Introduction to GST - What is GST? Here is everything you need to know!

The Goods and Services Tax, popularly known as GST is a comprehensive indirect tax levied on the supply of goods and services in India. It was implemented on 1st July, 2017 to replace the multiple indirect taxes levied by the Central Government and the State Governments such as excise duty, value-added tax (VAT) and service tax. It was introduced for the purpose of bringing uniformity in the tax structure across states and for promoting economic growth. Lets explore how it works.

The Goods and Services Tax operates under a dual structure: GST is designed as a dual tax. It is levied by both the Central Government and the State Government concurrently. Whenever goods or services are supplied intra-state i.e. within the same state, tax is levied under 2 heads i.e. CGST and SGST in equal proportion. CGST also known as the Central Goods and Services Tax is the tax collected by the Central Government and SGST also known as the State Goods and Services Tax is the tax collected by the State Government. For all goods and services that are supplied inter-state i.e. between two different states, tax is levied under a single head known as IGST or the Integrated Goods and Services Tax. Under IGST the Central Government collects the tax and transfers an appropriate share of the collected tax to the state where the goods or services are ultimately consumed. IGST is also imposed on the import of goods and services.

The Goods and Services Tax is a destination based tax: GST is a destination based tax. This means that the tax revenue is collected not by the state where the goods or services is supplied or produced but rather by the state where the goods or services are consumed. In the context of GST the terms "consumed" and "sale" have distinct meanings. Consumption refers to the final use of the goods or services by the end-user or consumer. It is the point at which the product or service is actually utilized or enjoyed. On the other hand, sale refers to a transaction where goods or services are exchanged for payment, regardless of whether they are consumed. Let us understand GST as a destination based tax with the help of an example. Suppose, A, a manufacturer based in Gujarat sells a car to B, a retailer based in Delhi for Rs. 10 Lakhs. B sells that car to C, a consumer belonging to the state of Haryana for Rs. 12 Lakhs. In this case A and B are not consumers of the car. C is the end-user/consumer of the car. A and B are mere suppliers of the car who exchanged ownership of the car for the purpose of selling it for profit without utilizing or enjoying its utility. Therefore, in this situation the State of Haryana will benefit from the sale of the car and will collect the tax revenue arising thereof merely because the car is consumed in Haryana. Note that in the context of GST a good or service is said to be consumed in the state where the end-user/consumer resides. Since C belongs to the state of Haryana, it is understood that the car is consumed in Haryana itself. Even if C had consumed the car is any other state despite having purchased the car in the state of Haryana, even then the State of Haryana would have benefitted from the sale of the car and would have collected the tax revenue arising thereof merely because C belongs to the State of Haryana. Documents such as Aadhar Card or GST registration exhibited by the recipient at the time of purchase of good or service to the supplier uncover details of the recipient and air information about the recipients belonging/residence. Where the recipient is the end-user/consumer of the good or service, the state where such end-user/consumer belongs collects the tax revenue accruing from such sale and the states where the good or service is merely supplied or even produced unless it is consumed in the same state do not benefit from the supply of such good or service. Remember only the state where the good or service is consumed is the state that collects the tax revenue.

The Goods and Services Tax is a multi stage tax: GST is a multi-stage tax. This means that it is levied at each point of the supply chain, from production to final sale. Here is how it works.

• Production Stage: At the time of production, manufacturers pay GST on the purchase of raw materials.

• Intermediate Stage: After the goods have been produced, manufacturers supply the finished goods to wholesalers and retailers. They charge GST from such wholesalers and retailers at the time of supply of such produced goods..

• Final Stage: The produced goods are then supplied by the wholesalers and retailers to the end-user/consumer. Again GST is levied on the supply of produced goods however this time it is levied by the wholesalers/retailers on the end-user/consumer. The end-user/consumer pays the GST on the purchase of such produced goods.

GST as a multi-stage tax also includes Value Addition. Value Addition occurs when a business transforms raw materials or intermediate goods into finished goods thereby increasing the market value of the goods.. It includes any process that enhances the product's utility, desirability or quality. For example converting raw cotton into a finished t-shirt adds value to the cotton. Similarly, a consulting firm transforming raw data into actionable business strategies adds value through expertise. Value Addition can be made by any entity in the supply chain including intermediaries such as wholesalers and retailers. Factors such as packaging, marketing, distribution are all examples of value addition. Thus, each entity that adds value to a good or service increasing its market value pays tax (GST) on the additional value they create.

GST as a multi-stage tax increases transparency and reduces tax evasion. Unfortunately, it increases compliance. Nevertheless, it offers incentives to businesses to maintain proper records. One such incentive is to claim ITC, also known as Input Tax Credit.

