What is GST

What is GST in India? Goods & Services Tax Law Explained

In this article, we take a closer look at what is GST and the reason why it is making business and taxes simpler and easier.

1. What is GST?
2. Journey of GST in India
3. Advantages Of GST
4. Components of GST?
5. Tax Laws before GST
6. What changes does GST bring in?

1. What is GST?

GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017. The Act came into effect on 1st July 2017; Goods & Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.

In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of goods and services. This law has replaced many indirect tax laws that previously existed in India.

GST is one indirect tax for the entire country.

So, before Goods and Service Tax, the pattern of tax levy was as follows:

Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. Inter-state sales are chargeable to Integrated GST.

Now let us try to understand the definition of Goods and Service Tax – “GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.”

Multi-stage

There are multiple change-of-hands an item goes through along its supply chain: from manufacture to final sale to the consumer.

Let us consider the following case:

• Purchase of raw materials
• Production or manufacture
• Warehousing of finished goods
• Sale to wholesaler
• Sale of the product to the retailer
• Sale to the end consumer

 Goods and Services Tax is levied on each of these stages which makes it a multi-stage tax.

Value Addition

The manufacturer who makes biscuits buys flour, sugar and other material. The value of the inputs increases when the sugar and flour are mixed and baked into biscuits.

The manufacturer then sells the biscuits to the warehousing agent who packs large quantities of biscuits and labels it. That is another addition of value after which the warehouse sells it to the retailer.

The retailer packages the biscuits in smaller quantities and invests in the marketing of the biscuits thus increasing its value.

GST is levied on these value additions i.e. the monetary value added at each stage to achieve the final sale to the end customer.

Destination-Based

Consider goods manufactured in Maharashtra and are sold to the final consumer in Karnataka. Since Goods & Service Tax is levied at the point of consumption. So, the entire tax revenue will go to Karnataka and not Maharashtra.

2. Journey of GST in India

The GST journey began in the year 2000 when a committee was set up to draft law. It took 17 years from then for the Law to evolve. In 2017 the GST Bill was passed in the Lok Sabha and Rajya Sabha. On 1st July 2017 the GST Law came into force.

3. Advantages Of GST

GST has mainly removed the Cascading effect on the sale of goods and services. Removal of cascading effect has impacted the cost of goods. Since the GST regime eliminates the tax on tax, the cost of goods decreases. GST is also mainly technologically driven. All activities like registration, return filing, application for refund and response to notice needs to be done online on the GST Portal; this accelerates the processes.

4. What are the components of GST?

There are 3 taxes applicable under this system: CGST, SGST & IGST.

• CGST: Collected by the Central Government on an intra-state sale (Eg: transaction happening within Maharashtra)
• SGST: Collected by the State Government on an intra-state sale (Eg: transaction happening within Maharashtra)
• IGST: Collected by the Central Government for inter-state sale (Eg: Maharashtra to Tamil Nadu)

In most cases, the tax structure under the new regime will be as follows:

Transaction	New Regime	Old Regime
Sale within the State	CGST + SGST	VAT + Central Excise/Service tax	Revenue will be shared equally between the Centre and the State
Sale to another State	IGST	Central Sales Tax + Excise/Service Tax	There will only be one type of tax (central) in case of inter-state sales. The Centre will then share the IGST revenue based on the destination of goods.

Illustration: 

• Let us assume that a dealer in Gujarat had sold the goods to a dealer in Punjab worth Rs. 50,000. The tax rate is 18% comprising of only IGST.

In such case, the dealer has to charge Rs. 9,000 as IGST. This revenue will go to the Central Government.

• The same dealer sells goods to a consumer in Gujarat worth Rs. 50,000. The GST rate on the good is 12%. This rate comprises of  CGST at 6% and SGST at 6%.

The dealer has to collect Rs. 6,000 as Goods and Service Tax. Rs. 3,000 will go to the Central Government and Rs. 3,000 will go to the Gujarat government as the sale is within the state.

5. Tax Laws before GST

In the earlier indirect tax regime, there were many indirect taxes levied by both state and centre. States mainly collected taxes in the form of Value Added Tax (VAT). Every state had a different set of rules and regulations. Interstate sale of goods was taxed by the Centre. CST (Central State Tax) was applicable in case of interstate sale of goods.  Other than above there were many indirect taxes like entertainment tax, octroi and local tax that was levied by state and centre. This led to a lot of overlapping of taxes levied by both state and centre. For example, when goods were manufactured and sold, excise duty was charged by the centre. Over and above Excise Duty, VAT was also charged by the State. This lead to a tax on tax also known as the cascading effect of taxes. The following is the list of indirect taxes in the pre-GST regime:

• Central Excise Duty
• Duties of Excise
• Additional Duties of Excise
• Additional Duties of Customs
• Special Additional Duty of Customs
• Cess
• State VAT
• Central Sales Tax
• Purchase Tax
• Luxury Tax
• Entertainment Tax
• Entry Tax
• Taxes on advertisements
• Taxes on lotteries, betting, and gambling

CGST, SGST, and IGST has replaced all the above taxes. However, the chargeability of CST for Inter-state purchase at a concessional rate of 2%, by issue and utilisation of c-Form is still prevalent for certain Non-GST goods such as: (i) Petroleum crude; (ii) High-speed diesel; (iii) Motor spirit (commonly known as petrol); (iv) Natural gas; (v) Aviation turbine fuel; and (vi) Alcoholic liquor for human consumption. in respect of following transactions only:

• Resale
• Use in manufacturing or processing
• Use in the telecommunication network or in mining or in the generation or distribution of electricity or any other power

6. What changes has GST brought in?

In the pre-GST regime, every purchaser including the final consumer paid tax on tax. This tax on tax is called Cascading Effect of Taxes.

GST has removed this cascading effect as the tax is calculated only on the value-addition at each stage of the transfer of ownership.