Goods & Services Tax (GST) in India Law Explained
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.
GST is a destination based tax let us understand this with an example:
Assuming, Goods are produced in Delhi and sold to the end consumer in Uttar Pradesh. As for GST point of taxation is the point of consumption. So, GST will be applicable in Uttar Pradesh and not in Delhi.
There are multiple stages through which material goes through.
Let us understand this with an example:
- Purchase of raw materials
- Manufacturing or production
- Labelling and Packaging
- Sale to wholesaler or/and retailer
- Sale to the end consumer
GST gets levied on every value addition let us understand this with an example:
The manufacturer who manufactures clothes takes raw material such as cotton, silk etc. The input value increases when the cotton is stitched into a shirt.
Then it is transferred to the packaging and labelling company. The value of the produced shirt increases once it is labelled and packed. This also adds up the value to the shirt manufactured.
Then it is given to distributor or retailer which bifurcate the slot into smaller quantities and starts the marketing of such shirts. Thus, adding the value of such shirts.
GST is levied on each stage wherever there is an addition in the value of the manufactured shirt.
Taxes before GST in India
Before the introduction of GST, different indirect taxes were charged by both 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)
- 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 taken a substitute to all the above taxes.
There are different advantages that can be enjoyed under GST, let us understand this with the following table
The taxes before GST were origin-based taxes that are applicable 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 was levied on another tax.
The cascading effect has been removed as GST has subsumed all the indirect taxes.
A taxpayer has to follow multiple tax compliances
Now the taxpayer has to follow less tax compliance as GST is only applicable.
GST has three main components namely:
Central Goods and Services Tax (CGST)
CGST is charged on an intra-state supply that is collected by the Central Government.
State Goods and Services Tax (CGST)
SGST is also charged on an intra-state supply but it is collected by the State Government.
Integrated Goods and Services Tax (CGST)
IGST is charged on an inter-state supply that is collected by the Central Government.
Here is a table through which you can understand the GST components more clearly:
CGST + SGST
The tax collected will be given to the state and central government in the respective manner.
The tax is collected by the central government which will be then shared with the states in the determined ratio.
- In case if a car dealer in Delhi sold a card to a dealer in UP worth 10,00,000. Assuming 18% rate of GST.
Then in such the dealer in UP has to pay 1,80,000 INR as IGST to the central government.
- In case if 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 UP Government and 90,000 INR to Central Government.
Changes under GST in India
The indirect tax structure under GST has brought drastic changes in the revenue generation in India. Further, the GST has uplifted the Indian economy to a higher level by eliminating all the indirect taxes. In addition to this GST has simplified the indirect tax structure which in turn helped with less tax compliance.
Pre and Post GST Illustrations
Let us take the same example of a shirt manufacturer along with some numbers.
Pre GST Illustration
Labelling and Packaging @ 400
Marketing and Retailing @350
Here in the above example, we can see the cascading effect i.e. tax on tax. The liability of tax is increasing as one type of tax cannot be adjusted with other tax. Along with this, the tax liability is transferring from one taxpayer to another. And at last, the customer is liable to pay all the tax. Along with this, in the pre-GST regime, the cost and sales price was also getting a negative impact due to the cascading effect.
Post GST Illustration
Labelling and Packaging @ 400
Marketing and Retailing @350
Through the above example we can understand that in the GST Regime, the taxpayer can take Input Tax Credit (ITC). Input Tax Credit is a provision where the taxpayer who has already paid tax on their output can claim credit at the time of paying tax on input.
The same thing is happening in the above illustration the taxpayer is claiming ITC on the input. Due to this, the cost for the supply chain buyer is diminishing along with the sales price for the end consumer.
This is the reason why there is a significant difference between the final prices of a shirt from 2200 to 1925 in pre and post GST regime.
The Bottom Line
Introduction of GST has not only subsumed all the indirect taxes but has also improved the Indian economy condition to a great extent by the method of unification of taxes. This unification of taxes has a positive impact as it is reducing 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 we can say that GST is reducing the burden of both finance and tax of the supply chain buyer and end consumer.