What is GST in Detail ? GST Explained / How Does It Work?
GST is one indirect tax for the whole of India that makes India one unified common market. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Taxes paid at each stage of trade will be available in the subsequent stage of value addition as input credit set off, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
Goods & Service Tax or GST is an Indirect Tax levied on the supply of goods and services. It has replaced various indirect taxes and brought them under one umbrella to make compliance easier.
(i) Taxes previously levied and collected by the Centre:
- Central Excise duty
- Additional Duties of Customs (commonly known as CVD)
- Special Additional Duty of Customs (SAD)
- Service Tax
(ii) Taxes previously levied and collected by the State:
- State VAT
- Central Sales Tax
- Entertainment and Amusement Tax (except when levied by the local bodies)
- Taxes on lotteries, betting, and gambling
- Luxury Tax
Components in GST: SGST, CGST and IGST
India is a federal country where both the Centre and the States have been assigned the powers to levy and collect taxes. Both the levels of Government have distinct responsibilities to perform for which they need to raise resources.
- Central GST or CGST – To be charged by the central government.
- State GST or SGST – To be charged by the state government.
- Integrated GST or IGST – To be charged by central government on the inter-state supply of various goods and services.
There will be two components of GST – Central GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.
In case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods and services. The IGST would be equal to CGST plus SGST. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another.
In one invoice either CGST & SGST or IGST is available. Not all in one invoice
What are the GST Rates/Tax Slab in GST
The GST scheme consists of different slab structure under which the proposed goods and services will be taxed accordingly. The five slabs currently available are 0%, 5%, 12%, 18% and 28%.
GST – Multiple Choice Questions (MCQ)↓
GST is Goods and Services Tax levied on the supply of Goods and Services. GST will subsume various indirect taxes levied by the state and central governments. It is expected to bring together India under a single market. The implementation of GST is expected to lower the cost of goods and services in India.
Central Goods and Services Tax is levied under the Central Goods and Services Tax Act, 2016. CGST is levied on the intra-state supply of goods and services by the Centre.
State Goods and Services Tax is the GST that is levied on the intra-state supply of goods and/or services by the State.
Integrated Goods and Services Tax would be levied and collected by the Centre on inter-state supply of goods and services under IGST Act 2017. IGST is also applicable on imports. IGST is designed to ensure seamless flow of Input Tax Credit from one state to another.
Taxable person is a person who carries on any business at any place in India and who is registered or required to be registered under GST Act. The person who engages in economic activity including trade and commerce is treated as taxable person.
CASUAL TAXABLE PERSON
A person who occasionally supplies goods and/or services in a territory where GST is applicable, but s/he does not have a fixed place of business. As per GST, such a person will be treated as a casual taxable person.
NON-RESIDENT TAXABLE PERSON
A person does not have a place of business in India, but occasionally supplies goods/services in a territory where GST applies. S/he will be considered as a non-resident taxable person.
INPUT TAX CREDIT (ITC)
Input Tax is the GST paid/payable on purchases of goods and services. Input Tax Credit is the credit that manufacturers receive for paying input taxes towards inputs used in the manufacture of products. Tax payers shall be allowed to take credit of taxes paid on inputs (ITC) and utilize the same for payment of output tax. However, no ITC on account of CGST shall be utilized towards payment of SGST and vice versa. The credit of IGST would be permitted to be utilized for payment of IGST, CGST and SGST in that order. ITC is meant to avoid the cascading of taxes. ITC can be availed only if the registered person produces a valid tax invoice. It is not available to tax payers who opt for composite levy.
The term ‘supply’ is wide in its import and includes all forms of supply of goods and / or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. It also includes import of service. The model GST law also provides for including certain transactions made without consideration within the scope of supply.
Composite supply means a supply comprises two or more goods/services, which are naturally bundled and supplied with each other in the ordinary course of business, one of which is a principal supply. The items cannot be supplied separately.
Cascading effect is ‘tax on tax’ in simple terms. Cascading happens when a tax is levied on each stage of the production process up to the point of selling to the final consumer. The new GST regime is designed to avoid the cascading effect.
