GST | Explainer on 4-tier GST Tax Structure in India

Introduction

The Goods and Services Tax (GST) in India is a comprehensive, multi-stage, destination-based tax that has unified the country's indirect tax system together. Introduced on July 1, 2017, GST replaced various cascading taxes levied by the national and state governments, streamlining the tax procedure and creating a single market in India.​

The Goods and Services Tax (GST) was enacted to harmonize all taxes and place them under the control of a single integrated tax system. The purpose of this action was to make it easier for business owner and to control tax evasion and streamline the nation's tax collection process through the GST framework.

What is Goods and Services Tax (GST)?

The Indian government implemented the Goods and Services Tax, or GST, an indirect tax, on July 1st, 2017. The numerous direct and indirect taxes, including Value Added Tax (VAT), excise taxes, services taxes etc., were intended to be replaced by it.

When any type of goods or services are provided, GST is levied. The Goods and Services Tax Law in the Indian context is a comprehensive, multi-level, goal-oriented tax levied in accordance with the addition of value to goods and services. As a result, it is possible to describe the GST's structure as a single domestic indirect umbrella tax scheme for the entire nation.

Three taxes that are imposed under various circumstances make up the GST structure:

1. ‍Central Goods and Services Tax: The central government imposes the Central Goods and Services Tax (CGST) on intrastate supply of goods and services, or supply of goods and services within the same state.
2. ‍State Goods and Services Tax: Tax that the state governments impose on the provision of goods and services within their own borders.
3. ‍Integrated Goods and Services Tax: This tax is imposed by the central government on the supply of goods and services between states. The central government and the state government (state government of the state where the goods/services are consumed), however, split the IGST revenue equally.
4. Union Territory Goods and Services Tax (UTGST): The UT governments impose the Union Territory Goods and Services Tax (UTGST) on the delivery of goods and services inside the UT.

What is the 4-tier GST Tax Structure?

In India, the GST is a 4-tiered tax structure. The way the GST tax structure is set up, all necessary items, services, and a few food items fall within the lowest GST tax category. The top GST tax category is reserved for high-value goods and services as well as devalued goods.

The four-tier structure of the Goods and Services Tax, or GST, has been determined by the GST Council to be 0%, 5%, 12%, 18%, and 28%.

The move of excluding basic products and items, which are the main food units, from the GST regime can be interpreted as an effort to control inflation. However, some common goods would still be subject to a 5 percent tax. On the other hand, the majority of common services would be subject to tax rates of 12 and 18 percent, respectively, while expensive items would be subject to a 28 percent tax.

Zero Rate (0%)

A few fundamental goods won't be charged at all under this classification of the GST council structure, it has been agreed. The majority of Consumer Price Index (CPI) units fall under this rate category.

The following items have been placed under the zero rate GST tier structure:

• Potatoes, tomatoes, and other raw veggies high in protein are examples.
• Live animals include fish, lambs, goats, chickens, and shelled eggs from birds.
• Corn, maize, wheat, cereal grains, and soybeans that are not packaged.
• Various components of human blood as well as actual human blood.
• Raw resources including unprocessed wool, khadi fabric and yarn, charcoal, raw silk, and its trash.
• Tools and equipment like shovels, spades, and agricultural tools are equivalents.

Lower Rate (5%)

In this rate tier, the majority of ordinary items and services will be subject to a 5 percent tax. This would encompass the remaining CPI-compliant items as well as goods intended for mass consumption. For instance, frozen veggies, tea, coffee, rail tickets, and cheap airline or train tickets.

Standard Rate (12% and 18%)

The bulk of goods and services come under the aegis of this rate tier. The Government of India decided to maintain two standard rate slabs of 12 and 18 percent for this tier in order to control inflation.

Dairy products, accessories, telephones, business class airfare, and theatre tickets under ₹100. are all included in the 12percent rate slab.

Pasta, bakery goods, cleaning supplies, hair dryers, panels, electronics, and other items are among the commodities charged at the 18percent rate slab.

