Unit 5 GST

INTRODUCTION TO GST

GST is a tax on goods and services with comprehensive and continuous chain of set-off
benefits up to the retailer level. It is essentially a tax only on value addition at each stage,
and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the
GST paid on the purchase of goods and services. Ultimately, the burden of GST is borne
by the end-user (i.e., final consumer)of the commodity/service.

There are about 160 countries that have implemented GST/VAT, both being destination-
based taxation system. France was the first country to introduce GST in the year 1954.
Only Canada hasdual GST model (like India).

With the introduction of GST, a continuous chain of set-off from the original producer’s
point andservice provider’s point up to the retailer’s level has been established, eliminating
the burden of all cascading or pyramiding effects of an indirect tax system. This is the
essence of GST. GST taxes only the final consumer. Hence the cascading of taxes (tax-on-
tax) is avoided and productioncosts are cut down.

Prior to the introduction of GST, the indirect tax system of India suffered from various
limitations.There was a burden of tax-on-tax in the pre-GST system of Central excise duty
and the sales tax system of the States. GST has taken under its wings a profusion of indirect
taxes of the Centre andthe States. It has integrated taxes on goods and services for set-off
relief. Further, it has also captured certain value additions in the distributive trade. There
is now a continuous chain of set- offs which would eliminate the burden of all cascading
effects.

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In a nutshell, GST is a comprehensive indirect tax levy on manufacture, sale and

consumption of goods as well as services at the national level. GST is an indirect tax for the
whole of India to makeit one unified common market. GST is designed to give India a world
class tax system and improvetax collections. It would end the long-standing distortions of
differential treatment of manufacturing sector and services sector. GST will facilitate
seamless credit across the entire supply chain and across all States under a common tax
base.

GST IN INDIA

GST is known as the Goods and Services Tax. It is an indirect tax which has replaced many
indirect taxes in India such as the excise duty, VAT, services tax, etc. The Goods and
Service Tax Act was passed in the Parliament on 29th March 2017 and came into effect
on 1st July 2017.

In other words, Goods and Service Tax (GST) is levied on the supply of goods and services.
Goodsand Services Tax Law in India is a comprehensive, multi-stage, destination-based
tax that is leviedon every value addition. GST is a single domestic indirect tax law for the
entire country and wouldmake India one unified common market.

This new tax proves beneficial not only to the common man but for the country as a whole
due tothe following:

1. Combining various taxes: It combines variety of taxes and provides tax credit
against goods and services as well.
2. Stage wise tax on Value Addition: It is levied at all stages right from manufacture
upto final consumption with credit of taxes paid at previous stages available as set-
off. In a nutshell, only value addition will be taxed and burden of tax will be borne
by final consumer.
3. Recovery from ultimate consumer: The final consumer will, however, bear only
the tax charged by the last dealer in the supply chain with the set off benefits that
are allowed at previous stages.
4. Uniform rates: GST is to be charged at the same rate at national level on similar

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productsand services and it replaces almost all the current indirect taxes which are
imposed by theCentral Government and the States/ Union Territories.
5. Destination based tax: GST is however consumption-based tax which means that
the tax which is paid is at the ultimate point of sale.
6. Place of accrual of tax: The tax would accrue to the taxing authority which has
jurisdiction over the place of consumption which is also termed as ‘place of
supply’.
7. Exemption to small traders: Tax payers with aggregate turnover of Rs.40 lakhs
would be exempted from tax. For North Eastern States and Sikkim, the exemption
would be Rs.20 lakhs.
8. Registration under GST: Businesses whose turnover exceeds Rs.40 lakhs in case
of goods (Rs.20 lakhs for special category states) and Rs.20 lakhs in case of
services (Rs.10 lakhs for special category states) is required to register as a normal
taxable person.

COMPONENTS OF GST

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

➢ Central Goods and Services Tax (CGST): It is the tax collected by the Central
Government on an intra-state sale (e.g., a transaction happening within
Maharashtra)
➢ State / Union Territories Goods and Services Tax (SGST/UTGST): It is the tax
collected by the state government on an intra-state sale (e.g., a transaction
happening within Maharashtra)
➢ Integrated Goods and Services Tax (IGST): It is a tax collected by the Central
Governmentfor an inter-state sale (e.g., Maharashtra to Tamil Nadu)

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

Transaction Old Regime New Regime Revenue Distribution

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Sale within VAT + Central CGST+SGST Revenue will be shared equally between
the State Excise/Service tax theCentre and the State

Sale to Central Sales Tax IGST There will only be one type of tax
another State +Excise/ServiceTax (central) incase of inter-state sales. The
Centre will thenshare the IGST revenue
based on the destination of goods.

