Goods and Services Tax (GST): A Comprehensive Guide in 2023
Goods and Services Tax (GST) stormed the nation and caused abuzz for a long time. Keeping in mind the furor caused by this GST, this article simplifies the Goods and Services tax and answers related questions to make you understand the concept. Whether you are a taxpayer, an entrepreneur, or a student seeking a career as a GST practitioner, this article will guide you all along the process and clear all your doubts.
From the former complex taxation system to the present-day GST taxation regime- the article discusses what GST is, its types, features, advantages, needs, and other major compliances under GST.
Dive in now.
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Former Taxation System in India
Prior to GST, there existed a complex taxation system inclusive of both state and Central Government Taxes. Several state taxes such as VAT, luxury tax, sales tax, entertainment tax intertwined with taxes levied by the Central Government. As both the taxes intertwined, it rendered a cascading effect elevating burden on the domestic and international consumption of Goods and Services.
As a matter of fact, the states collected taxes in the form of VAT or Value-added Taxes. Moreover, each state had its own set of rules and regulations. Likewise, the Central Government taxed CST or Central State Tax on the inter-state sale purchase of goods. As both these taxes overlapped, it created a tax-on-tax effect.
For example, Centra charged excise duty on the manufacture and trade of a product. Over the top, the state government imposed VAT on the same product. As a result, it erupted as a tax-on-tax effect. This is termed as the cascading effect of taxes.
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What is GST?
GST- an acronym for Goods and Services Tax- can be defined as an indirect tax levied on the sale, purchase, and consumption of goods and services. The GST tax ousted plethora of taxes such as excise duty, service tax, VAT, etc., to stand as a unified tax regime.
Most specifically, GST is a multistage, value-addition single domestic indirect tax regime for the entire nation. This comprehensive tax is assorted into 5 slabs which are 0%, 5%, 12%, 18%, and 28%.
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Types of GST
Apparently, there are four types or components of GST. All of them are discussed in detail below:
CGST is a shortened form for Central Goods and Services Tax. The central Government collects the revenue on the sale and purchase of goods and services across intra-state transactions. That accounts for CGST.
SGST is a shortened form for State Goods and Services Tax. The state government collects revenue on the sale and purchase of goods and services across intra-state transactions. That accounts for SGST.
IGST is a shortened form for Integrated Goods and Services Tax. It is an integrated tax, which is mutually collect by both Central and State Governments with an equal share.
Let’s understand these taxes with an illustration.
For instance, if there is a sale of INR 1,00,000 at an 18% GST rate from Bangalore to Delhi. Then, 18% GST, that is, INR 18,000 will go directly to the Central Government.
Take another case.
If there is a sale of INR 1,00,000 at an 18% GST rate within Bangalore from one trader to another. Then, the collected revenue of INR 18,000 will be shared equally between The Central Government and the State Government of Bangalore. Each will acquire a share of INR 9,000. That’s how it works.
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Genesis of GST
In 1954, France became the first and foremost country to implement GST. Since then, the count of GST implemented countries has ramped up to 160, encompassing Canada, Singapore, UK, Vietnam, Italy, Spain, Nigeria, to name a few.
In India, the genesis of GST dates back to the year 2000- when the incumbent PM Atal Bihari Vajpayee introduced GST Bill in Parliament. Traveling a long journey since then, the GST Bill finally came into effect on 1st July 2017 grounded by One hundred and First Amendment in the Constitution.
The Need for GST in India
The former taxation system attracted a tax-on-tax effect. To simplify this cascading effect, let us take an example. An A trader sells particular goods to trader B and charges sales tax on it. After a while, trader B re-sells those goods to C along with the sales tax. Now, this becomes a tax-on-tax effect, where the same tax is computed again on the sale of the same goods and services. This process is known as the cascading effect of taxes.
Thus, to eliminate this cascading effect of taxes, the need for GST becomes predominant.
