Everything You Need to Know About the GST System in India
Countries with a complicated tax system have finally made economic reforms to ensure each country’s economy is sustainable. A densely populated country like India is also taking the step to reform its tax system for the supply of goods. Before July 2017, they are enforcing tax based on the origin of the products. For every stage of the supply chain, there are several more taxes based on the individual states. But, now, ever since the implementation of a better tax system, India sees simpler and way better management of complicated tax issues. For that, it is time to get intimate with the overview of goods and services tax (GST) in India.
Goods and Services Tax (GST)
As you can guess, it is a tax on goods and services. Previously, India also taxes on products and the supply of goods. But the taxation system was cumbersome as some states have overlapping taxes at a stage of supply chain and some are central tax. Effective 1st July 2017, the Indian government launched GST, and it replaces all tax used on the supply of goods and services. GST is a consumption tax. Under GST, for every stage of the production process, the charge is collected at the consumption stage. It is a comprehensive tax as it covers from the basis of production up to the consumer. All tax collected within the supply chain can be refunded except for the final stage, the consumer. Before the implementation of GST, levies on goods or services can reach up to 26.5%. After the GST takes place, most products are within the 18% tax range.
Different Tax Rates
GST has different tax rates for various goods or services. They are zero per cent, five per cent, twelve per cent, 18% and 28%. Only items such as luxury cars, tobacco products and oxygenated drinks are taxed at 28% plus an addition of 22% cess. Since GST subsumes most of the indirect tax in the country, state government tax applies only to petroleum products, electricity and alcoholic drinks. Gold and semi-precious stones each have a special rate of 0.25% and three per cent respectively. The GST rates for services are zero for essential financial services, five per cent for cab rental services and air travel. 12% for movie tickets under Rs.100, 18 % for outdoor catering, theatre and 28% for amusement parks.
Other countries adopt the GST model as it is. A single tax administered by an only government. However, India takes the dual GST model. It means both the Union and state government manage India taxation. GST is collected on all transactions including sale, purchase, barter, lease, transfer or import of goods or services. In India, there is Central GST (CGST), State GST (SGST) and Interstate GST (IGST). CGST and SGST apply when a transaction happens within a single state. The revenue is shared equally between the Central and the State government, respectively. For example, If the sale is to a different state, then IGST is levied. The revenue of this tax goes to the Central Government.
As previously mentioned, the implementation of GST is to replace all indirect taxes applied in the supply of goods and services. Before GST, there a cascading effect of the tax. It means that when a manufacturer produces and sells the products, the central government deploys excise duty. This is followed by a value-added tax charged by the state government. As you can see, this is a tax on tax or cascading effect of taxes. Each of these tax is not claimable. Hence, everyone in the supply chain is paying tax on taxed goods right from the beginning. Before GST, there was Central excise duty, Special Additional Duty of Customs, Cess, State VAT, Central Sales Tax, Purchase Tax, Luxury Tax, Entertainment Tax, Entry Tax, Tax on advertisements and gambling-related matters. All the components of GST have since replaced all of these taxes.
The Beauty of GST
In line with GST implementation, the government creates the Goods and Services Tax Network (GSTN). It is a non-profit organisation with a sophisticated network, accessible to taxpayers, government and stakeholders to access information from a single portal. The portal is designed to track every transaction and connect tax returns. Both tax authorities and taxpayers are frequent users of this portal. GST is fully electronic and automated. Another aspect that most welcomes GST is that the tax paid is refundable. Manufacturers, wholesalers, dealers and retailers can file for GST and claim refunds. This has drastically reduced the price of manufactured produces for consumers buying it.
From e-waybills, invoicing, filing, and refund, everything GST can be done electronically. E-waybills is the electronic, paperless permit to ship goods to another state. The ultimate aim of using e-waybills is to plug loopholes where transactions are on a cash basis. Each e-waybill has a matching GST invoice. E-waybills are also available for intra-state shipment. It means delivery pf goods happens within the same state. We are hoping that the intra-state and interstate e-waybill can become a seamless e-waybill system. There is also a trial project of e-invoicing system starting from January 2020. The requirement is that large businesses with an annual aggregate of above Rs.100 crore must obtain a unique invoice reference number. This is for the business-to-business invoice. Large companies will need to upload on the GSTN as invoice registration. The portal verifies the invoice and authorises using a digital signature plus a QR code. The reason for e-invoicing is that it helps reduce data entry errors. The system passes information directly from the invoice registration portal to the GST portal and the e-waybill portal. Hence, there is no more need to manually enter data while filing GST returns for specific parts of the e-way bills.
Who Must Register for GST
As for how this overview is about, it is an assumption that only businesses should register for GST. GST requires companies with turnover exceeding Rs.40 lakhs to register as a taxable person. Registered individuals under the Pre-GST law must register for GST too. People or companies that are paying tax under the reverse charge mechanism should register for GST. A reverse charge mechanism is GST charged to the receiver. The moment they receive an item from unregistered, smaller material and service supplier, they will have to pay the tax. Initially, the GST allows suppliers to claim for the input tax credit, where the tax is refunded. But with a reverse charge mechanism, the receiver gets to claim the input tax credit. Everyone in the supply chain of goods and services is required to register for GST. To register for GST, the applicant will need their permanent account number (PAN), ID card, incorporation certificate, physical business address, bank account statement, digital signature, letter of authorisation and identity and address of directors.
GST for Good
If you find this overview of goods and services tax (GST) in India useful, maybe it is time you consider getting on the GST wave. Be sure to get in touch with the GST experts to ensure all GST related matters are dealt with from the start till the end. You could even reach out to us, and we will gladly help you through the adversities.