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Goods and Services Tax (GST) in India

What is GST?

GST Act came into existence in India on 1st July 2017 with the motive of One Nation One Tax. Goods and Services Tax (GST) is a destination-based tax that subsumed many indirect taxes in India. GST is a multi-stage tax that gets levied on every value addition.

Features of GST

Destination-Based

GST is a destination-based tax. Let us understand this with an example.

“Goods are produced in Delhi and sold to the end consumer in Uttar Pradesh. As for the GST, the point of taxation is the point of consumption. So, GST will be applicable in Uttar Pradesh and not in Delhi.”

Multi-stage

There are multiple stages in a production cycle. The various stages in the production cycle are:

Goods and Services Tax (GST) in India

Value Addition

GST is levied on every value addition made at different stages of production. We can understand the concept of value addition with the help of the following example:

The manufacturer who manufactures clothes takes raw materials such as cotton, silk etc.

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The input value increases when the cotton is stitched into a shirt.

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Then it is transferred to the packaging and labelling company. The value of the produced shirt increases once it is labelled and packed. It also adds up the value to the shirt manufactured.

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Then it is given to the distributor or retailer, which bifurcates the slot into smaller quantities and starts marketing such shirts. Marketing improves the salability of the shirt.

Taxes before GST in India

Before the introduction of GST, different indirect taxes were charged by the state and central government. Here is the list of taxes that were applicable before GST in India

Central Indirect Taxes

Following Central Indirect Taxes were applicable in India before GST:

  • Central Excise Duty
  • Additional Excise Duties
  • Service Tax
  • Countervailing Duty
  • Customs Duty
  • Central Surcharges and Cess

State Indirect Taxes

Following State Indirect Taxes were applicable in India before GST:

  • State VAT
  • Entertainment Tax (except the tax levied by the local bodies)
  • Central Sales Tax (charged by the Centre and collected by the States)
  • Octroi
  • Entry Tax
  • Purchase Tax
  • Luxury Tax
  • Taxes on lottery
  • Betting and gambling
  • State cess and surcharges

But after the introduction of GST in India, Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST), and Integrated Goods and Services Tax (IGST) have replaced most of the above taxes.

Taxes subsumed under GST

Central Indirect Taxes

  • Central Excise Duty
  • Duties of Excise (Medicinal & Toilet Preparations)
  • Additional Duties of Excise (Goods of Special Importance)
  • Additional Duties of Excise (Textile and Textile Products)
  • Additional Duties of Customs (CVD)
  • Special Additional Duty of Customs (SAD)
  • Service Tax
  • Central Sales Tax
  • Central Surcharges & Cesses so far as they relate to supply of goods and services

State Indirect Taxes

  • State VAT
  • Luxury Tax
  • Entry Tax (all forms)
  • Entertainment & Amusement Tax (except those levied by local bodies)
  • Taxes on advertisements
  • Purchase Tax
  • Taxes on lotteries, betting and gambling
  • State surcharges & cesses so far as they relate to supply of goods and services
Before GST After GST
The taxes before GST were origin-based taxes that apply to that place where the goods were sold. GST is a destination-based tax that is applicable where the goods are consumed.
Cascading effect was there before GST. In simpler words, a tax used to be levied on another tax. The cascading effect has been removed as GST has subsumed all the indirect taxes.
A taxpayer had to follow multiple tax compliances Now the taxpayer has to follow less tax compliance as GST is only applicable.

GST Components

GST has three main components namely:

Central Goods and Services Tax (CGST)

CGST is charged on an intra-state supply that the Central Government collects.

 State Goods and Services Tax (CGST)

SGST is also charged on an intra-state supply, but the State Government collects it.

Integrated Goods and Services Tax (CGST)

IGST is charged on an inter-state supply that the Central Government collects.

Supply GST Regime Tax Collection
Intra-State CGST + SGST/ UTGST The tax collected will be given to the state and central government, respectively.
Inter-State IGST The central government collects the tax, which will be shared with the states in the determined ratio.

For example,

Say, a car dealer in Delhi sold a card to a dealer in UP worth 10,00,000, chargeable at 18% GST. Then in such a case, the dealer in UP has to pay 1,80,000 INR as IGST to the central government. In case the same dealer sells the car worth 10,00,000 INR to another dealer in Delhi. Assuming 18% rate of GST (9% CGST + 9% SGST), The UP dealer has to pay 90,000 INR to the UP Government and 90,000 INR to the Central Government.

The Bottom Line

The introduction of GST has not only subsumed all the indirect taxes. It has also improved the Indian economic condition to a great extent by unifying taxes. This unification of taxes has a positive impact as it reduces the tax compliance that used to be a burden for the taxpayer. In addition to this, under GST, the supply chain buyer can claim ITC, which directly impacts the sales price, hence benefitting the end consumer. So, ultimately, GST reduces the burden of both finance and tax of the supply chain buyer and the end consumer.

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GST Compliance