What is GST – Goods & Service Tax [GST] in India Explained | 2020

What is Goods & Service Tax?

Goods & Service Tax is known as GST. This is an indirect tax that has replaced other Indian indirect taxes such as the excise duty, VAT, Sales tax etc. The Goods and Service Tax Act was passed in Parliament of March-29-2017 and entered into forces on July-1st-2017. In other words, Goods and Service Tax (GST) is imposed on goods and services provision.

Goods and services Tax Act in India is a complex, multi-stage, destination-based tax imposed on any added value. Goods & Service Tax (GST) is a single indirect domestic tax law for the entire country. Prior to the implementation of the Goods and Services Tax, the Indian indirect tax levy arrangement was as follows:

Good and Service GST clear tax

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Now, let’s understand in depth the concept of Goods and Service tax, as mentioned above.

Multi-Stage

An object goes through many change-of-hands in its supply chain: from manufacturing to final sale to the customer.

Let’s find the stages below

  • Buying up raw materials
  • Production or fabrication of
  • Stocking of finished goods
  • On sale to wholesalers
  • Stuff for sale to retailers
  • Sale to end users

raw material gst clear tax

The Goods and Service Tax is levied on each of these stages making it a multi-stage tax.

Value Addition

value addition gst clear tax

A maker producing biscuits purchases four, sugar and other products. The input value decreases when the sugar and flour are mixed together and baked into biscuits.

The producer then sells such biscuits to the warehousing agent who packs and marks vast numbers of biscuits in cartons. It is just another value applied to biscuits. The warehousing agent then sells it to the seller after this.

The manufacturer sells the biscuits in smaller amounts, and invests in the biscuits advertisement, thus increasing their interest. GST is assessed on these value additions, i.e. the monetary value applied to the end-customer at each point to achieve the final sale.

Destination-Based

Consider the products produced at Maharashtra and sold in Karnataka to the final customer. Since the Goods and Service Tax is imposed at the point of consumption, Karnataka and not Maharashtra will collect all the tax revenue.

The Journey of GST in India

The GST journey started in the year 2000 when a bill drafting committee was set up. It took the Law 17 years to grow. The GST Bill had been passed in Lok Sabha and Rajya Sabha in 2017. The GST Law came into effect on July-1st-2017.

the journey of the gst cleartax

Advantage of Goods & Service Tax

The cascading impact of GST on the selling of Goods and Service was effectively eliminated. Removing the cascading effect influenced the cost of the goods. Since the GST system reduces tax, the cost of the products is falling.

GST is also mainly tech-driven. All things such as registration, return filing, refund request and notice response need to be performed electronically on the GST portal, which will speed up the processes.

advantage of gst cleartax

What are the components of GST?

In this scheme three taxes apply: CGST, SGST & IGST.

  • CGST: This is the tax levied by the Central Government on intra-state transactions (e.g. a Maharashtra transaction).
  • SGST: It is the tax levied by the state government of an intra-state selling (e.g. a Maharashtra transaction).
  • IGST: It is a central government tax levied for inter-state transactions (e.g. Maharashtra to Tamil Nadu).

Under the new system, the tax structure would mainly be as follows:

Transaction New Regime Old Regime Revenue Distribution
Sale within the State CGST + SGST VAT + Central Excise/Service tax Income shall be divided equally between the Center and the Government.
Sale to another State IGST Central Sales Tax + Excise/Service Tax In the case of interstate transaction, there will only be one form of tax (central). The center would then share the income from IGST depending on the destination of the products.

Illustation

  • Let’s say a Gujarat dealer had sold the goods to a Punjab dealer worth Rs. 50,000. The tax rate is 18% with IGST alone.

In such a case the dealer must charge Rs. 9,000 for IGST. The revenue is going to go to Central Government.

  • The same dealer, in Gujarat, sells goods worth Rs. 50,000 to a customer. The rate of GST on products is 12%. This levels includes CGST at 6% and SGST at 6%.

The dealer will have to collect Rs. 6,000 as Goods and Service Tax, Rs. 3,000 will go the Central Government and Rs. 3,000 will go to the Government of Gujarat as the sale is within the State.

Tax Laws before Goods & Service Tax

There were plenty of indirect taxes imposed by both the state and the middle in the earlier indirect tax system. States collected taxes mainly through Value Added Tax (VAT). Each State had a different set of regulations and rules.

The core regulated the interstate selling of products. CST (Central State Tax) was applicable for the selling of Goods between states. Indirect taxes such as entertainment tax, Loans and Local Tax is imposed by State and Center together. That contributed to a tax increase also known as the tax cascading increase.

