What is GST in India? Goods & Services Tax Law Explanation

What is GST in India? If you are new to the term GST and want to know what is GST means (जीएसटी क्या है)  and what is the definitions of word GST(जी एस टी), then you are right place. GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017. The Act came into effect on 1st July 2017; Goods & Services Tax Law in India is a comprehensivemulti-stagedestination-based tax that is levied on every value addition.

In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of goods and services. Goods and Service Tax law has replaced many indirect tax laws that previously existed in India.

GST is one indirect tax for the entire country.

Brief History of GST (वस्तु एवं सेवा कर)

GST full form is Goods and Service Tax

The Central government passed four sets of Goods & Services Tax Acts in the Budget session this year. These were Central GST Act, 2017; Integrated GST Act, 2017; Union Territory GST Act, 2017 and Goods & Services Tax (Compensation to States) Act, 2017. The Acts were approved by the Parliament after they were introduced as part of the Money Bill. Following the passage of the GST Acts, the GST Council decided the rate slabs for the Goods and Services to be taxed under the GST regime. This guide will help you build a basic understanding of Goods & Services Tax, its role in your day to day life and its benefits.

What is GST?

GST (Goods and Services Tax) is the biggest indirect tax reform of India. GST is a single tax on the supply of goods and services. It is a destination based tax. Goods & Services TaxGST has subsumed taxes like Central Excise Law, Service Tax Law, VAT, Entry Tax, Octroi, etc. Goods and Service Tax is one of the biggest indirect tax reforms in the country. GST is expected to bring together state economies and improve overall economic growth of the nation.

Goods and Service Tax is a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at the national level. It will replace all indirect taxes levied on goods and services by states and Central. Businesses are required to obtain a GST Identification Number in every state they are registered.

There are around 160 countries in the world that have GST in place. GST is a destination based taxed where the tax is collected by the State where goods are consumed. Goods and Service Tax has been implemented in India from July 1, 2017 and it has adopted the Dual GST model in which both States and Central levies tax on Goods or Services or both.

  • SGST – State GST, collected by the State Govt.
  • CGST – Central GST, collected by the Central Govt.
  • IGST – Integrated GST, collected by the Central Govt.
  • UTGST – Union territory GST, collected by union territory government

Why is GST needed in India?

Introduction of Goods and Service Tax (GST) is considered to be a significant step in the reform of indirect taxation in India. Amalgamating of various Central and State taxes into a single tax would help mitigate the double taxation, cascading, a multiplicity of taxes, classification issues, taxable event, etc., and leading to a common national market.

VAT rates and regulations differ from state to state. On the other hand, Goods and Service Tax brings in uniform tax system across all the states. Here, the taxes would be divided between the Central and State government.

Impact of Goods & Services Tax on Indian Economy

GST offers several benefits to our economy. Here are some key advantages:

  • Create unified common national market for India, giving a boost to Foreign investment and “Make in India” campaign
  • Boost export and manufacturing activity and leading to substantive economic growth
  • Help in poverty eradication by generating more employment
  • Uniform SGST and IGST rates to reduce the incentive for tax evasion

 Impact of GST on Consumers

Goods & Services Tax is also beneficial for consumers. Here is how it impacts the Indian consumers:

  • Simpler Tax system
  • Reduction in prices of goods & services due to elimination of cascading
  • Uniform prices throughout the country
  • Transparency in taxation system
  • Increase in employment opportunities

Impact of GST on Traders

Goods & Services Tax is also has some positive impact on traders. Let’s see how it affects the traders:

  • Reduction in multiplicity of taxes
  • Mitigation of cascading/ double taxation through input tax credit
  • More efficient neutralisation of taxes especially for exports
  • Development of common national market
  • Simpler tax regime
  • Fewer rates and exemptions
  • Distinction between Goods & Services no longer required

What are the Different Types of GST?

In India, there are 4 components of GST. The following table explains the 4 types of Goods & Services Tax and compares them on various parameters:

Central GST – CGSTState GST – SGSTUnion territory GST – UTGSTIntegrated GST – IGST
Tax Levied ByCentral GovernmentState GovernmentUnion territory GovernmentCombined levy, collected by Central Government
Taxes that it will replaceService tax, excise duty, countervailing duty (CVD), special additional duty (SAD), Additional duties of excise(ADE), and any other indirect central levyVAT, sales tax, luxury tax, entry tax, entertainment tax, purchase tax, Octroi, taxes on lotteryVAT, sales tax, luxury tax, entry tax , entertainment tax, purchase tax, Octroi, taxes on lotteryCentral sales tax (CST)
ApplicabilitySupplies within a stateSupplies within a stateSupplies within a union territoryInterstate supplies and import
Input Tax CreditAgainst CGST and IGSTAgainst SGST and IGSTAgainst UTGST and IGSTAgainst CGST, SGST and IGST
Tax Revenue SharingCentral governmentState governmentUnion territory governmentShared between state and central governments
Exemption LimitRs 20 lakh annual turnoverRs 20 lakh annual turnoverRs 20 lakh annual turnoverExemption limit not defined
Composition SchemeThe dealer may use the benefit of turnover of Rs 50 lakhThe dealer may use the benefit of turnover of Rs 50 lakhThe dealer may use the benefit of turnover of Rs 50 lakhComposition Scheme is not available in this regard
Free SuppliesCGST is applicable on free suppliesSGST is applicable on free suppliesUTGST is applicable on free suppliesIGST is applicable on free supplies
RegistrationNot applicable till the turnover exceeds Rs 20 lakhNot applicable till the turnover exceeds Rs 20 lakhNot applicable till the turnover exceeds Rs 20 lakhRegistration is necessarily mandatory if supply is made outside the states

GST Explained with the Help of Example

Let’s assume that a manufacturer of shirts buys raw materials like cloth, thread, buttons, zips and other equipment that is required to stitch the pants. This raw material costs the manufacturer Rs 400. This Rs 400 includes a 10% tax of Rs 40. Once the shirt is made, the manufacturer has added his own value to the input material. As a part of this example, if one were to assume that the value added is Rs 100, then the total cost of the trouser is now Rs 500 (Rs 400 + Rs 100). With a 10% tax rate, the tax on this trouser would be Rs 50. However, since the manufacturer has already paid Rs 40 as tax while purchasing raw material, under GST, the tax incidence will now be only Rs 10 (Rs 50 – Rs 40).

Now, let’s see how GST works at the second stage, which is for the wholesaler. Now, the wholesaler would buy the shirts at Rs 500 and would keep a margin on it to make a profit. Assuming that the margin is kept at Rs 50, the cost of the clothing item now becomes Rs 550. Applying the same 10% principle, the tax would amount to Rs 55. But, out of this Rs 55, Rs 50 are already accounted for from stage one. So the effective tax incidence for the wholesaler would be Rs 5 (Rs 55– Rs 50).

The final stage is that of the retailer. Now that the retailer has bought the shirts at Rs 550, he would also keep a profit margin. Say the margin that the retailer decides on is Rs 50. The total cost now becomes Rs 600. Using the 10% rule, the tax would be Rs 60. However, with Rs 55 already accounted for in the earlier two stages, the tax incidence would be Rs 5 (Rs 60– Rs55 ). To sum up, the total GST for the entire chain, from manufacturer to retailer is Rs (50+ 10+ 5+ 5= 70). The suppliers of inputs would be able to claim no tax credit, given the fact that they have themselves not purchased any item.

FAQ’S on Goods and Services Tax

Is GST Applicable to me?

  • Indirect tax laws in India have been heavily revamped with the onset of Goods & Services Tax. Therefore it is important for you to understand if you come under the purview of GST. If you are involved in any business except agriculture and your aggregate turnover is above Rs. 20 lakh in a financial year, then you are a taxable person under Goods and Services Tax law.
  • Businesses operating in North Eastern and some other states need registration if their turnover exceeds Rs 10 lakh.
  •  If you are an NRI doing business in India then it is mandatory for you to register under GST irrespective of the turnover of your business.

What documents are required for GST registration?

The type of documents required for gst registration vary depending on the type of business. As a taxable person under Goods and Services Tax you must obtain GST registration.

What is GST Identification Number?

Under GST, every registered taxable person is assigned a unique identification number for every state he is registered in. This number is known as GSTIN which is a state-wise PAN-based 15 digit number.

How do I Verify GST Number of my vendor?

Many small and medium enterprises do not opt for GST registration and therefore use fake GSTIN to avoid the compliance cost that comes with it. However, one can verify any GSTIN online to ensure that their taxes land up in the right pockets.

What are the types of Invoices under GST?

In order to assess the levy of GST, the Goods and Services Tax Act has prescribed a comprehensive format for invoicing. There are two types of invoices under GST regime, namely tax invoice and bill of supply.

What is eWay Bill and How to generate it?

e-Way bill is a permit required for movement of goods exceeding Rs 50,000 in value. You can generate e-way bill using the government’s e-way web based portal.

What is Composition Scheme in GST?

Businesses which opt to file taxes under GST composition scheme need to file separate set of returns. This scheme makes compliance easier for small businesses. Businesses with turnover less than Rs 75 lakh can opt to file under this scheme.

Still if you have doubts regarding what is GST ? you can ask us through comment box of this article.

1 Comment
  1. Gaurav Gupta says

    Thank you for sharing such a valuable piece of information. I have read various blog posts regarding GST but most of my doubts weren’t cleared. Now all my GST related queries are resolved.

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