What is GST in India

What is GST in India

The General Service Taxation scheme known as the Goods and Services Tax(GST) is an indirect tax throughout India to replace taxes levied by the central and state governments.

It was introduced as The Constitution Act 2017 , following the passage of Constitution 122nd Amendment Bill.

The GST is governed by GST Council and its Chairman is the Finance Minister of India.

Under GST, goods and services will be taxed at the following rates, 0%, 5%, 12%, 18%, 28%. There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on gold.

The Goods and Services Tax, India's biggest tax reform in 70 years of independence, was launched at midnight of 30 June 2017 by Prime Minister Narendra Modi.

It was the fourth time since Independence that an event was held there at midnight, one of them being India's Independence where Nehru gave his Tryst With Destiny speech.

It was joined by TMC, Left & DMK. GST, which replaces a slew of indirect taxes with a unified tax, is set to dramatically reshape the country's 2 trillion dollar economy.

What is GST? 

Goods & Services Tax is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition.

If we had to look at a pictorial description of the various stages, it would look like: GST basics Goods and Services Tax will be levied on each of these stages, which makes it a multi-stage tax.

Goods and Services Tax will be levied on all transactions happening during the entire manufacturing chain.

Earlier, when a product was manufactured, the centre would levy an Excise Duty on the manufacture, and then the state will add a VAT tax when the item is sold to the next stage in the cycle.

Earlier the pattern of tax levy was like this: ClearTax GST Now, Goods and Services Tax will be levied at every point of sale.

Since Goods & Services Tax is levied at the point of consumption, so the state of Rajasthan will get revenue in the manufacturing and warehousing stages, but lose out on the revenue when the product moves out Rajasthan and reaches the end consumer in Karnataka.

Browse GST articles by Topic Registration Returns Invoice Transition to GST Composition Scheme Penalties & Appeals News & Announcements Input Tax Credit Analysis & Opinions GST Software Accounts & Record Time, Place & Value of Supply Procedure Payments & Refunds GST Terms Why is Goods and Services Tax so Important? So, now that we have defined GST, let us talk about why it will play such a significant role in transforming the current tax structure, and therefore, the economy.

Currently, the Indian tax structure is divided into two - Direct and Indirect Taxes.

An example of this is Income Tax where you earn the income and you alone are liable to pay the tax on it.

In the case of Indirect Taxes, the liability of the tax can be passed on to someone else.

It has a system of Input Tax Credit which will allow sellers to claim the tax already paid, so that the final liability on the end consumer is decreased.

How does GST work? A nationwide tax reform cannot function without strict guidelines and provisions.

The GST Council has devised a fool proof method of implementing this new tax regime by dividing it into three categories.

When Goods and Services Tax is implemented, there will be 3 kinds of applicable Goods and Services Taxes: CGST: where the revenue will be collected by the central government SGST: where the revenue will be collected by the state governments for intra-state sales IGST: where the revenue will be collected by the central government for inter-state sales In most cases, the tax structure under the new regime will be as follows: Transaction New Regime Old Regime Comments Sale within the state CGST SGST VAT Central Excise/Service tax Revenue will now be shared between the Centre and the State Sale to another State IGST Central Sales Tax Excise/Service Tax There will only be one type of tax now in case of inter-state sales.

The Goods and Services Tax rate is 18% comprising CGST rate of 9% and SGST rate of 9%. In such cases the dealer collects Rs. 1800 and of this amount, Rs. 900 will go to the central government and Rs. 900 will go to the Maharashtra government.

There will no longer be any need to pay CGST and SGST. Simplify Your GST Filing & Invoicing Get Trained & Try Cleartax GST Software for FREE Start Free GST Software Trial & Training How will GST help India and common man? The basis of Goods and Services Tax is the seamless flow of Input Tax Credit along the entire value addition chain.

At every step of the manufacturing process, businesses will have the option to claim the tax already paid in the previous transaction.

To understand this, let us first understand what is Input Tax Credit.

It is the credit an individual receives for the tax paid on the inputs used in manufacturing the product.

If there is a 10% tax that the individual must submit to the government, he can subtract the amount he has paid in taxes at the time of purchase and submit the balance amount to the government.

If the rate of taxes is set at 10%, and there is no profit or loss involved, then he has to pay Rs. 10 as tax.

On top of this, he has to pay a 10% tax, and the final cost therefore becomes Rs. 150 10% tax = Rs. 165.

Now, the retailer pays Rs. 165 to buy the shirt from the wholesaler because the tax liability had passed on to him.

The cost of the shirt becomes Rs. 214.5 Let us see a breakup for this: Cost = Rs. 165 Value add = Rs. 30 10% tax = Rs. 195 Rs. 19.5 = Rs. 214.5 So, the customer pays Rs. 214.5 for a shirt the cost price of which was basically only Rs. 170.

Along the way the tax liability was passed on at every stage of transaction and the final liability comes to rest with the customer.

This is called the Cascading Effect of Taxes where a tax is paid on tax and the value of the item keeps increasing every time this happens.

What happens in this case is, the individual who has paid a tax already can claim credit for this tax when he submits his taxes.

When the wholesaler buys from the manufacturer, he pays a 10% tax on his cost price because the liability has been passed on to him.

He has already paid one tax to the manufacturer.

This time what he does is, instead of paying Rs 14 to the government as tax, he subtracts the amount he has paid already.

At the next stage, the retailer adds value of Rs. 30 to his cost price and has to pay a 10% tax on it to the government.

Now, if he had to pay 10% tax on it, he would pass on the liability to the customer.

He already has input credit because he has paid Rs.14 to the wholesaler as the latter's tax.

Now he reduces Rs. 14 from his tax liability of Rs. 17 and has to pay only Rs. 3 to the government.

The final value of the shirt also therefore reduced from Rs. 214.5 to Rs. 187, thus reducing the tax burden on the final customer.

Goods & Services Tax is going to have a two-pronged benefit.

One, it will reduce the cascading effect of taxes, and second, by allowing input tax credit, it will reduce the burden of taxes and, hopefully, prices.

In many countries, VAT is the substitute for GST, but unlike the Indian VAT system, these countries have a single VAT tax which fulfills the same purpose as GST. In India, the discussion on GST Law was flagged off in the year 2000, when the then Prime Minister Atal Bihari Vajpayee brought the issue to the table.

History of GST in India - Year by Year Events gst Summary The idea behind having one consolidated indirect tax to subsume multiple currently existing indirect taxes is to benefit the Indian economy in a number of ways: It will help the country's businesses gain a level playing field It will put us on par with foreign nations who have a more structured tax system It will also translate into gains for the end consumer who not have to pay cascading taxes any more There will now be a single tax on goods and services In addition to the above, The Goods and Services Tax Law aims at streamlining the indirect taxation regime.

It is also expected that Goods and Services Tax will improve the collection of taxes as well as boost the development of Indian economy by removing the indirect tax barriers between states and integrating the country through a uniform tax rate.