➢ Input Tax Credit

Input credit means at the time of paying tax on output, you can reduce the tax you have
already paid on inputs and pay the balance amount.

For example: You are a manufacturer –

a. Tax payable on output (FINAL PRODUCT) is Rs.450
b. Tax paid on input (PURCHASES) is Rs.300
c. You can claim INPUT CREDIT of Rs.300 and you only need to deposit Rs.150 in taxes.

How is Input Tax Credit used:

ITC Received on account of Setoff against (in order)
IGST 1. IGST
2. CGST
3. SGST
SGST 1. SGST
2. IGST
CGST 1. CGST
2. IGST

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THE JOURNEY OF GST IN INDIA

COMMODITIES KEPT OUTSIDE GST

The new GST replaced most of the previous taxes in India. Now GST is levied at all stages
right from manufacture up to the final consumption with credit of taxes paid at previous
stages availableas set off. Only value addition will be taxed and burden of tax will be borne
by the final consumer.

However, at present following items are kept outside the purview of GST:

1. Alcohol for Human Consumption: Alcohol for human consumption has been kept
outside the purview of GST in India at present. However, the taxes imposed to alcohol
for human consumption will continue as per the structure before GST implementation.

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Sales Tax/VAT could be continued to be levied on alcoholic beverages as per the

existing practice. VAT is levied on alcohol purchases in some states, and there will be
no objection to that. Excise duty,which is presently levied by the states, may also be
unaffected.
2. Petroleum products: Petroleum Products such as petroleum crude, motor spirit
(petrol), highspeed diesel, natural gas and aviation turbine fuel etc. are also kept outside
the purview of GSTin India. However, the taxes for these products will be charged as
per the structure before introduction of GST. Sales tax could continue to be levied by
the states on these products withthe prevailing floor rate. Similarly, Centre could also
continue its levies.
3. Electricity: The electricity has been kept outside the purview of GST at present.
However, thetaxes applicable at present for electricity will continue as before.

STRUCTURE OF GST
The Goods and Service Tax in India is organized in such a way that all the necessary
services andsome food items are placed in the lowest bracket, and the other luxury goods
and services and de-merit goods are placed in the highest bracket.

The GST council has set the four-tier structure at 0%,5%,12% and 18% and 28%. The
Government has decided in an attempt to keep inflation in check to exclude essential items
such as basic food commodities from tax. However, a 5% tax will be applicable for
common commodities. Most of the standard services will fall under the 12%, and 18% tax
slab and the luxury items will fall under the 28% slab.
➢ The Four-Tier Tax Structure
• Nil Rate
• Lower Rate
• Standard Rate
• Higher Rate

NIL Rate (0%)

Under this category, the GST council has decided to exempt or not charge any taxes on a

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few of the basic commodities. Most of the items in the Consumer Price Index (CPI) comes
under the zerorate. Basically, in simple words, no GST will be charged on these goods.
The following items stated below are some of the GST-Exempted Goods:
❖ Raw vegetables including potatoes, onions, and various leguminous vegetables, etc.
❖ Live animals such as sheep, goats, live poultry, birds, bird’s eggs in the shell, fresh fish
❖ Wheat, corn, maize, cereal grains, soybeans that have yet to put into containers
❖ Human blood and various components of the same
❖ Fresh ginger, melon, roasted coffee beans, unprocessed green tea leaves, etc.
❖ Raw materials such as raw silk, silk waste, khadi fabric, khadi yarn, charcoal,
firewood,handloom fabrics and wool (not processed).
❖ Tools and instruments such as hearing aids, spades, shovels, tools used in
agriculturalpurposes, handmade musical instruments, etc.

Lower Rate (5%)

Under this slab, a 5% rate will apply to most of the common commodities and services. This
mainly includes the rest of the items under the Consumer Price Index and the mass
consumption products.Some of these items are-frozen vegetables, coffee, tea, rail tickets,
economy air tickets, takeawayfood, fertilizers, etc.
Standard Rate (12% and 18%)

Most of the goods and services come under this slab. To keep inflation in check, the
government has decided to keep two standard rates for the products and services. The 12%
slab consists of - butter, cheese, handbags, jewelry boxes, cellphones, frozen meat,
business class air tickets, movietickets priced under ₹100, etc. Some of the items under the
18% slab are-pasta, pastries, cakes, vacuum cleaners, hairdryers, panels, wires, IT services,
telecom services, etc.
Higher Rate (28%)

More than 200 products will come under the 28% tax slab. This mostly consists of luxury
products. Some of these items include-pan masala, paint, cement, automobile, washing
machine, shampoo,sunscreen, motorcycles, aerated water, etc. For some of the products
under the 28% slab category,an additional cess has been fixed by the government.