Supply: The fundamental cornerstone of any tax system is its taxable event. A taxable event tells us exactly when a tax will be levied. In GST, supply is the taxable event. Thus every time a good or a service is supplied from a supplier to a recipient tax is levied. In the context of GST, the word supply includes all forms of supply of goods and services such as sale, transfer, barter, exchange, license, rental, lease or disposal. Thus every time a good or service or both are sold, transferred, bartered, exchanged, licensed, leased, or disposed whether made or agreed to be made for a consideration by a person in the course or furtherance of business, GST is levied. Under GST supply can be of various types such as;

1. Taxable Supplies: refers to the supply of such goods or services which levy tax under GST. Tax rates for such goods or services may vary between 5%, 12%, 18% and 28% depending on the nature of the good or service being provided. Normally goods and services satisfying basic/essential needs are taxed at 5% or 12% and other incidental goods or services are taxed at 18% or 28% on the value of such good or service.

2. Exempted Supplies: refers to the supply of such goods or services the tax on which has been exempted by the Government via notification. Note that the supply of such goods or services is also taxable in nature however the Government for matters pertaining to public interest exempts tax on the supply of such goods or services for sometime. Bear in mind that the Government holds complete liberty to charge tax on the supply of such goods and services once it is satisfied that matters pertaining to public interest have been dealt with and tax shall be imposed on the supply of such goods or services.

3. Nil-Rated Supplies: refer to supply of such goods or services that attract tax @ 0%. Unlike Exempted supplies, the Government holds no right/liberty to charge tax or change the rate of tax on the supply of such goods or services. Nil-Rated supplies are taxed at 0% right from the incorporation of GST in India. Usually goods and services satisfying paramount needs are classified as nil-rated supplies under GST.

4. Zero-Rated Supplies: All export supplies and supplies made to Special Economic Zones are zero-rated supplies. The words 'Zero-Rated' means that no tax is levied on the supply of such goods and services in India. It is almost impossible to levy tax on goods and services being supplied outside India or to SEZ units.

5. Non-Taxable Supplies: refer to the supply of such goods or services that fall outside the ambit of GST. Alcohol for human consumption and petroleum products are examples of Non-taxable supplies in India.
   

Input Tax Credit: Input Tax Credit or ITC (as it is popularly known as) is a crucial feature of GST in India. ITC allows businesses to reduce their tax liability by permitting them to claim credit for the tax paid on purchase of inputs used in the course or furtherance of business. It helps avoid the cascading effect and ultimately reduces the cost of goods and services in the market benefiting both businesses and the end-user/consumer. Let us understand how it works;

1. Stage 1: When a business buys raw materials it pays GST on its purchase. This GST is known as Input Tax.

2. Stage 2: When the business supplies the finished goods or services to its sellers it charges GST on its sale. This GST is known as Output Tax.

3. Stage 3: Subtract Input Tax levied at the time of purchase of inputs with the Output Tax charged at the time of sale, the difference is the businesses reduced tax liability. This is how ITC is claimed.

Observe that once Input tax is subtracted from Output tax the tax liability of a business is reduced. ITC as a mechanism ensures that tax paid on the purchase of inputs is considered. Once considered it is consequently reduced from the amount of tax payable on outputs so that tax is not levied on the same good or service twice. ITC effectively guarantees that tax is only levied on the value added on the product at each stage of the supply chain. This is how ITC prevents the cascading effect and ultimately reduces the cost of goods and services in the market. It promotes compliance and ensures transparency and efficiency in the economy.

Threshold Exemption under the Goods and Services Tax: Not every person making a taxable supply of goods or services or both in India is required to be registered under the GST Act. This is because GST in India offers a threshold exemption, an aggregate turnover limit below which businesses are not required to be registered under the Act. They are exempted from charging GST on the supply of goods or services or both from the recipients and are even spared from filing regular GST returns so as to reduce the burden of compliance on small-scale businesses in India. The threshold limit for GST registration and the exemptions thereof vary from state to state. Let us understand them in detail;

• Special Category States: For special category states such as Nagaland, Manipur, Meghalya, Sikkim, Tripura, Arunachal Pradesh, Mizoram and Uttrakhand, the threshold limit is 20 lakhs (aggregate turnover) for supply of goods and 10 lakhs (aggregate turnover) for the supply of services. Persons having aggregate turnover less than the prescribed limit need not register under GST in India.

