Introduction to GST

Introduction

Taxes are of two types: Direct and Indirect. Direct taxes are the ones which are paid on income by various persons like individual, firm, company, NPO, Body of Individuals, etc. Whereas, indirect taxes are the taxes paid on expenses by various persons. In India, Indirect taxes play a very important role as it is not income based. It is progressive in nature as every person irrespective of caste, creed, gender, age, income , religion is required to pay tax which is not the same in case of direct taxation. In a heavy populated country like India, Government requires taxes in many forms to focus on subjects like health, sanitation, education, defense, security, transportation and other infrastructure. Hence, India is a country where there is an extensive levy of indirect taxes. Prior 2017, India had indirect taxes like Central Sales Tax - for inter state sales transactions, VAT - for intra state sales transactions, Service Tax - for provision of services anywhere in India except Jammu and Kashmir, Octroi Tax for entry of goods in to a particular city, luxury tax and even entertainment tax. In 2017, a major reform took place and all the above taxes came under one roof i.e. 'Goods and Services Tax' so as to have 'one nation, one tax'. This has not only simplified work for accountants, professionals and the Government, but has also focused on national integrity and a strict financial relationship between the center and the state. 

You know what?

• Indian Government collected a gross of Rs. 12.33 Lakh Crores of GST during the financial year 2019-2020. 

• Indian Government collected 6.78 Lakh Crore of Corporate Tax and Rs. 5.55 Lakh Crores of Personal Income Tax during the FY 2019-2020.

• In India, only 1.46 Crore people out of 130 Crores pay taxes.

• Around 160 countries in the world have GST.

• For launching GST, the Indian Constitution was amended. Earlier, one transaction cannot be taxed by the Center an the State simultaneously. The amendment has given power to the government to divide taxes between the Center and the State i.e. CGST and SGST.

• The Central Government has to compensate the State Governments for 5 years due to the consumption-based tax system of GST. High productive states like Tamil Nadu, Maharashtra and Gujarat have potentially lost a great amount of VAT.

• Tobacco is the only product on which existing taxes like CST, VAT is levied along with GST. That means, the more you smoke, the more taxes you're paying to the Government.  

• Alcohol for human consumption doesn't attract GST. But wait, no need of getting happy. VAT and Excise is still applicable on alcohol for human consumption. The same applies to certain petroleum products. 

What is GST?

First of all, it's Gods and Services Tax. It's an indirect tax levied on supply of goods and services at state, national and international level. It is tax collected by merchants at every stage of production / value addition and deposited to the Government. That means, the purchaser is the one who bears the tax and pay to the merchant, who hands it over to the Government. GST in India is governed by GST Council of India and is under the purview of Central Board of Indirect Taxes and Customs. It was launched on 1st July, 2017 by former President, Late Dr. Pranab Mukherjee by passing the GST Act. Since inception, GST rules in India have been going through continuous alterations by way of amendments.

Previous Taxes Subsumed under GST

Most of the forms of indirect taxes which existed prior GST have been subsumed by GST, which means those taxes no longer exist. And there is one single tax i.e. GST. Earlier, Indirect taxes were levied by the respective State Governments and the Central Government. State Governments imposed taxes on intra state transactions and the Central Government imposed taxes on services and inter-state movement of goods. 

State Taxes subsumed under GST includes the following:

1. Value Added Taxes like Maharashtra Value Tax (MVAT), Gujarat Value Added Tax (GVAT), etc.

2. Entertainment Tax; tax levied on any form of commercial entertainment like movie tickets, sports events, circus, gaming events, exhibitions. etc. Prior GST, Entertainment Tax was levied at an overall rate from 15% to 110% (average of 30%) ranging from state to state. But under the GST regime, there is a common  rate of 18% (for movie tickets up to Rs. 100/-) and 28% (for movie tickets more than Rs. 100/-)