In India, a dual GST regime is implemented. In dual GST, a Central Goods and Service Tax (CGST) and a State Goods and Service Tax (SGST) will be levied on the taxable value of every transaction of supply of goods and services. It is envisioned to increase tax collections due to wider tax base and better compliance. This will eliminate the multiplicity in the number of taxes levied at the State and Central level.
The supplier is liable to pay the tax on supply in general. In certain cases, the liability is passed on to the receiver to pay the tax, which means the chargeability gets reversed. It is called reverse charge. In GST regime, reverse charge is applicable to goods as well as services.
Goods and Services Tax Network is a non-profit, public-private partnership company. Its main purpose is to provide IT infrastructure and services to Central and State Governments, tax payers and other stakeholders to facilitate the implementation of GST.
A supplier is a person supplying goods and/or services and shall include an agent acting as such on behalf of such supplier in relation to the goods and/or services supplied.
Electronic commerce is the commercial transactions conducted electronically on the internet. E-commerce shall mean the supply or receipt of goods and services or transmitting of funds or data, over an electronic network. In GST, transactions like tax payment can be done through e-commerce.
Goods and Services Tax Identification Number (GSTIN) is a pan based 15 digit identification number allotted to every registered tax payer.
Detailed examination of records, returns and other documents maintained or furnished by the taxable person and to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess their compliance with the provisions of GST Act.
A manufacturer is a person who manufactures goods. Manufacturer shall include not only a person who employs hired labor in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture of his/her own account.
Aggregator means a person, who owns and manages an electronic platform, and by means of the application and a communication device, enables a potential customer to connect with the persons providing service of a particular kind under the brand name or trade name of the said aggregator.
Composition scheme under GST contains an option for a registered taxable person having turnover less than the limit to pay tax at a lower rate respect to certain specified conditions. When opting for the composite scheme, a taxpayer will be required to file summarized returns on a quarterly basis, instead of three monthly returns. A trader registered under the composition scheme shall not collect tax from the consumer.
A tax which is levied on the income or profits of the person who pay it, rather than on goods and services is direct tax. In direct tax, the incidence and impact of taxation fall on the same entity. In this case, the burden of tax cannot be shifted by the tax payer to someone else. Income tax is an example of direct tax.
In case of indirect tax, the burden of tax can be shifted by the tax payer to someone else. Indirect tax is levied on goods and services rather than on income or profits. All the indirect taxes, levied by both centre and state, are now subsumed under the roof of GST regime.
Every taxable person under GST regime shall take GST registration. Persons/entities doing business of taxable supply of goods and services whose turnover exceed Rs. 20 lakh/10 lakh, whichever is applicable, are required to register as normal taxable person. This process of registration is referred as GST registration.
TAX COLLECTION AT SOURCE
Tax Collected at Source (TCS) is the tax collected by the seller from the buyer at the time of sale of specified category of goods. It refers to the tax which is collected by the e-commerce operator when a supplier supplies some goods or services through its portal and the payment for that supply is collected by the electronic commerce operator.
TAX DEDUCTION AT SOURCE
Tax Deduction at Source (TDS) is a system, initially introduced by the Income Tax Department. It is one of the modes/methods to collect tax, under which, certain percentage of amount is deducted by a recipient at the time of making payment to the supplier. It is similar to “pay as you earn” scheme also known as Withholding Tax, in many other countries. It facilitates sharing of responsibility of tax collection between the deductor and the tax administration. It also ensures regular inflow of cash resources to the Government. It acts as a powerful instrument to prevent tax evasion and expands the tax net, as it provides for the creation of an audit trail.
Every registered taxable person who crosses the threshold limit for payment of taxes needs to file return in GST regime. A supplier needs to be registered when the aggregate turnover crosses Rs. Twenty lacs. So he will be required to file returns when he crosses the threshold limit of Rs. twenty lacs. There are some other class of persons who need to be registered and therefore will have to file returns like interstate suppliers, TDS deductors, e-commerce operators, suppliers supplying goods through e-commerce operators etc
A registered tax payer, who is registered under the composition scheme, is a compounded dealer. A compounded dealer is neither allowed to avail Input Tax Credit of GST paid to the supplier nor to collect tax from the final consumer.
