The Government of India introduced the GST in 2017 under their “one nation, one tax” reform. It is a single tax levied on the supply of goods and services right from the manufacturer to the consumer and essentially replaces multiple indirect taxes. The main objective of the reform was to unite different types of taxes in the ambit of a single tax system.
How does GST work?
The GST is levied in the state where goods and services are consumed (and not where they are manufactured), which makes it a destination-based tax. It is charged at every point of sale and is included in the price that a consumer pays when purchasing a product.
1. In simple words, GST works as a replacement for several indirect taxes levied by the central and state government, making India a unified market.
2. Certain goods and services are exempted from GST and they are instead subjected to a state’s existing levies such as the value added tax (VAT)–a tax paid at every stage of value addition in the supply chain. These levies are paid at each stage of the production process by the consumer.
3. GST on petroleum crude, high-speed diesel, motor spirit, natural gas and aviation turbine fuel have been postponed and are currently covered under the Centre’s excise duties and VAT.
4. GST offers both national and international benefits:
- Nationally, it eases the job of the manufacturer by clubbing different taxes into one and boosts economic unification.
- Internationally, it brings India at par with the global market by following a universally-accepted tax regime.
5. GST comes with certain relaxations and exemptions that one can avail after the fulfilment of necessary criteria. An example of this incentive is tax credit, which is the amount that certain taxpayers have the liberty to remove from the tax they owe.
What is the structure of GST?
All goods and services are primarily divided into a four-tier rate structure of 5%, 12%, 18% and 28% at this point in time.
The government is considering changing the four-slab structure to either three or two tiers to make the taxation process smoother. Although introduced in 2017, GST is still in its budding stage and is susceptible to deviations, violations and conflicts of interest. In order to avoid this, the authorities released an Advanced Ruling Mechanism on matters of supply of goods and services. Taxpayers can refer to this mechanism for issues like registration, classification, tax rate, taxability, etc.
What can be taxed under GST?
All investors or parties that pay taxes to the government experience a taxable event. Under the traditional regime of tax, before the implementation of GST, these events were different for each legislation. However, after 2017, there was a significant change in the determination of the taxable event, wherein "supply" of a particular goods or service became the centre point for levying taxes.
The definition of 'supply' is quite wide and covers all forms of supply with few exceptions and exclusions. Supply under GST includes sale, transfer, barter, exchange, license, rental, lease or disposals of goods and services. For instance, certain essential items are exempted from the GST and some attract an additional cess, such as demerit goods and luxury items. Certain precious metals (like gold) and special stones attract additional GST rates, apart from the normal applicable.
How are goods and services classified under GST?
In order to classify traded products, an internationally standardised system of numbers and names was developed. The Harmonized System of Nomenclature (HSN) code is widely used to categorise goods under the GST regime and the Services Accounting Code (SAC) is used for classifying services.
Who can levy GST?
Since GST is a destination-based tax, the Centre and States can levy it on a common tax base. As a result of this, it has multiple components:
- Central GST (CGST): This is the tax levied by the Centre
- State GST (SGST)/Union Territory GST (UTGST): SGST is the tax levied by the state and the UTGST is the tax levied by the Union Territory
- Integrated GST (IGST): This is levied for interstate supply of goods. Imports of goods are treated as inter-state supplies. In addition to IGST, imports will also be subject to customs duties as applicable.
- GST has a dual structure wherein both the Centre and the states have the power to simultaneously levy the tax on supply of goods and services.
- The Centre has the power to levy and administer CGST and IGST, whereas the state or the Union Territory has the authority to levy SGST/UGST.
- GST is not applicable on export and supply of goods made to Special Economic Zones (known as zero-rated supply). For special scenarios like these, exporters can either claim an IGST refund or can export goods under a bond without paying the IGST.
- Separate provisions for goods and services have been incorporated under GST law to determine the nature of supply. The location of the supplier and the place of supply of goods or services determine whether the transaction is intra- or inter-state supply.
- Ever since its introduction in 2017, the GST rates have been revised a few times. As mentioned above, the applicable GST rates have been classified into a four-tier rate structure. For instance, considering the ongoing COVID-19 pandemic, the GST rates on two medicines were temporarily removed, while GST rates were reduced on as many other 15 essential items.
What is the purpose of GST for consumers or taxpayers?
- Earlier, the tax system in India had multiple taxes at the central and the state level which often confused the taxpayers. Under the “one nation, one tax” regime, taxes have been clubbed together, which is aimed at making the tax filing process easier for the taxpayers.
- GST enables easier movement of goods and services across borders. With the implementation of IGST, manufacturers can now eliminate paying CST (Central Sales Tax) and other taxes.
- GST brings with it a single tax department, which means lesser tax laws and a unified subsumption of various tax departments.
- With an aim to safeguard consumers, anti-profiteering provisions have been included in the GST law. Any reduction in the rate of tax on any supply of goods or services, or any benefit of the input tax credit shall ultimately be passed on to the customer by reducing the commission in prices.
GST is among the biggest reforms in the taxation system of India. While moving away from the existing taxation system and embracing the GST regime has been a challenging feat, its success will ease the woes of many stakeholders.
The article was originally published in Forbes Advisor.