3. Luxury tax, tax levied on services offered by hotels, resorts, clubs and spas. 

4. Tax on Lottery, Betting and Gambling, etc.

5. Octroi / Local Body Tax, Entry Tax, tax imposed on entry of goods in to a particular jurisdiction for sale purpose.

Central Taxes subsumed under GST includes the  following:

1. Central Excise Duty; tax imposed on manufacturing of goods anywhere across India.

2. Additional Customs Duty; imposed on import of goods from foreign countries.

3. Service Tax; tax imposed on supply of certain services.

4. Central Cess and Surcharge, additional tax for specific purposed over and above the amount of tax.

Old Taxes Vs GST

India has been considered as the land of taxes prior the GST regime. With multiple levy of taxes at various level, there was a cascading effect on the price of the products. Earlier, every product had to undergo Excise Duty at the manufacturing. That means, if you want to manufacture a manufacture something, pay Excise. Once Excise Duty is paid, the goods are ready for supply in markets.  At the time of selling the goods, VAT was applicable in case of intrastate sales or CST was applicable in case of interstate sales. But now under the GST regime, Excise will not be collected. Only GST will be collected at the time of selling the product. Let's understand with an example.

Old Regime Example: Sale value of a manufactured product is Rs. 1,000/- subject to Excise Duty @ 10% and VAT @ 12%. Here, the final price charged to the consumer will be Rs. 1,000 + Excise Duty (10% of Rs. 1,000) + VAT (12% on 1,100)

= Rs. 1,000 + Rs. 100 + Rs. 132

= 1,232/-

Note: VAT is charged on sale value plus Excuse Duty i.e. Rs. 1,000 + Rs. 100.

GST Regime: Sale value of a manufactured product is Rs. 1,000/- subject to GST @ 18%. Here, the final price charged to the consumer will be Rs. 1,000 + GST (18% of Rs. 1,000)

= Rs. 1,000 + Rs. 180

= Rs. 1,180/-

Looking at the above two examples, it can be seen that there exist a difference in the final chargeable price. Under the GST regime, the consumer is being less charged, thereby gaining a benefit of Rs. 52/-. (This may vary from goods to goods and services to services)

Coverage of GST

We all know India is huge. With 3.287 million km square, one thing to be remembered is - 'GST is applicable to the whole of India'. Here, whole of India not only includes India's States and Union Territories, but also it's air space and coastal shelf. This means supply of goods or services anywhere in India, be it land or air or water, is taxable. 

As per Section 2(56) of the CGST Act 2017, “India” means the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, and the air space above its territory and territorial waters. 

Let's understand coverage in detail. GST is applicable on the following:

1.  Air space above India's territory and territorial waters, where territorial waters extend up to12 nautical miles from nearest point of the baseline. Under GST, territorial waters are treated as a part of the adjacent state. That means, if the supplier is located within the territorial waters adjacent to Karnataka, then his place of supply shall be Karnataka. (1 Nautical mile = 1.852 kms)

2. Continental Shelf comprising of seabed and subsoil beyond the limits of territorial waters up to a distance of 200 Nautical Miles from the baseline. 

3. Exclusive Economic Zone is an area beyond and adjacent to the territorial waters up to a distance of 200 Nautical Miles from the baseline.

4. For points 2 and 3, the Union of India has sovereign rights of exploration, exploitation , conservation, management, maintenance, construction, creation and maintenance of artificial islands, terminals, structures, etc. including regulation of scientific research.

5. Beyond 200 Nautical Miles, the water area is called 'High Sea' where countries have equal rights. Transactions made at this level (especially consigning goods to another consignee after dispatch of goods) are called High Sea Sales. As per Government notification, High Sea Sales for importation of goods will be chargeable to IGST.

6. Besides this, GST is applicable to every Indian State and all the Union Territories (Delhi, Puducherry, Andaman & Nicobar Islands, Lakshadweep Islands, Dadra & Nagar Haveli, Daman and Diu, Jammu & Kashmir, Ladakh and Chandigarh).

See the below image to understand the concept of Territorial water, Continental Shelf, Exclusive Economic Zone and High Sea. 

