GST Basics - J&S

Basics of GST in India

Goods and Services Tax (GST) is one of the greatest tax reforms introduced in India from 1st July 2017. It is a value-added tax levied i.e. tax is only paid on the value added during the process of manufacturing. Alternatively, GST can be defined as a destination-based tax where the tax is collected in the place where the ultimate consumption is done.

Why GST was implemented in the system

There are various taxes that have to pay at every stage and are differently collected by State and Central Government and also rates differ from one state to another. 

India is a land of laws and a country with 30 different taxation laws.

  • Each state nearly had a different tax regime, which led to a confusion and procedural gaps in the taxation structure.
  • Flow of credit of tax was restricted and tax on tax was levied

If we talk about GST, it will subsume all the taxes, which will make easier to provide services and goods across country, as no more additional state taxes will be imposed.

How will GST Help

  • Tax Structure will be Simple reducing multiple taxes to one tax structure
  • Tax revenue will increase
  • Easy tax payment and filing
  • Reduced Tax Evasion

Who need to comply with GST

  • Person who supplies goods and/or services of value exceeding INR 20 lakh in a financial year.
  • To any person making inter-state taxable supply of goods and/or services
  • E-commerce operator
  • Person who supplies goods and/or services, other than branded services, through e-commerce operator
  • Aggregators who supply services under their own brand name
  • Casual Taxable Person
  • Non-Resident Taxable Person
  • Person required to deduct/collect tax (TDS/TCS)
  • Input Service Distributor
  • Person required to pay tax under Reverse Charge
  • Person supplying the goods on behalf of other taxable person (e.g. Agent)

Who Doesn’t need to comply with GST

  • Agriculturists
  • Person engaged exclusively in the business of supplying goods and/or services that are not liable to tax or are wholly exempt from tax under this Act

How does GST Works

A product has to go through different stages before it reaches the end consumer, and there are several taxes applicable throughout this process. However, this situation will change in the GST regime. Here’s an illustration to understand how:

Stage 1: Manufacturing

Take Shirt manufacturing as an example and 10% as the GST applicable.

The manufacturer buys material worth INR 5000 that is inclusive of the GST of INR 500 (10% of 5000).

He then adds his own value of INR 500 to the materials bringing the gross value of the product to INR 5500.

Now, the total tax amount on the output of the Shirt comes to INR 550 (10% of 5500). In the current tax system, the manufacturer would be required to pay a tax of INR 550; however, under GST he can set some of his tax off as he has already paid it while purchasing the raw materials. Therefore, the final GST will be of INR 50 (total tax amount till now minus the tax he has already paid) i.e. INR 50 (5500-5000)

Stage 2: Wholesale

Here, the shirt is passed from the manufacturer to the wholesaler at a gross value of INR 5500 that is inclusive of the GST. The wholesaler then adds his value (his margin) of INR 500 making the total INR 6000 (5500 + 500). This brings the total tax amount on the final to INR 609 (10% of 6000). The wholesaler too can set off this tax amount thus, the final GST for the wholesaler would be INR 50 (6000 – 5500)

Stage 3: Retailer

In this final step, the retailer buys the shirt from the wholesaler at a gross value of INR 6000 that is inclusive of the GST of INR 600 (10% of 6000). He then adds his margin of INR 500 making the total cost of the goods INR 6500. The GST applicable here is INR 650 (10% of 6500), but since the retailer has already paid a tax while purchasing the goods, he can set it off. Thus, the final GST incidence for the retailer would be INR 50 (6500 – 6000).

At the end, since the retailer will sell at INR 6500, the GST paid by the customer would be INR 650(10% of 6500) only. 

Thus GST can be a win-win scenario that will benefit the entire value chain and make it easier for both businesses and consumers. 

Key Component of GST

The government has adopted GST in its Dual or concurrent model. As a result of which both Centre and State government will levy GST simultaneously. The implemented GST structure is categorised under four heads, namely

IGST – Integrated Goods and Service Tax – Tax levied by the Central Government on the supplies of both goods and services outside the state i.e. intrastate as well as on imports.

CGST – Central Goods and Service Tax (CGST) – Tax levied by the Central Government on the supplies of both goods and services within the state i.e. intrastate.

SGST – State Goods and Service Tax – Tax levied by the State Government on the supplies of both goods and services within the state i.e. intrastate.

UGST – Union Territory Goods and Service Tax – Tax levied by the Government of Union Territory on the supplies of both goods and services within the state i.e. intrastate.

Whether it makes products cheaper for the common man like you and me, nobody can tell. But this is going to impact our lives in our jobs, our businesses, and the overall economic environment.  

Published By: akash On 07/19/21 4:25 PM