• Other States: For other states the threshold limit is 40 lakhs (aggregate turnover) for supply of goods and 20 lakhs (aggregate turnover) for supply of services. Persons having aggregate turnover less than the prescribed limit need not register under GST in India.
  

• For persons supplying both goods and services the threshold limit shall be the threshold limit prescribed for the supply of services in that state where such person is making his taxable supplies. This is also known as the conservative approach.

Note that the threshold exemption provided under the Act shall cease to exist as soon as the person supplying the goods or services or both crosses the threshold limit prescribed for that state. Once the threshold limit is superseded the person making the taxable supply shall with effect from the date of crossing the threshold limit be liable to be registered under the Act. Such person need not wait for the financial year to end or for the new financial year to begin to register himself under the Act. He shall with effect from the date of superseding the threshold limit be liable to be registered under the Act.

Voluntary Registration: For businesses having an aggregate turnover below the threshold limit but wanting to register under GST may not wait for their aggregate turnover to supersede and shall voluntarily register themselves under the Act. Once registered, they shall hold the right to charge GST on their supply of goods and services or both and avail the benefits of ITC. Furthermore, they shall be duty bound to file GST returns monthly and appear as a credible business in the market willing to engage in B2B transactions with other businesses efficiently.

Composition Scheme under the Goods and Services Tax: Section 10 of CGST Act, 2017 discusses composition levy, a scheme under GST that reduces the tax burden on small and medium scale businesses operating in India. It is available to businesses that have an aggregate turnover of less than Rs. 1.5 Crores (for normal states) and Rs. 75 Lakhs (for special category states) in the preceding financial year. It only applies to businesses that are engaged in the supply of goods and not in the supply of services except those providing restaurant services. Furthermore, it only applies to businesses that deal in intra-state supplies i.e. supply within the same state and not to businesses dealing in inter-state supply, supply of exempt goods or services and those who operating under the regular scheme. The composition scheme allows small and medium scale businesses to pay tax at a reduced rate on their turnover.

• For Manufacturers, 1% of the turnover in the State or turnover in the Union Territory.

• For Restaurants not serving alcohol, 5 % of the turnover in the State or turnover in the Union Territory, and

• For service providers, 6% of the turnover in the State or turnover in the Union Territory.

Note that businesses under the Composition scheme are required to file GST returns on a quarterly basis. They have to bear tax from their own pocket and cannot claim credit of input tax on purchases of inputs. Moreover, they cannot collect tax from recipients on any supply of goods or services made to them. Dealers under the composition scheme issue a bill of supply instead of an invoice. Note that one can opt for the Composition Scheme only at the beginning of an financial year however he/she may automatically opt out of the composition scheme as soon as the aggregate turnover of the business crosses the prescribed limit at which point such person shall within a period of 30 days from the date of such outstrip shift to the regular scheme. One may opt out of the composition scheme and shift to the regular scheme anytime during the financial year. One may not need to wait for the beginning of a new financial year to shift to the regular scheme. Further note that even new businesses can opt for the composition scheme under GST.

Online Compliance: All GST related activities such as registration, filling returns, making tax payments and claiming refunds are done online using the GST portal. The GST portal which is the official website for all GST-related activities in India is a centralized digital platform that facilitates seamless GST compliance for businesses and Tax Authorities in India. It is developed and managed by the Goods and Services Tax Network (GSTN). It enables businesses and taxpayers to handle their GST obligations efficiently, offering features such as e-filing of returns, e-way bill generation, and access to detailed reports on tax credits and payments. The portal ensures precise data processing and reconciliation between taxpayers and tax authorities, playing a crucial role in the effective administration and implementation of GST in India.

Anti-Profiteering Measures: One of the most prominent features of GST is that it helps to reduce the price of goods and services in the market. It does this by ensuring that the benefits of reduced tax rates and input tax credits are passed on to the consumers and not retained by businesses. Therefore, for the purpose of preventing businesses from retaining the benefits of ITC and increase price of goods and services in the market despite reductions in tax rate, GST has been equipped with certain anti-profiteering measures. They are as follows:

1. The Anti-Profiteering Rules: Chapter XV of the Central Goods and Services Tax Rules, 2017 deals with the mechanism and procedures of the anti-profiteering measures given under GST and,

2. National Anti-profiteering Authority (NAA): To ensure that the benefits of GST are passed to the end-consumer an authority is established to oversee and enforce the anti-profiteering measures in India known as the National Anti-profiteering Authority (NAA). However, since 1st December, 2020 the NAA has been wound up and its mandate has been transferred to the Competition Commission of India. The Competition Commission of India now deals with all the the GST anti-profiteering complaints.

By Advocate Akshaye Ahuja