Last Updated on May 25, 2022 by Neera Bhardwaj
In the pre-GST era, there was chaos of indirect taxes. It included a range of taxes from VAT, service tax, central excise, etc. This led to different compliance requirements, making filing returns and paying taxes a hassle. Business owners also could not set off the payment of one indirect tax against another. Moreover, it also led to a cascading effect where goods were taxed at every stage in the supply chain.
In 2000, Prime Minister Vajpayee set up a committee to draft a single indirect tax. It took years of discussion to set up a proper system. Bills were pushed in both Lok Sabha and Rajya Sabha for approval. Finally, in 2017, the GST Act came into existence. It gave the go-ahead to the new indirect tax regime. Let us understand how GST works in detail.
Table of Contents
What is GST?
The Goods and Service Tax (GST) is the indirect tax on the supply of goods and services. It came into effect on 01 July 2017, after the GST Act was passed in Parliament on 29 March 2017. GST is a destination-based tax, meaning that it is levied in the state where the goods or services are consumed.
Benefits of the GST regime
Unification of indirect tax
The introduction of GST gave rise to a unified system of indirect taxation throughout India. With the tagline of ‘One Nation, One Tax,’ GST removed varying indirect taxes and different rates across states. It brought further relief to taxpayers as it simplified filing returns and claiming refunds by creating a robust online platform and a GST Network.
Removal of the cascading effect of tax
Before GST, indirect taxes were levied on every successive level in the supply chain. This led to a multiplication of taxes, with no relief to get credit on previous payments. With GST, taxpayers who supply goods for further processes and not for consumption can claim the input tax credit. This has removed the cascading effect.
Regulation of more taxpayers
Registration under GST comes with certain benefits. This is why more businesses have officially registered and are paying taxes. Moreover, the input tax credit rules have pushed many unorganised businesses in the manufacturing cycle to register. Tax evasion has reduced and consequently increased the tax revenue for the Government.
Benefit for small businesses through the composition scheme
Small businesses with a turnover of less than Rs. 1.5 cr. (Rs. 75 lakh in the Northeast and Himachal Pradesh) can opt for this scheme. The composition scheme allows taxpayers to stay free of formalities and pay the tax at a fixed rate.
Now that we have outlined how GST improves the tax system let us see how it works.
What are the components of GST?
GST is divided into three main categories. These are as follows:
The Central Goods and Services Tax (CGST) is levied by the Central Government. This means that out of the total GST collected, this part will serve as the revenue for the Centre. It is applicable on supply within the state.
The State Goods and Services Tax (SGST) is levied by the respective State Governments on supply within the state. This part of the total GST collected goes to the State Government, where the goods or services are consumed.
Similarly, UTGST is applicable in the Union Territories. These include Andaman and Nicobar Islands, Lakshadweep, Dadra & Nagar Haveli and Daman & Diu, Ladakh, and Chandigarh.
The Integrated Goods and Services Tax is collected by the Central Government. It is charged on inter-state supply of goods or services. The Central and State Governments share revenue based on where the goods are consumed.
Apart from this, different rates are applicable based on the type of good or service. Let us have a look at the slabs under GST.
What are the rates under GST?
The rates under GST are divided into four major tax slabs: 5%, 12%, 18%, and 28%. Different goods and services fall under different slabs. The GST Council revises these from time to time.
Let us understand how GST is levied with some examples.
Assume Mr X lives in Mumbai. He sells goods worth Rs. 50,000 to Mr Y, who lives in Nagpur. The goods fall under the 5% tax slab. Because goods were supplied and consumed within Maharashtra, the transaction will attract the intra-state tax. This means CGST+SGST will be applicable at 2.5%+2.5%.
In another example, Mr X, from Mumbai, supplies goods worth Rs. 30,000 to Mr Z in Kochi. The goods were in the 12% slab. Here, the supply is between two states, Maharashtra and Kerala. This will attract IGST. The revenue of Rs. 3,600, thus will go to the Central Government.
Registration under GST
Registration under GST comes with a set of benefits, including the provision for the input tax credit. That being said, if your turnover exceeds a set limit, you must register under GST. Let us see who is eligible for the same.
Who is eligible?
The following persons are eligible to register under GST:
- Businesses supplying goods and services with turnover more than the threshold limit.
- Individuals who were registered under the old indirect taxation regime.
- All Casual Taxable Persons (CTPs) and non-resident taxable persons.
- Individuals who pay taxes under the reverse charge mechanism.
- E-commerce aggregators and persons supplying goods and services through e-commerce aggregators.
- Agents of input service distributors and suppliers.
Threshold limits for registration
|Nature of business||Turnover (Rs.)|
|Supplying goods in normal states||40 lakh|
|Supplying goods in special category states of Himachal Pradesh, Jammu and Kashmir, Uttarakhand, and all north-eastern states.||20 lakh|
|Supplying services in normal states||20 lakh|
|Supplying services in special category states||10 lakh|
The procedure to register online is fairly straightforward. You can do so on the GST Portal set up by the Government.
GSTIN and the GST Certificate
On successful registration, you will be allotted a GST Identification Number (GSTIN). It is a 15 digit code based on your state of operation and your PAN. The benefits of having a GSTIN are that you can claim refunds easily and simplify the verification process. Moreover, you may also avail loans using your GSTIN.
You will also be given a GST Certificate. It contains all the details of your business and registration. It is only available as a digital copy that you can download from the GST Portal.
The GST regime has transformed how indirect taxes are levied and collected in the country. It comes with lesser compliances, removal of duality, and more support for business owners. It has paved a way for more benefits to both the taxpayers and the Government. Consult your CA/Tax advisor for professional guidance on GST.