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Additional cess

People worried that demerit goods (such as tobacco products and aerated drinks), which
were previously taxed at 65% and 40%, would become cheaper and too easily accessible
with the new higher rate of GST set at 28%. Keeping this in mind, the GST structure
collects an additional cesson top of 28% GST. The cess will only be applied on certain
demerit goods. The percentage of additional cess has been fixed by the government as
15% for luxury vehicles, 1% for petrol powered small cars and 3% for diesel powered
small cars. Motorcycles with an engine capacity ofover 350 cc are liable for an additional
cess of 3%.

SALIENT FEATURES OF GST IN INDIA

The salient features of GST in India have been highlighted below:
1. Supply as the base: GST would be applicable on “supply” of goods or services as
againstthe erstwhile concept of tax on the manufacture of goods or on sale of
goods or on provision of services.
2. Destination-based tax: As opposed to the previous principle of origin-based
taxation, GST would be based on the principle of destination-based consumption
taxation.
3. Dual GST: The Centre and the States would simultaneously levy tax on a common
base.The GST to be levied by the Centre would be called Central GST (CGST)
and the GST tobe levied by the States (including Union territories with legislature)
would be called StateGST (SGST). Union territories without legislature would
levy Union territory GST (UTGST).

4. Inter-State supply: An integrated GST (IGST) would be levied on inter-State

supply of goods or services. This would be collected by the Centre so that the
credit chain is not disrupted. Imports of goods and services would be treated as
inter-State supplies and wouldbe subject to IGST. (This would be in addition to
applicable customs duties).
5. Central taxes subsumed: GST would subsume the following taxes that were
levied and collected by the Centre: Central excise duty; Additional duties of excise;
Additional dutiesof customs (commonly known as countervailing duty); special

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additional duty of customs(SAD); service tax; and cesses and surcharges insofar
as they relate to supply of goods orservices.
6. State taxes subsumed: GST would subsume the following taxes that were levied
and collected by the State: State VAT; Central Sales Tax; purchase tax; luxury
tax; entry tax; entertainment tax (except those levied by the local bodies); taxes on
advertisements; taxes on lotteries, betting and gambling; and State cesses and
surcharges insofar as they relate to supply of goods or services.
7. Applicability: GST would apply to all goods and services except alcohol for
human consumption. GST on five specified petroleum products (crude, petrol,
diesel, aviation turbine fuel, natural gas) would be applicable from a date to be
recommended by the GSTCouncil.
8. Threshold for GST: A common threshold exemption would apply to both CGST
and SGST. Taxpayers with an annual turnover of Rs.20 lakhs for services and
Rs.40 lakhs forgoods (for special category States (except J&K) Rs.10 lakhs for
services and Rs.20 lakhsfor goods as specified in article 279A of the Constitution)
would be exempt from GST. Acompounding option (i.e., to pay tax at a flat rate
without credits) would be available to small taxpayers (including to manufacturers
other than specified category of manufacturers and service providers) having an
annual turnover of up to Rs.1 crore (Rs.75lakhs for special category States (except
J&K and Uttarakhand) enumerated in article 279A of the Constitution). The
threshold exemption and compounding scheme is optional.
9. Exports: All exports and supplies to Special Economic Zones (SEZs) and SEZ
units would be zero-rated.
10. Input tax credit: Credit of CGST paid on inputs may be used only for paying
CGST on the output and the credit of SGST/UTGST paid on inputs may be used
only for paying SGST/ UTGST. In other words, the two streams of input tax credit
(ITC) cannot be cross utilized, except in specified circumstances of inter-State
supplies for payment of IGST.
11. Electronic filing of returns: There will be electronic filing of returns by different
class of persons at different cut-off dates. Various modes of payment of tax
available to the taxpayer including internet banking, debit/credit card and National

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Electronic Funds Transfer (NEFT)/Real Time Gross Settlement (RTGS).

12. Tax deduction on payment made: While the provision for TDS has not been
notified yet, it is obligatory on certain persons including government departments,
local authoritiesand government agencies, who are recipients of supply, to deduct
tax at the rate of 1% from the payment made or credited to the supplier where total
value of supply, under a contract, exceeds Rs.2,50,000.

13. Refund: Refund of tax can be sought by taxpayer or by any other person who has
borne the incidence of tax within two years from the relevant date. Refund is to be
granted within

60 days from the date of receipt of complete application and interest is payable if
refund is not sanctioned within 60 days.
14. Anti-profiteering clause: An anti-profiteering clause has been provided in order
to ensurethat business passes on the benefit of reduced tax incidence on goods or
services or both to the consumers.