Higher Rate (28%)

More than 200 products are included in this 28 percent rate slab, most of which are items like paint, cement, automobiles, electrical devices, bathing products, soft beverages, etc. However, the Indian government levies an extra tax on select commodities that come under this slab category.

Impact of the 4-Tier GST Structure on Prices in India

The introduction of GST has had multiple effects on different sectors.

• Essential Goods: Prices for items in lower tax brackets (0% and 5%) were reduced, making them cheaper to purchase.
• Luxury Goods: Prices for items in the highest tax bracket (28%) increased as a result of greater taxes.
• Overall Inflation: The initial phase saw a slight increase in inflation, but over time, the system stabilized, with many industries benefiting from lower costs and better efficiency.​

Advantages and various objectives of Goods and Services Tax (GST)

1. To achieve the objective of a country-wide unified tax system

The Goods and Services Tax system has made it easier to combine different taxes under one inverted tax structure. The advantage of this one tax structure is that it would apply the same GST rates throughout all Indian states for identical goods and services. As a result, the Central Government can more easily decide on rates and policies while yet maintaining delicate control over tax rates.

2. To Include the Majority of Indian Tax Rates

For many years, India implemented a series of indirect taxes at different supply chain levels, including Central Excise, Value Added Tax(VAT), and others. In addition, the Center and the states shared control over taxation. GST was therefore adopted in place of a single, unionized tax structure.

3. Prevent Tax Evasion

The transparent and unified system has increased tax compliance and government revenues. Invoices submitted by their respective suppliers are the only ones on which taxpayers may mark out an input tax credit under the new GST tax system. The introduction of e-invoicing has strengthened this goal. Additionally, because GST is a taxing system that is applied nationally, it is simpler for the government to maintain surveillance and find defaulters more quickly and effectively.

4. To Widen the Taxpayer Base

The GST has made it easier for India's taxed population to grow. Previously, each registration had to be enrolled under each tax legislation, and each tax code had a distinct ending limit dependent on the total value of the business. However, the introduction of the GST, a single integrated tax system applied on both goods and services, has increased the number of companies that are registered under tax laws.

How Jordensky can assist

Jordensky's accounting and tax knowledge can help you navigate the complexity of the GST system. Our team of experts assures compliance with all GST requirements, assists with appropriate tax filings, and provides strategic guidance to optimize tax liability, allowing businesses to successfully leverage the GST regime's benefits.

Conclusion

The Government of India has made an effort to streamline tax distribution and collection procedures through the GST structure, as well as to establish corporate setups with a formal economic tone.

The GST system in India, with its four-tier structure, has dramatically altered the indirect tax environment. Businesses can improve their financial and operational management by understanding the various tax slabs and their effects. Engaging professionals such as Jordensky can further simplify compliance and strategic planning, resulting in a more seamless experience with the GST system.

Do you have problems with GST and payment management? When you need assistance with anything relating to business Funding, Accounting, income tax or GST filing, or anything else, Jordensky is here to help. Try it now!

FAQs

Q: What is the new GST structure rule?

Ans: The Indian government made e-invoicing mandatory for all business-to-business (B2B) transactions with a turnover of above 100 crores as of January 1, 2021, under the new regulation of the GST law's framework.

Q: What exactly does the phrase "goal-oriented tax consumption" mean?

Ans: Under the GST tax structure, the tax collected would be paid to the taxing authority, which controls the location of consumption, according to the notion of goal-oriented tax consumption.

Q: What does the GST structure's requirement for Dual GST entail?

Ans: Due to the fact that taxes under the GST system are split between the federal government and state governments, a dual GST makes it easier to preserve the nation's federal structure in accordance with the Constitution's provisions.

Q: An integrated goods and services tax is what?

Ans: An Integrated GST (IGST) would be levied against and appropriated by the Central Government for inter-State procurement of goods and services under the new inverted tax structure of the GST system.