GST: The Fundamentals

Table of Contents

The Goods and Services Tax, has been well-received. A new law has been proposed in India that will change the way individuals do business and how goods and services are taxed. Nobody can say whether it lowers the cost of goods for ordinary people like you and me. However, this will have an impact on our lives at work, on our enterprises, and in the general economy. It’s plenty of a reason to learn about it! 


Framework of GST

The Goods and Services Tax (GST) is planned to replace a slew of indirect taxes, including VAT, customs duty, excise, CST, service tax, and entertainment tax, with a single tax known as the GST.

  • Broadly there will be 2 forms of GST in India.
  • At the intra-state level (when goods travel within a state) and at the inter-state level (when goods travel between states)
  • At the intra-state level two types of GST is levied CGST (Central Goods and Service Tax) and SGST (State Goods and Service Tax)
  • At the inter-state level IGST (Integrated Goods and Services Tax) shall be levied.
  • Imports shall be considered as inter-state supply.
  • Exports shall be zero rated.

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For Whom Is GST Applicable?

  • To anyone who provides goods and/or services worth more than Rs 20 lakh in a financial year. (Some special category states have a limit of Rs 10 lakh.) Registration is required for these. In addition, if your annual revenue surpasses Rs 20 lakh, you must pay GST (Rs 10 lakh for some special category states).
  • To someone making inter-state taxable supply of goods/ services
  • To E-commerce operator
  • To anyone who sells goods and services through an E-commerce operator, excluding branded services.
  • Aggregators who sell their own services under their own brand
  • Casual taxable person
  • Non-resident taxable person
  • Person required to deduct/ collect tax
  • Input Service Distributor
  • Other than a registered taxable person, a person who provides online information and database access or retrieval services to a person in India from a location outside India.
  • Person required to pay tax under reverse charge
  • Taxable person who supplies products on behalf of another taxable person (e.g., Agent)
  • GST does not apply to Agriculturists
  • GST does not apply to anyone who is only in the business of supplying products / services that are not subject to tax or are completely tax exempt under this Act.


How GST Allows Tax Cascading Benefits

Many people are aware that service tax and VAT have cascading benefits, which means you can get credit for taxes you paid on inputs. For example, in the case of service tax, you levy service tax on services you sell and can deduct service tax paid on services utilised as inputs when paying this tax.

Imposing taxes on the overall worth of the product at each stage, the GST regime simply charges taxes on value added. This strategy significantly lowers the overall cost of manufacturing and selling items because it credits input taxes paid at each prior stage of the supply chain.

Previous Tax Structure vs GST


Previous Tax Structure:

The buckets are sold by the producer to a distributor in State 1 for Rs. 1,000 each, plus a 10% VAT (which adds Rs. 100 per bucket).

State 1’s wholesaler purchases the buckets for Rs. 1,100 per piece and raises the selling price to Rs. 2,000 per bucket before selling a handful to a merchant in another state (State 2). This interstate sale would have been subject to a 12 percent Central Sales Tax (CST) on the first Rs. 2,000 under the pre-GST regime (which adds Rs. 240 CST per bucket).

The retailer pays Rs. 2,240 each bucket, raises the price by 20%, and sells the buckets for Rs. 2,688 + 15% VAT to local consumers in State 2. (Which adds Rs. 403.20 per bucket).

Per bucket, the end user pays a total of Rs. 3,091.20/-.

Note: that we’ve assumed that the VAT rate in state 1 is 10%, whereas the VAT rate in state is 15%. This is due to the fact that the VAT rates in the pre-GST regime differed between states.

The application of tax is non-uniform at every stage of the process, as shown in the example above. The tax rate and type vary from time to time, and obtaining an ITC is difficult or impossible due to the fact that the various taxes are administered by separate bodies.

Bottom line: When sellers make a sale, they lose money on taxes since they don’t obtain an input tax credit or a refund on the tax they paid on the purchase.

GST:

The buckets are sold by the manufacturer to a wholesaler in State 1 for Rs. 1,000 each, plus a 10% GST.

Before selling a few of them to a retailer in another state, the wholesaler in State 1 buys them for Rs. 1,100 per piece and raises the total selling price to Rs. 2,000 per bucket (State 2). Under the GST regime, this interstate sale will attract an IGST of 10 percent on Rs. 2,000 (which adds Rs. 200 per bucket) (which adds Rs. 200 per bucket).

The retailer pays Rs. 2,200 per bucket, raises the price by 20%, and sells the buckets for Rs. 2,640 plus a 10% GST to local consumers in State 2. (Which adds another Rs. 264 per bucket). The end consumer pays a total of Rs.2,904/-.

Note: We’ve assumed a 10% GST on zinc-coated steel buckets in this example. Regardless of whether the bucket is sold intra-state or inter-state, the GST rate will remain the same across India.


Bottomline:

Looking at both situations, there isn’t much of a difference in terms of the buyer/end consumer. The benefit to the end consumer totally depends on the rate associated with a particular item or service under the GST. The end user would have paid a lot more than before if we had assumed a higher GST rate for the bucket. However, sellers, manufacturers, and merchants profit the most from the GST regime since it allows for an unrestricted flow of input tax credits, allowing them to receive a refund on the input taxes they paid at the time of sale. Sellers, on the other hand, can pass this benefit on to the end user if they so choose to reduce their final selling prices as they do get their tax money back.

GST Tax Structure:

The four-tier tax structure of GST has the following slabs: a zero rate, a lower rate, two standard rates, and a higher rate. Here’s a brief overview of each rate.


Zero Rate:

The zero-rate tax is a nil tax that is applied on goods and services. Zero rated items include milk, eggs, curd, unpacked food grains and health & educational services.


Lower Rate:

Items like Sugar, tea, edible oil, coal, spices, and cotton fabric will all be taxed at a reduced rate of 5%. This, combined with the zero-interest rate, will serve to keep inflation from having a significant influence on the costs of necessities.


Standard Rate:

The GST Council has decided on two standard rates: 12% and 18%.

Processed foods, butter, and cell phones will all be subject to a 12% tax. The second standard rate of 18% will be applied to capital items, industrial intermediates, toiletries, computers, and printers.


Higher Rate:

White items will be taxed at a higher rate of 28%. Washing machines, high-end motorcycles, air conditioners, refrigerators, small vehicles, and other things fall into this category.


Additional Cess:

The additional cess, which has been a source of contention since the proposed GST rates were announced, has now been confirmed. It was expected that if the maximum rate of GST was set at 28 percent, depreciating commodities like tobacco and aerated drinks, which were formerly taxed at 65 percent and 40 percent, would become cheaper and more widely accessible. To prevent this, the new GST system will levy an extra cess on top of the existing 28 percent GST. Only demerit items such as coal, paan masala, cigarettes, aerated drinks, and motor vehicles will be subject to the cess.

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