ADVANTAGES OF GST

GST benefits in India will assist the Government as well as the consumers in the long run
in creating a win-win situation for both. Some of the advantages of GST in India are
enlisted as follows:

1. Mitigation of Cascading effect: Under the GST administration, the final tax
would be paid by the consumer for the goods and services purchased. However,
there would be an input tax credit structure in place to ensure that there is no
slumping of taxes. GST is leviedonly on the value of the good or service.
• Pre-GST regime
A business consultant extends services at Rs.50000 and levies a service tax at
the rate of 15%, i.e., Rs.7500 (50000×15%). The consultant purchased office
supplies at Rs.20000 and paid VAT at the rate of 5% without any deduction, i.e.
Rs.1000 (20000×5%). The total cash outflow would amount to Rs.8500.
• Post-GST regime
A business consultant’s cash outflow will amount to – GST levied on services at the rate of

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18%, i.e. Rs.9000 (50000×18). The GST applied to office supplies is subject to deduction. So,
the net GST amounts to Rs.8000 (9000- 1000)
2. Abolition of Multiple Layers of Taxation: One of the advantages of GST is that
it integrated different tax lines such as Central Excise, Service Tax, Sales Tax,
Luxury Tax,Special Additional Duty of Customs, etc. into one consolidated tax. It
prevents multiple tax layers imposed on goods and services.
3. Higher threshold limit: With the implementation of GST norms, the minimum
threshold limit for registration has increased. Previously, under the VAT regime,
all businesses with a turnover above Rs.5 lakhs (limit used to vary among states)
had to pay VAT. However, under this new GST regime, this threshold limit was
increased to Rs.20 lakh providing relief to several small service traders.
4. Lowering of tax rates: For the consumers, the biggest gain is in terms of
reduction in the overall burden of taxes on goods, which was earlier around 25-
30%.
5. Lesser number of compliances: Under the previous tax regime, both service tax
and VAT extended different compliances. For instance, excise returns were filed
monthly whereas in case of service tax, companies and Limited Liability
Partnership filed its monthly, and partnership and proprietorship filed them
quarterly. Conversely, in case of VAT, the filing of returns varied largely.
Nevertheless, with GST in the picture taxpayers are now required to file only one
return.

6. Composition Scheme: Businesses with an annual turnover less than Rs.1.5 crores
(Rs.75 lakhs for special category states) for goods and Rs.50 lakhs for services
are eligible to lower their taxes with the help of the Composition Scheme. This option has
not only lowered the applicable tax rate but has also reduced the compliance burden to
a great extent. This pointer proves a vital parameter to weigh in the advantages and
disadvantages of GST.
7. Resourceful Administration by Government: Previously, the management of
indirect taxes was a complicated task for the Government. However, under the GST
establishment,the integrated tax rate, simple input of tax credit mechanism and a
merged GST Network, where information is available, and administration of

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resources are well-organized and straightforward for the Government.

8. Creation of a Common National Market: GST gave a boost to India’s tax to
Gross Domestic Product ratio that aids in promoting economic efficiency and
sustainable long –term growth. It led to a uniform tax law among different sectors
concerning indirect taxes. It facilitates in eliminating economic distortion and
forms a common national market.
9. Ease of Doing Business: With the implementation of GST, the difficulties in
indirect tax compliance have been reduced. Earlier companies faced significant
problems concerning registration of VAT, excise customs, dealing with tax
authorities, etc. The benefits of GST have aided companies to carry out their
business with ease.
10. Regulation of the Unorganized Sector under GST: It has created provisions to
bring unregulated and unorganized sectors such as the textile and construction
industries to name a few under regulation with continuous accountability. This
would promote their shift towards the organized market.
11. Reduction of Litigation: GST aids in reducing litigation as it establishes clarity
towards the jurisdiction of taxation between the Central and State Governments.
GST provides a smooth assessment of tax.
12. Tackling Corruption and Tax Leakages: With the GST online network portal,
the taxpayer can directly register, file returns and make payments of the taxes
without havingto interact with tax authorities. A mechanism has been devised to
match the invoices of thesupplier and buyer. This will not only keep a check on tax
frauds and evasion but also bringin more businesses into the formal economy.
DISADVANTAGES OF GST

1. Increased operational cost: GST had directed businesses to update their old
accounting to GST-compliant software or ERP to keep their businesses running.
Nonetheless, the cost of purchase, installation of software along with training
employees to use GST- compliant software can be quite substantial. Also,
adherence to GST norms has increased the operational cost for small businesses
as more firms are now forced to hire tax professionals to become more GST-
compliant.
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2. IT Infrastructure: Since GST is an IT-driven law, it cannot be sure whether all

the states in India are currently equipped with infrastructure and workforce
availability to embrace this law. Only a few states have implemented this E-
Governance model. Even today somestates use the manual VAT returns system.
3. Increase Burden of Compliance: The GST administration states that companies
are required to register in all the states they operate in. This increases the burden
on the business for excessive paperwork and compliance.

