GST or the Goods Services Tax has been in effect from July 1, 2017. The tax system of India till that time had been extremely complicated.
There had been the introduction of a new tax in the past decade known as Service Tax. Besides, there were a plethora of Central and State taxes that required separate invoices (challans). The scope for tax evasion and avoidance was high, and so was the scope for disputes and litigation.
In 2007, the then Finance Minister P. Chidambaram had spoken of implementing GST by 2010. After enormous delays as the modalities were slowly worked out, the new tax regime came into effect.
But as yet many do not have a clear idea about GST. That is why we have written about the 10 ways in which it affects small businesses and their owners.
Replaces Multiple Taxations
Under the previous system, there was a tax on tax.Say – X, a manufacturer sold a phone to Y, a retailer for INR 10,000 and charged Sales Tax at 5%.
If Y charged 10% profit, he sold the phone at INR 10,500 (his total purchase price) + profit at 10% on INR 10,000 + 5% Sales Tax = INR 12,075 to his customers.
This had the effect of causing a price rise. The 5% Y had paid to X was also being taxed again.
GST does away with this anomaly with an input tax credit system.
Y will pay the tax (in addition to that paid by X) only on the value-added by him (his profit).
So the customer will pay INR 10,000 + 10% profit + 5% GST = INR 11,550.
Y will pay INR 550 as tax to the government and receive INR 500 refund. X will pay INR 500 as GST.
The government will receive 5% on INR 11,000 or INR 550 as tax.
Does away with VAT, CENVAT confusion
To avoid multiple taxations, VAT had been introduced in India at the state level 15 years ago.
However, it did not wholly work since VAT could not be set off against CENVAT (comprising of Excise Duty and Service Tax) since one was administered by the state and other by the central government.
The great thing about GST is that it subsumes several taxes on almost everything except petroleum and alcohol.
- State VAT
- State Cess
- Purchase Tax
- Central Excise Duty
- Additional Duties of Excise (Goods of Special Importance)
- Service Tax
- Central Sales Tax
- Entertainment Tax
Slabs of GST
One of the most confusing features of GST is that there are too many slabs. It was conceived as a single-rate tax on everything from salt to champagne.
At the time of writing, GST has 4 tiers 5%, 12%, 18%, and 28%. Some goods such as cars, luxuries face an additional cess.
All necessities, including medicines, are charged 5% GST.
Some items, such as milk does not attract any GST.
Going forward the 12 and 18% slabs may be merged to give a three-tier GST.
Almost every country except India has a single GST rate of about 16%.
However, keeping in mind the needs of the very poor, it was necessary to have a lower-tier at 5% and offset it with a higher one at 28%.
CGST, SGST, IGST
There are three different GST taxes – Central GST, State GST, and Intra State GST.
If you sell goods inside a state, you will have to charge both CGST and SGST. Let us say that you sell hair oil at 18% GST. It will be divided equally as 9% and 9%.
But what happens if you manufacture hair oil in Gujarat and sell in Bihar? Any interstate transaction will be charged GST (in case of hair oil at 18%) at the appropriate slab and the amount deposited with the central government.
Every business that has turnover over INR 20 lakhs has to be registered for GST.
In the case of special category states, every business that has turnover over INR 10 lakhs has to be registered for GST.
Any business providing services has to register for GST irrespective of turnover.
In addition, any business selling goods or services across state boundaries has to register for GST mandatorily.
Every business has to maintain a GST ledger (or a set of ledgers) that display the following information.
- Input SGST
- Input CGST
- Input IGST
- Output SGST
- Output CGST
- Output IGST
Also, an electronic cash ledger has to be maintained.
At least following data has to be supplied about GST whenever asked by tax authorities:
- Purchase and Sale of goods and services
- Manufacture of goods
- Stock records
There have to be separate accounts for GST Payable and GST Receivable.
Length of maintenance
All of the books of records have to be maintained for at least 6 years from the last date of filing annual returns.
In case accounts and records are not maintained as specified, there will be fine as decided by the tax authorities.
GST Returns include details about GST paid, GST refund claimed as well as particulars of purchase, and sales.
GSTR Form 1, 2, 3 has to be filed monthly and GSTR 9 annually. GSTR 9 is due on the 31st of December following the end of a financial year. Such as for the 2018-19 period the GSTR 9 will be filed on December 31, 2019.
GST Composition Scheme
Composition Scheme is a simplified format by which a taxpayer who does not have sales exceeding INR 50 lakhs in the previous year can only deposit quarterly returns.
The major benefit is a lesser degree of compliance. The drawback is that goods cannot be sold outside the state, and no input tax credit can be availed.
At this moment, GST is in a nascent stage. The effects are still being understood, and the government has to figure out if GST is grossing more tax or less.
There are changes to the legislation on a monthly basis as the protocol is still being finalized.
The business community, as a whole, has faced tremendous difficulties. Most of the problem is due to lack of tax refund by the government and loot of GST by vendors (GST collected but not deposited).
In August, Finance Minister Nirmala Sitharaman has promised that all GST pending to MSMEs would be cleared in 30 days. Hopefully, inside a year, the wrinkles will be ironed out of the system.