Features of GST
Moving along, let us have a glance at the prominent features of GST:
1.The GST is divided into 3 types which are CGST, SGST, and IGST.
2.GST is a sum-up of 17 taxes at the State and Central levels.
- Central Excise Duty
- Duties of Excise
- Additional Duties of Excise
- Additional Duties of Customs
- Special Additional Duty of Customs
- State VAT
- Central Sales Tax
- Purchase Tax
- Luxury Tax
- Entertainment Tax
- Entry Tax
- Taxes on advertisements
- Taxes on lotteries, betting, and gambling
- One Nation, One Tax
- Value addition at each stage of production or manufacturing
- No tax-on-tax effect.
- Petroleum products, alcohol, and tobacco are out of the ambit of GST.
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Advantages of GST
The consolidation of multifarious taxes into one unified GST tax regime came as a revolutionary reform in the taxation system of India. Here know about the advantages of this tax structure:
1.It led to the eradication of double taxation or tax-on-tax effect, thus forming a common national market.
2.For customers, the benefit comes in the form of tax reduction on the overall tax brunt. As per Wikipedia, the reduction estimation stands around 25-30%. Now, that’s a number.
3.Lower cost for maintaining compliances. No special endeavors are required to separate CGST, SGST, and IGST.
4.Manufactures and traders don’t have to induce taxes as a part of their cost production, thus, lowering the prices.
5.GST is advantageous in terms of more transparency, accountability, and efficacious compliance.
6.It also amped up the GDP growth favoring Central and State governments, industrialists, manufactures, common people, and the whole country through a bird’s perspective.
Shortcomings of GST in India
It goes without saying that nothing is perfect, so does apply to the Goods and Services Tax. Besides the worthwhile positive impacts of GST, there come a few shortcomings. Let’s have a look at them:
1.Digital Taxation System
As we know, GST is an online tax system where all the procedures are taken up online. From registration to filing of returns and refunds- all of it is done at the GSTN portal. While it’s true that most of the businesses have jumped on the bandwagon and shifting to digital solutions, yet there are a few small businesses that have a long road to travel. Put in simpler words, many small businesses are not well-equipped with the latest technologies and digital solutions. Thus, they are facing challenges in keeping up with the GST trends.
Though the online system is a simple process, for few business owners the learning gap poses challenges.
2.Additional Software Charges
The business used ERP or Accounting software developed as per the conventional taxation system. With new GST comes the need for new software that is compliant with GST. Not only the new software has incurred more expenses, but training employees is an additional cost for business companies.
Unprecedented Compliances Under GST
GST regime brings few novel systems along with it that are beneficial for better administration of the taxes. These are:
In the name of E-way bills, GST introduced a centralized and consolidated system of waybills. Its launchpad execution was prosecuted in two tiers. Firstly, on 1st April 2018, the system consented to intra-state travel of goods and services. Secondly, the system affiliated to inter-state transactions of goods and services on 15th April 2018. Since then, every transaction must possess e-way bills for goods transferal.
As a part of this e-way bill system, there is a common portal where manufactures and traders can generate e-way bills for the transfer of goods from the place of origin to the final destination. Moreover, tax authoritative also enjoyed the share of its benefits as both check-post time and tax evasions diminished.
Basking in the success of the E-way bill system, another system came into existence-namely the E-voicing system- on 1st October 2020. Initially, the system applied to businesses with an annual turnover of INR 500 crore or more. But soon enough, on 1st January 2021, it confided to businesses with an aggregated turnover of INR 100 crore or more.
Under this E-voicing system, these businesses are obliged to obtain a unique reference number for each B2B invoice by updating the details at the GST invoice registration portal. As a matter of fact, the portal verifies and authenticates the credibility of the invoice. Following this procedure, it provides authorization to use digital signature along with QR code.
If you are wondering, what are the benefits of E-invoicing, then here we go. It allows interoperability of invoices and further helps to mitigate data entry errors. Its formulation allows for the direct updation of invoice information from IRP to GST and the e-way bill portal. Thus, eradicating the need for manual data entry in GSTR-1 form filling. Moreover, it helps in an e-way generation.