4. GST is an online taxation system: Unlike earlier, businesses are now switching
from pen and paper invoicing and filing to online return filing and making
payments. This might betough for some smaller businesses to adapt to.
5. Petroleum Products don’t fall under the GST Slab: Petrol and petroleum
products havenot been included in the scope of GST until now. States levy their
taxes on this sector. Taxcredit for inputs will not be available to these industries or
those related industries.
6. Coaching of Tax Officers: There is inadequate training that is provided to the
Governmentofficers for practical usage and implementation of such systems since
the GST administration heavily banks on information technology.
7. Teething trouble: GST Network (GSTN) may not work optimally for quite some
time dueto various factors that could be ascertained only after its implementation
for few years. There seems to be a lot of improvement in this regard.

DEFINITIONS

❖ GOODS – SECTION 2(52) OF CGST ACT

“Goods means every kind of movable property other than money and securities but
includes actionable claims, growing crops, grass and things attached to or forming part of
the land which are agreed to be severed before supply or under a contract of supply.”

❖ SERVICE – SECTION 2(102) OF CGST ACT

“Services means anything other than goods, money and securities but includes activities
relating to the use of money or its conversion by cash or by any other mode, from one

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form, currency or denomination, to another form, currency or denomination for which a

separate consideration is charged.”

Service means any economic activity resulting into value addition. Service is instantly
perishableand cannot be stored. Service also cannot be returned to the service provider or
transferred to another.

❖ AGGREGATE TURNOVER – SECTION 2(6) OF CGST ACT

“Aggregate turnover means the aggregate value of –

1. All taxable supplies pertaining to inter/intra state activities,

2. Exempted supplies,
3. Exports of goods or services or both.

It is to be computed on pan-India basis for the person having the same Permanent Account
Number.
➢ PERSON

Person includes –
1. an Individual;
2. Hindu Undivided Family (HUF) ;
3. Company;
4. Firm;
5. Limited liability partnership;
6. an association of persons or a body of individuals, whether incorporated or not, in
India oroutside India;
7. any corporation established by or under any Central Act, State Act or Provincial
Act or a Government Company as defined under clause (45) of Section 2 of
Companies Act, 2013;
8. anybody corporate incorporated by or under the laws of a country outside India;
9. a co-operative society registered under any law relating to co-operative societies;
10. a local authority;
11. Central Government or State Government;
12. Society as defined under the Societies Registration Act, 1860;

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13. Trust; and

14. every artificial juridical person, not falling within any of the above.

➢ TAXABLE PERSON

A ‘taxable person’ under GST, is a person who carries on any business at any place in
India and who is registered or required to be registered under the GST Act. Any person
who engages in economic activity including trade and commerce is treated as taxable
person.

➢ BUSINESS – SECTION 2(17) OF CGST ACT

“Business” includes –

a. any trade, commerce, manufacture, profession, vocation(

calling), adventure, wager(gamble) or any othersimilar activity, whether or not it
is for a pecuniary benefit;
b. any activity or transaction in connection with or incidental or ancillary to (a) above;
c. any activity or transaction in the nature of (a) above, whether or not there is
volume,frequency, continuity or regularity of such transaction;
d. supply or acquisition of goods including capital assets and services in
connection withcommencement or closure of business;
e. provision by a club, association, society, or any such body (for a subscription or
any otherconsideration) of the facilities or benefits to its members, as the case may
be;
f. admission, for a consideration, of persons to any premises; and
g. services supplied by a person as the holder of an office which has been accepted by
him inthe course or furtherance of his trade, profession or vocation;
h. services provided by a race club by way of totalizator or a license to book maker
in suchclub;
i. Any activity or transaction undertaken by the Central Government, a State
Government orany local authority in which they are engaged as public authorities.

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➢ PLACE OF BUSINESS

Place of business includes –

a. A place from where the business is ordinarily carries on, and includes a warehouse,
a godowns, or any other place where a taxable person stores his goods, supplies or
receives goods or services or both; or
b. A place where a taxable person maintains his books of accounts; or
c. A place where taxable person is engaged in business through an agent, by whatever
namedcalled.

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