B, in his turn sells them to a trader (C) in Rajasthan for ₹ 17,500. 
• Finally, these get sold to a customer D from Rajasthan by Trader C for ₹ 30000.

So, intrastate sales  would carry SGST of 9% and CGST also at 9%. Interstate sales like selling from Maharashtra to Rajasthan will bear IGST at 18%. IGST credit can also be used to pay IGST, then IGST, then CGST followed by SGST. Since GST is a consumption based tax, the taxing authority would be the state in which the goods are consumed, in this case, Rajasthan.

On what points is GST leveled?

Under the existing regime, several levies exist at different points like manufacture, sale or service delivery. On the contrary, GST will eliminate this multitude and will have a single tax simple and easy to pay. Example: Suppose, while eating food in a restaurant or going for a service, you don’t need to pay both VAT and service tax. Today, it comes as one GST on the total amount.

Key Concept: Time, Place, and Value of Supply

The three main aspects GST deals with are the time, place, and value of supply of goods or services. These make it easier to determine when, where, and how much tax is to be charged on a sale. These parameters being standardized means the taxes are easier and uniform all over the country in computation.

Armed with such knowledge, one can then navigate the world of GST accordingly and still be able to take advantage of the streamlined approach to taxation that the system offers with compliance.