GST in India: A Comprehensive Guide with Examples

The Goods and Services Tax (GST) is one of the most significant tax reforms implemented in India on July 1, 2017. It is a value-added tax, which means that the tax is only paid on the value added during the manufacturing process. GST can also be defined as a destination-based tax, where the tax is collected at the point of ultimate consumption.

Why was GST introduced into the system?

There are various taxes that must be paid at each stage, which are collected differently by the state and central governments, and their rates vary from one state to the other state.

India is a legal country with 30 different taxation laws.

• Almost every state had a different tax regime, causing confusion and procedural gaps in the taxation structure.
• The flow of tax credit was restricted, and a tax on tax was imposed.

When we talk about GST, it will include all taxes, making it easier to provide services and goods across the country because no additional state taxes will be imposed.

Basics of GST

GST is levied on the supply of goods and services at every stage of the supply chain, from the manufacturer to the consumer. The tax is collected by the government at each stage of the supply chain and is then passed on to the next stage as a credit. This ensures that the tax burden is shared equally among all participants in the supply chain and prevents the cascading effect of multiple taxes.

GST is applicable to all businesses whose annual turnover exceeds a certain threshold (INR 40 lakh for most states and INR 20 lakh for special category states). Businesses that are below the threshold can opt for GST registration voluntarily.

There are four GST rates in India: 5%, 12%, 18%, and 28%. The GST rate applied to a particular goods or service depends on the nature of the goods or service and the classification of the goods or service under the GST tariff.

GST is a transparent and efficient tax system that simplifies the process of indirect tax compliance for businesses. It also helps to reduce the overall tax burden on businesses and consumers and promotes a level playing field for all businesses.

How will GST help Business in India?

• The tax structure will be simplified, with multiple taxes reduced to a single tax structure.
• Tax revenue will increase.
• Simple tax payment and filing
• Tax evasion has been reduced.

Who is Required to comply with GST?  

• A person who supplies goods and/or services worth more than INR 20 lakh in a fiscal year.
• To anyone who makes an interstate taxable supply of goods or services.
• E-commerce operator
• Person who supplies goods and/or services other than branded services via e-commerce operator
• Non-Resident Taxable Person
• Person required to deduct/collect tax (TDS/TCS)
• Input Service Distributor
• Person required to pay tax under Reverse Charge Mechanism (RCM)
• Person supplying goods on behalf of another taxable person (e.g. Agent)

Who is Exempt from GST compliance?

• Agriculturists
• Persons who are solely engaged in the business of supplying goods and/or services that are not taxable or are entirely exempt from tax under this Act

How does GST Function?

Before a product reaches the end user, it must passthrough several stages, and several taxes must be paid at each stage. However,under the GST regime, this situation will change. Here's an example to help you understand:

Stage 1: Manufacturing

Consider shirt manufacturing and the applicable GST rate of 10%. The manufacturer purchases materials worth INR 5000, which includes INR 500 in GST (10 percent of 5000). He then adds INR 500 to the materials, bringing the total gross value of the product to INR 5500.

Now, the total tax on the output of the Shirt is INR 550(10 percent of 5500). The manufacturer would be required to pay a tax of INR550 under the current tax system; however, under GST, he can set some of his tax off because he already paid it when purchasing the raw materials. As a result, the final GST to be paid will be INR 50 (550-500) (total tax amount minus tax already paid)

Stage 2: Wholesale

The shirt is transferred from the manufacturer to the wholesaler at a gross value of INR 5500, inclusive of GST. The wholesaler then adds his value (margin) of INR 500, for a total of INR 6000 (5500 + 500). This brings the total tax on the final bill to INR 600. (10 percent of 6000). The wholesaler can also deduct this tax amount, making the final GST payable for the wholesaler INR 50 (600 - 550).

Stage 3: Retailer

In this final step, the retailer purchases the shirt from the wholesaler for INR 6000, inclusive of INR 600 in GST (10 percent of 6000).He then adds his INR 500 margin, bringing the total cost of the goods to INR 6500. The GST applicable in this case is INR 650 (10% of 6500), but because the retailer already paid a tax when purchasing the goods, he can deduct it. As a result, the retailer's final GST incidence would be INR 50 (650 - 600).

Finally, because the retailer will sell at INR 6500, the customer will  pay INR 650 (10% of 6500).

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

GST Most Important Component

In its Dual or concurrent model, the government has implemented GST. As a result, both the federal and state governments will levy GST at the same time. The implemented GST structure is divided into four sections, namely -

• IGST - Integrated Goods and Services Tax - A tax levied by the Central Government on both intrastate and interstate supplies of goods and services.
• CGST - Central Goods and Services Tax - Tax levied by the Central Government on intrastate supplies of both goods and services.
• SGST - State Goods and Services Tax - A tax levied by the state government on intrastate supplies of both goods and services.
• UGST - Union Territory Goods and Service Tax - Tax levied by the Government of Union Territory on intrastate supplies of both goods and services.

Here are some frequently asked questions (FAQs) on the basics of GST in India:

Q: What is GST?

Goods and Services Tax (GST) is a comprehensive indirect tax levied on the supply of goods and services in India. GST was introduced in India in 2017 to replace the existing system of indirect taxes, such as VAT, service tax, and excise duty, with a single tax.

Q: Who is required to pay GST?

GST is applicable to all businesses whose annual turnover exceeds a certain threshold (INR 40 lakh for most states and INR 20 lakh for special category states). Businesses that are below the threshold can opt for GST registration voluntarily.

Q: What are the GST rates in India?

There are four GST rates in India: 5%, 12%, 18%, and 28%. The GST rate applied to a particular goods or service depends on the nature of the goods or service and the classification of the goods or service under the GST tariff.

Q: How does GST work?

GST is levied on the supply of goods and services at every stage of the supply chain, from the manufacturer to the consumer. The tax is collected by the government at each stage of the supply chain and is then passed on to the next stage as a credit. This ensures that the tax burden is shared equally among all participants in the supply chain and prevents the cascading effect of multiple taxes.

Q: What are the benefits of GST?

Some of the benefits of GST include simplification of the indirect tax compliance process for businesses, reduction of the overall tax burden on businesses and consumers, promotion of a level playing field for all businesses, and increased transparency and efficiency in the tax system.

Q: How do I register for GST?

You can register for GST online through the GST Portal (https://www.gst.gov.in/). To register for GST, you will need to provide your personal and business details, along with supporting documents such as PAN,