“Taxable Service” means any service provided or to be provided to a client by any person in relation to business auxiliary service.
A ‘taxable supply’ means a supply of goods and / or services which is chargeable to good and services tax under the GST Act.
In GST ‘goods’ may refer to every kind of movable property other than money and securities but included actionable claim, 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.
Assessment means determination of tax liability under the GST Act and included self-assessment, provisional assessment, summary assessment and best judgment assessment.
Refund has been discussed in section 48 of the MGL. “Refund” includes refund of tax on goods and/or services exported out of India or on inputs or input services used in the goods and/or services which are exported out of India, or refund of tax on the supply of goods regarded as deemed exports, or refund of unutilized input tax credit as provided under section48(3).
Transportation of goods by road is done by a transporter or agencies. It is called Goods Transport Agencies (GTA). GTA means any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called.
PLACE OF SUPPLY
Place of supply is the registered place of business of the recipient. Place of supply is important in GST as it is a destination based tax on consumption. The place of supply determines whether the supply/transaction be considered as intra-state or interstate. It will define the type of tax to be levied such as CGST, SGST and IGST.
HARMONIZED SYSTEM NOMENCLATURE (HSN)
Harmonized System Nomenclature (HSN) is an internationally adopted commodity description and coding system. In India, it is currently adopted to classify Goods and Services Tax under GST regime. Taxpayers whose turnover is above Rs. 1.5 crores but below Rs. 5 crores shall use 2 digit code and the taxpayers whose turnover is Rs. 5 crores and above shall use 4 digit code. Taxpayers whose turnover is below Rs. 1.5 crores are not required to mention HSN Code in their invoices.
INPUT SERVICE DISTRIBUTOR
Input Service Distributor (ISD) means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, state tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number (PAN) as that of the said office.
Job work means undertaking any treatment or process by a person on goods belonging to another registered taxable person and the expression “Job Worker” shall be construed accordingly. This is how job work is defined in the Model GST Law (MGL), sec 2 (61).
TAX RETURN PREPARER (TRP)
Tax Return Preparer is a person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax. As per the decision of the 6th GST Council Meeting, the word TRP is proposed to be replaced with GST Practitioner.
Electronic Ledgers or E-Ledgers are statements of cash and input tax credit in respect of each registered taxpayer. In addition, each taxpayer shall also have an electronic tax liability register. Once a taxpayer is registered on Common Portal (GSTN), 2 e-ledgers (Cash & Input Tax Credit) and an electronic tax liability register will be automatically opened and displayed on his dashboard at all times.
The cash ledger will reflect all deposits made in cash, and TDS/TCS made on account of the taxpayer. The information will be reflected on real time basis. This ledger can be used for making any payment on account of GST.
COMMON PORTAL IDENTIFICATION NUMBER (CPIN)
CPIN stands for Common Portal Identification Number (CPIN) given at the time of generation of challan. It is a 14 digit unique number to identify the challan. As stated above, the CPIN remains valid for a period of 15 days.
SPECIAL ECONOMIC ZONE (SEZ)
Special Economic Zone is a dedicated zone wherein businesses enjoy simpler tax and legal compliance. SEZs are located within a country’s national borders, however, they are treated as a foreign territory from taxability perspective. As per the legal definition, a SEZ is a geographically bound zone where the economic laws relating to export and import are more liberal as compared to other parts of the country. Supply of goods or services to a Special Economic Zone is considered as a zero rated supply.
Proper officer is the commissioner or the officer of the central tax who is assigned that function by the commissioner in the Board.
Services under GST 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 form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
Non-taxable supply is the supply of goods and/or services which is not entitled to pay tax under the CGST Act or under the Integrated Goods and Services Act.
Output tax means the tax chargeable under CGST Act on taxable supply of goods and/or services by him/her or by his/her agent but excludes tax payable by him on reverse charge basis.
Exempted supplies are those goods and services which don’t fall under the GST regime and aren’t included in your GST return.
Aggregate value of all taxable and non-taxable supplies of goods, exempt supplies and exports of goods and/or services of a person with the same PAN card is called aggregate turnover. It is calculated on all-India basis and excludes taxes if any is applied under the SGST, CGST and IGST Acts.