GST Impact in India
The most defined GST reform had a huge impact on the Indian economy, small, medium, & large businesses, the common man, and the Government. Overall, it has had a trailblazing mark on the Indian Economy.
Since its inception, GST has been affecting the lives of billions of people all over India. With rate additions and sanguine relaxations from former taxes- the impact is a roller coaster ride. Indeed, this revolutionary tax reform has simplified the taxation system, yet it comes with its own hard moves.
Here let’s look at a few statistics to define the impact of GST reform in India:
1.Increased tax base: As more and more taxpayers shifted to the GST regime, there is a significant upsurge in the tax base and a change in taxpayer’s compliance dispositions.
2.Revenue Collections: Undoubtedly, the revenue collection amount witnessed a vertical rise as tax evasions became impossible due to the online taxation system.
3.Rate rationalization: The Government took some serious steps to rationalize the rates of various products under GST. For instance, while there were 19% items under 28% GST slab, now it has come down to only 3% items under the stated slab. That means the Government is pushing hard to cut down GST rates on various products.
4.E-way Bill System: The GST compliance though witnessed technical glitches, now have shone up as a streamlined procedure.
5.Taxpayers’ demands: Paying heed to the demands of taxpayers, the Government made noteworthy amendments to suit up the needs of the taxpayers.
All these factors together have contributed to the simplified taxation system and helped to curb tax evasion to a large extent.
GST as a Gateway to New Job Opportunities
Researches show that GST has created a demand for 1.3 million finance professional. Consequently, GST has generated a deluge of opportunities for people interested in finance, accounts, and taxation. Moreover, this also opens up new avenues for people looking forward to career growth and development.
The Government understands that people go frantic as the tax-paying deadlines come closer. And this new tax regime and its compliances rendered more complexities for people all over the nation. Thus, to ease the pain, the Government introduced the concept of GST Practitioners, who could act as representatives of the taxpayers and assist in registrations, filing returns, and other compliances under GST.
Now, if you are pondering over the question of how to become a GST Practitioner, then start with enrolling in the GST Course. These courses are available both in online and offline mode- with weekday and weekend batches.
Q1. What is the purpose of goods and services tax?
The central purpose behind introducing the Goods and Services Tax was to eliminate the tax-on-tax effect or cascading effect of taxes. Further, it aimed to eliminate tax evasion through an online and unified tax system.
Q2. What is the GST Law?
GST stands for Goods and Services Tax. GST is a multi-staged indirect tax that replaced several central and state taxes such as VAT, excise duty, service tax, etc.
Q3. What are 3 types of GST?
The 3 types of GST in India are:
1.CGST-Central Goods and Services Tax
2.SGST-State Goods and Services Tax/ UGST- Union Goods and Services Tax
3.IGST- Integrated Goods and Services Tax
Q4. How is GST calculated?
Calculating GST is explained with this illustration: If a good or service is worth INR 1,000 and 18% GST is applicable on it, then GST amount will be equal to (18/100 X 1000)= Rs. 180. Consequently, the price of the good or service becomes 1000+180+1180.
Q5. Who can claim a refund in GST?
Under Section 54(3) of the CGST Act 2017, a GST registered person can claim a refund for unutilized Input Tax Credit at the end of a tax period. A tax period refers to a time period for which you have to furnish returns.
Walking along the lines of development and digitalization, GST has come up as a remarkable and revolutionary reform in Indian history. The GST has unified the nation under one market system and introduced compliances such as E-way bills and E-invoicing to consolidate and empower the nation.
Not only it has ousted several taxes but also relegated the cascading effect of taxes. Moreover, it has rendered twin benefits of reduced tax burdens and increased revenue as tax evasion became improbable.
As a person of interest, I hope that this article helped you to understand the concepts of GST and how it has impacted India.