Some key concept to understand before understanding GST

1. Business: An entity engaged in trade, commerce, manufacture, profession, association, society, gate-keeping, club, vocation adventure, wager or an activity in connection to the same.

2. Supply: Sale of goods, services and ideas for consideration.

3. Intra - State Supply: Supply of goods or services within the political boundaries of a particular State of a Union Territory.

4. Inter - State Supply: Supply of goods or services from one State / Union Territory to another.

5. Consideration: Any payment made or to be made in money or otherwise for exchange of goods or services but does not include subsidy provided by the Central and State Government. 

6. Goods: Every kind of movable property other than money and securities but includes actionable claims, growing crops, grass and things attached to or forming a part of land agreed to be severed under a supply contract.

7. Service: Anything other than goods, money and securities, but includes conversion form to another, for which a consideration is charged.

8. Supplier: A person supplying goods and services and includes agents acting on behalf such suppliers.

9. Recipient:

(a) a person liable to pay consideration for goods or services or both;                    

(b) A person to whom goods are delivered without consideration;

(c) An agent acting on behalf of the final recipient of goods or services of both.

10. Taxable Supply: Supplies that are chargeable to tax under GST at various rates.

11. Non-Taxable Supply: Supplies which are not chargeable to tax under GST like alcohol for human consumption and petroleum products.

12. Exempt Supply: Supplies which attract NIL rate of tax or wholly exempted from tax like human blood, sindhoor, pooja samagri, second class railway tickets, etc.

13. Zero Rated Supply: Supplies which are actually taxable but are taxed @ 0% for being exports. 

14. Person: Includes an individual, Hindu Undivided Family, Firm, Limited Liability Partnership, Body Corporate, Corporation, Local Authority, Company, Central Government, State Government, Artificial Juridical Person, Trust, Association of Persons, Body of Individuals, Cooperative Society.

15. Taxable Person: A person who is registered or liable to be registered under GST Act. To be precise, taxable person is the one who supply goods and services and collects GST from customers.

16. Related Person: Related persons include officers, directors, partners, employer and employee, a third person who holds 25% or more ownership, members of the same family, person directly or indirectly controlling or getting controlled by a third person, sole agent / distributor. 

17. Distinct Person: Establishments under a single PAN registered separately in the same State or any other State.

18. Casual Taxable Person: A person who occasionally undertakes transactions involving supply of goods or services or both in the course or furtherance of business, whether as principal, agent or in any other capacity, in a State or a Union territory where he has no fixed place of business. 

19. Non - Resident Taxable Person: Any person who occasionally undertakes transactions involving supply of goods or services or both, whether as principal or agent or in any other capacity, but who has no fixed place of business or residence in India. 

20. Input Service Distributor: Input Service Distributor is a business unit which receives invoice for availing services used by itself and it's branches. An ISD distributes the input tax among the branches (for utilizing services) so that such branches can claim input tax credit. Eg. Jana Bank headquartered in Delhi has branches in Mumbai, Cochin, Bengaluru and Pune. Tally Incorporation provided software services to the head office and all the branches of Jana Bank and invoiced the amount to Delhi head Office of Jana Bank. As software service is used by all the branches, the head office cannot claim the entire credit. This credit has to be distributed by the head office to all the four branches. Hence, the Delhi head office becomes the Input Service Distributor.   

21. E-Commerce Operator: A person who owns, operates or manages digital facility or platform for e-commerce. It also includes aggregators like Ola, Zomato, Amazon, etc.

22. Aggregate Turnover: Aggregate value of taxable supplies, exempt supplies, export of goods or services, inter state supplies of persons having same PAN. (Excludes Central Tax, State Tax, UT Tax, Integrated Tax, Cess and Reverse Charge Mechanism). This is calculated by vendors for determining their liability of registration into GST. This calculation helps them to know whether are falling in the GST bracket as per thresholds. 

