The taxation system in India can be broadly divided into two – direct taxation and indirect taxation. Direct taxation deals with tax on income and profit. Indirect taxation encompasses a wide range of taxes like excise duty, customs duty and the more recently introduced Goods and Services Tax (GST).
The implementation of GST in 2017 replaced a plethora of indirect taxes, streamlining the entire indirect taxation system. Continue reading to find out all about this comprehensive tax, its objective and the various types that are levied in the country.
What Is GST?
Goods and Services Tax or GST is an indirect tax that’s levied on certain notified goods and services. Unlike other indirect taxes, GST ensures that taxes are only levied on value additions at each stage. This makes it one of the most efficient forms of taxation and mitigates the cascading effect.
One of the major highlights of Goods and Services Tax is the input tax credit system, which allows GST-registered businesses and individuals to reduce their overall tax liability by deducting GST paid on inputs. Here’s a quick overview of how the input tax credit system works.
Assume you’re a GST-registered business owner. You purchase certain raw materials for your business and pay ₹25,000 as GST to the sellers. Next, you sell the finished goods in the market and receive ₹32,000 as GST, which you need to deposit with the tax authorities. But thanks to the input credit system, you can reduce your tax liability from ₹32,000 to just ₹7,000 (₹32,000 – ₹25,000) by deducting the GST you paid on the purchased raw materials.
Objective of GST
Now that you’ve seen what Goods and Services Tax is, let’s try to understand its objective and why it was introduced in the economy.
Before the introduction of GST, the indirect tax system in India was deeply fragmented and consisted of multiple taxes like excise duty, sales tax and Value Added Tax (VAT), among others. The plethora of different indirect taxes on goods and services led to a cascading effect, where tax was levied on tax. This not only led to a huge increase in the price of goods and services but also increased the regulatory requirements for businesses.
The Goods and Services Tax was envisioned to solve all of these issues. By bringing about a single taxation system to replace multiple indirect taxes, the government of India could effectively simplify the tax structure, reduce evasion and boost the ease of doing business significantly. Finally, after much deliberation and discussion, the Goods and Services Tax Act was passed on March 29, 2017, and the tax came into effect on July 1, 2017.
Which Taxes Did GST Replace?
The introduction of GST led to the eventual phasing out of as many as 11 different indirect taxes. Here’s a quick overview of the list of taxes that the Goods and Services Tax replaced.
- Sales Tax
- Value Added Tax (VAT)
- Entertainment Tax
- Customs Duty
- Service Tax
- Luxury Tax
- Tax on Lottery Gains
- Central Excise Duty
- Additional Excise Duty
- Import Duty
What Are the Different Types of GST and the Differences Between Them?
Goods and Services Tax in India can be broadly classified into four different types – State GST, Central GST, Integrated GST and Union Territory GST. Let’s take a more in-depth look at each of these types of GST.
State GST or SGST is levied on intrastate transactions (transactions that occur within a state). The levied tax goes entirely to the government of the state where the transaction took place.
Central GST or CGST is levied on intra-state transactions in addition to the SGST. The levied tax goes entirely to the central government even though the transaction took place within the boundaries of a state.
Integrated GST or IGST is levied on interstate transactions (transactions that occur between two states or a state and a union territory). The levied tax is shared between the central government and the state government or union territory to which the goods or services were supplied to.
Union Territory GST
Union Territory GST or UTGST is levied on transactions that occur within a union territory. The levied tax goes entirely to the union territory where the transaction took place.
Examples of Different Types of GST
Here are a few hypothetical examples that can help you understand how the different types of GST work.
State and Central GST
Assume you provide services worth ₹20,000 to a customer within your state. If the rate of GST on the service provided is 18%, your tax liability would come up to ₹3,600. This total GST of ₹3,600 will be divided equally into State GST and Central GST, which means that ₹1,800 (9%) would go to the government of the state in which the service was provided and the remaining ₹1,800 (9%) would go to the central government.
On the other hand, assume you reside in Telangana and provide goods worth ₹1 lakh to an individual in Maharashtra. If the rate of GST is 12%, your tax liability would come to ₹12,000. The entire tax will be categorised as IGST since it is an intra-state transaction and will go to the central government. This IGST will be shared equally between the central government and the government of Maharashtra.
Who is Liable to Pay GST?
Generally, the individual or business registered under GST and supplying taxable goods or services is the one liable to pay Goods and Services Tax. However, in certain specific cases (reverse charge mechanism), the recipient of the goods and services is the one liable to pay GST.
Goods Exempted from GST
The GST Council has exempted certain categories of goods from the ambit of the Goods and Services Tax. The exempted category of goods will not attract GST at any stage of value addition. Here’s a list of some of the most common exempted goods under GST.
- Food items like cereals, fruits, meat, vegetables, fish and poultry
- Fabric raw materials like cotton, unprocessed wool, handloom fabric, raw jute and raw silk
- Tools and instruments like those used by the differently abled and for agriculture
- Miscellaneous goods like newspapers, books, journals, vaccines, paper pulp and non-judicial stamp paper
With this, you must now be well-versed in what GST is and the various types of GST levied in India. The introduction of the tax has significantly transformed the indirect tax landscape in India. Goods and Services Tax has not only simplified indirect tax levy but has also made it easier to understand. The GST Council, the constitutional body responsible for the governance of the indirect tax system in India, is also very proactive and meets regularly to discuss and make appropriate changes to the tax system to make it more streamlined.
What are the GST rates in India?
GST in India is levied at five different rates depending on the type of goods sold or services rendered. These slabs are 0%, 5%, 12%, 18% and 28%. In addition to these, there are also other GST slab rates like 3%, 1.5% and 0.25%. However, they are very rarely used since they’re applicable for certain specific and uncommon goods.
Are the provisions of GST applicable to small businesses?
Yes. All businesses, including small businesses, must register for GST if their annual turnover is more than ₹40 lakhs (in the case of goods) and ₹20 lakhs (in the case of services).
Are there any goods that are exempt from GST?
Yes. Several goods like fruits and vegetables, agricultural tools, vaccines, newspapers and books, among others are exempt from the levy of GST.
Who is responsible for the implementation of GST in India?
The GST Council is the entity responsible for the implementation and governance of GST in India. It is a constitutional body consisting of 31 members from the states and union territories of India and 2 members from the central government.
Do you have to pay both SGST and CGST even for transactions within the state?
Yes. Every GST transaction within the state will have two components – SGST (State GST) and CGST (Central GST). Both SGST and CGST have the same rate of tax.