The list of indirect taxes under pre-GST scheme is as follow:

  • Central Excise Duty
  • Duties of Excise
  • Additional Duties of Excise
  • Additional Duties of Customs
  • Special Additional Duty of Customs
  • Cess
  • State VAT
  • Central Sales Tax
  • Purchase Tax
  • Luxury Tax
  • Entertainment Tax
  • Entry Tax
  • Taxes on advertisements
  • Taxes on lotteries, betting and gambling

CGST, SGST and IGST replaced all of the aforementioned taxes:

However, the issue and use of “Form C: is still prevalent in certain taxes such as the GST levied for inter-state purchase at a concessional rate of 2%.

This extends to other products not protected by GST such as:

  • Petroleum crude
  • High-Speed diesel
  • Motor Spirit (Commonly known as Petrol)
  • Natural Gas
  • Aviation turbine fuel and
  • Alcoholic liquor for human consumption.

This applies only to the following transactions:

  • Resale
  • Use in fabrication or processing
  • Use in certain sectors, such as the telecommunication network, mining, electricity generation or distribution or any other electricity sector.

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How has GST helped in Price Reduction?

Each buyer, including the final user, paid tax over tax during the pre-GST regime. The tax condition is known as the tax cascading effect.

The cascading effect had been removed by Goods & Service Tax (GST). At each stage of the transfer of ownership, tax is calculated only on the value-added. Understand what the effect of cascading is and how GST helps to watch this simple video:

The indirect tax structure under Goods & Service Tax (GST) would introduce a uniform tax rate into the country. It will improve tax collection, as well as boost the Indian economy’s development by removing indirect tax barriers between states.

Illustration

Based on the biscuit manufacturer’s example above, let’s take some real figures and see what happens with the cost of products and taxes by contrasting the earlier GST systems.

Tax calculations in earlier regime:

Action Cost (Rs) Tax rate at 10% (Rs) Invoice Total (Rs)
Manufacturer 1,000 100 1,100
Warehouse adds a label and repacks at Rs.300 1,400 140 1,540
Retailer advertises at Rs. 500 2,040 204 2,244
Total 1,800 444 2,244

By every point of the contract, the tax obligation has been passed on and the final responsibility comes to rest with the customer. This phenomenon is known as the cascading effect of taxes and every time this occurs the value of the item keeps each.

Tax calculations in current regime:

Action Cost (Rs) Tax rate at 10% (Rs) Tax liability to be deposited (Rs) Invoice Total (Rs)
Manufacturer 1,000 100 100 1,100
Warehouse adds label and repacks at Rs. 300 1,300 130 30 1,430
Retailer advertises at Rs. 500 1,800 180 50 1,980
Total 1,800 180 1,980

In the case of Tax on Goods and Services, there is a way to assert the tax credit charged while purchasing inputs. The individual who has already paid a tax, when submitting his GST returns, can claim credit for this tax.

Finally, if an person may demand the input tax credit, the sales price is lowered and the buyer’s cost price is lowered due to lower tax liability. Therefore, the final value of the biscuits is reduced from Rs. 2,244 to Rs. 1,980 thus reducing the tax burden on the end user.

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What are the New Compliance Under GST?

In addition to filing the GST Returns electronically, the GST regime has implemented many new programs alongside it.

e-Way Bills

Through implementing “E-Way bills”, GST implemented a centralized system of travel bills. The scheme was implemented in a phased manner on April-1st-2018 for inter-state movement of goods and on April-15-2018 for intra-state movement of goods.

Under the e-way billing scheme, manufacturers, traders and hauliers can easily produce e-way bills for the goods transported from their place of origin to their destination on a common portal. This also supports tax authorities as this program has decreased check-posts time and helps to minimize tax evasion.

E-invoicing

The E-invoicing program has recently been launched on a trail basis starting from January 2020 and going into operation from October 2020. To satisfy these criteria, this program includes large companies with an annual gross turnover of more than Rs. 100 Crore.

Through uploading to GSTN’s portal known as the invoice registration portal, they must obtain a unique invoice reference number for every business-to-business invoice. The database verifies invoice quality and genuineness. It then authorizes the use of the digital signature together with a QR-code.

E-invoicing enables invoice interoperability and helps to reduce errors in the data entry. This is intended to transfer information on invoices directly from the IRP to the GST portal and the e-way bill portal. Therefore, it will eliminate the requirement for manual data entry while filing ANX-1 / GST Returns and the generation of e-Way bills Part-A.

Details of Good Service Tax through Videos

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Conclusion on Goods and Service Tax in India

I suppose you have followed each step carefully for Goods and Service Returns (GST) in India for PC. After downloading this software, open this software.

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At last, I hope you liked this post on Goods and Service Returns (GST) in India for PC.

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