23. Harmonized System Nomenclature: Harmonized System Nomenclature classifies above 5000 goods universally in a systematic manner through an 8 digit code. Eg. HS Code for fresh onions is 07031010. HS Code for garlic is 07032030.

24. E-Way Bill: An electronic document generated on the GST portal evidencing movement of goods having a consignment value of more than Rs. 50,000/-. 

Part A – GSTIN, place of delivery, invoice no. and date, value of goods, HSN Code, transport document number (GR, RWB, AWB, BL) and reason for transportation. 

Part B – Transporter details.

A copy of the e-way bill has to be in possession with the carrier driver and has to be presented at terminals / check posts for check. The main objective of the e-way bill is to prevent fake transactions and enhance transparency in movement of goods. It is hypothesized that the amount of invoices created by vendors would actually match with the amount of goods sent by road. 

Need for GST

To a great extent, GST was required for India due to following reasons:

• To get rid of too many taxes levied by Centre and States.

• To stop Cascading of Taxes (tax on tax, as Central Government taxes were not available as set off against State Government taxes and vice versa)

• To stop different practices by different states.

• To have authenticated and free flow of trade. (by knocking out octroi, entry tax, Local Body Tax, etc.) 

• To save tax payer’s time and money in filing and tax payment.

• To have a “harmonized” system of indirect taxation. HSN – Harmonized System of Nomenclature to classify goods universally in a systematic manner. Contains a 6 digit code that classifies 5000 plus goods all over the world.

• To have a single tax for entire supply chain.

• To have a strong base with IT aid to have a better tax compliance.

Benefits of GST

1. One Nation, One Tax

2. Low Taxes

3. Lower Cost of collection

4. Boost to Make in India

5. Enhance Exports

6. Beneficial to small enterprises by way of higher threshold and composition scheme.

7. Uniform Tax

8. Simplified and automated procedures and record keeping.

9. Advanced IT enabled services (GSTN)

10. Employment generation

11. No tax evasion

12. Higher revenue for the Govt.

Who is behind GST?

GST Council

GST Council is a constitutional body for making recommendations to the Union and State Government on issues related to Goods and Service Tax. The GST Council is chaired by the Union Finance Minister and other members are the Union State Minister of Revenue or Finance and Ministers in-charge of Finance or Taxation of all the States.  

1. Powered by Article 279A of the Indian Constitution to constitute a joint forum of Centre and States.

2. Members

• Union Finance Minister (Chairperson)

• Union Minister of State in charge of Revenue or Finance (Member)

• Minister in charge of Finance or Taxation  (Members)

3. Provides recommendations on 

• Taxes, cesses, surcharges levied by State and Union which is to be subsumed by GST.

• List of goods and services to be taxable or exempted.

• Lay down principles regarding levy of GST.

• Threshold limit for registration and payment of GST.

• Band of Tax Rates for goods and services.

• Provision of Special Category States.

• Guiding principles and amendments.

4. Establishes a mechanism to redress disputes between Centre and the States or among States. 

Goods and Services Tax Network (GSTN)

• GSTN is the technological backbone for implementation and operation of GST in India.

• Set up by the Government of India with stakes equally held by State and Center Government. (Approved in April 2018) Prior, Government Share: 49% and Non Government Financial Institutions Share: 51% 

• Infosys has been appointed as Managed Service Provider (MSP)

• GSTN got 73 IT, IT enabled services, financial tech companies and 1 Commissioner of Commercial Taxes (GST Suvidha Providers)

• GSTN provides three front end services like registration, payment and filing of return. 

• GSTN facilitates computation and settlement of IGST.

• Providing Management Information System Reports to Central and State Government as per tax-payers return information.

• GSTN manages the matching engine for matching, reversal and claim of Input Tax Credit.

• GSTN facilitates accounting  of fund transfers between States and Central Government.

• GSTN has developed back end process like assessment, audit, refund, appeal, etc.

• https://www.gst.gov.in/ (GST Portal) developed by GSTN

Check out the next chapters to learn more about GST!

But before that, test your basics...!!