written by Khatabook | June 8, 2021

What is GST? Goods And Services Tax Explained With Benefits

GST is the result of an indirect tax reform that aims to make a single national market. For this purpose, the government had combined different taxes under GST. It has combined different indirect taxes like service tax, entry tax, luxury tax, entertainment tax, CST, VAT, excise duty, etc. The government has set up a common portal www.gst.gov.in in this regard. Read this simple brief about GST below.

What is GST?

Before we continue with more of the Indian GST, let us understand the basic idea of GST in simple language.

  1. GST is a value-added tax levied on supply.
  2. GST offers an extensive and continuous chain of tax set-offs.
  3. The supplier at each stage can use the input tax credit of GST paid on the purchase of goods and services. The business can set off this Input Tax Credit (ITC) against the GST payable on the supply of goods and services to be made.
  4. Input tax credit refers to the set-off of tax paid on purchases that you can use against the tax collected on sales. Only the balance amount of tax needs to be paid.
  5. There is no cascading effect on tax effects under the GST framework. Cascading effect refers to the system where tax is charged on every stage by including the tax previously paid on purchases. This leads to tax on tax.

Define GST

Let us understand the definition of Goods and the definition of Services. 

Term

Definition of Goods

Definition of Services

Goods

every kind of movable property.

 

Services

 

Means all services 

 

Other than

Money

Goods

Securities

Money

 

Securities

 

 

 

 

But includes

actionable claims

activities relating to the use of money or

growing crops

its conversion by cash or

grass and

by any other mode,

things attached to or forming part of the land

from one form,

which are agreed to be severed before supply or under a contract of supply.

currency or denomination,

 

to another form,

 

currency or denomination

 

for which a separate consideration is chargeable

History of GST in India

In 2000, Prime Minister A.B. Vajpayee introduced the idea of GST and set up a committee to plan a Goods and Services Tax (GST) model for the country. The Goods and Service Tax (GST) came into effect from 1st July 2017.

Take a quick look at the journey of GST in India explained in the table below:

Year’s

Journey

2000

Prime Minister A.B. Vajpayee introduces the concept of GST.

2006

Union Finance Minister proposes GST to be introduced from 1st April 2010.

2014

Constitution 122nd Amendment Bill introduced in the Lok Sabha.

2016 (August)

Constitution 101st Amendment Act enacted.

2016 (September)

GST council meeting.

2017 (March)

Council recommends IGST, CGST, SGST, UTGST & Compensation Cess Bill.

2017 (April)

The above recommendation passed.

2017 (May)

Council recommends all the rules.

2017 (June)

Except for Jammu and Kashmir, all states enacted the SGST Act.

2017 (1st July)

GST introduced

2017 (8th July)

Jammu and Kashmir enacted the SGST Act.

 

Need for GST in India

Under the previous indirect tax system, India’s value-added tax’s tax collection guidelines were not uniformly followed. The Centre’s CENVAT and the state-level VAT varied. Its application was confusing and stayed divided by the following reasons:

  1. The tax on tax effect due to:
    • Including CENVAT in the value for calculating VAT
    • Duty of Non-VAT CST
  2. Some of the local levies in State VAT, such as entertainment tax, luxury tax, tax on betting, lottery, gambling, etc., were not brought under VAT.
  3. Double taxation of certain goods and services
  4. Service tax and VAT were not integrated.
  5. No CENVAT after the manufacturing stage.

All these issues lead to under-reporting of sales by businesses, which in turn decreased the revenue to the government from tax collection. The government introduced GST to solve these issues, ensure proper tax payments and reporting by businesses, and ensure proper tax collection.

Also Read: Advantages of GST – GST Benefits Explained With Example

Old Tax Regime vs GST Regime

Old Tax Regime

GST Regime

There were multiple taxes.

GST is a single tax system

Multiple taxes lead to cascading effect.

No cascading effect as GST is charged on the value-added.

Separate taxes for goods and services.

Single tax for goods and services.

Cross set-off of taxes paid on purchases of goods and services not possible.

Cross set-off of taxes possible.

The Framework of GST in India

Here’s everything about GST explained in twelve sub-parts:

  1. Dual GST Model
  2. IGST/CGST/SGST/UTGST
  3. Legislative Framework
  4. Classification of goods and services
  5. Composition Scheme
  6. Registration
  7. Exemptions
  8. Seamless flow of credit
  9. GST Common Portal
  10. GSPs/ASPs
  11. Compensation Cess
  12. GST levied and taxes brought under GST

1. Dual GST Model 

Unlike most countries, we follow the dual GST model. Under this system, both the States and the Centre can tax goods and services.

2. IGST/CGST/SGST/UTGST

IGST or CGST or SGST or UTGST, in short, is all about GST only. GST is a destination-based consumption tax. It applies to all transactions involving the supply of goods or services for consideration.  

GST in India explained with the following terms:

 

1)IGST: IGST is the total of CGST and SGST or UTGST and is levied and collected by the Centre.

2)CGST: Central Goods and Services Tax levied and collected by the Central Government.

3)SGST: State Goods and Services Tax levied and collected by State Governments.

4)UTGST: Union Territory Goods and Services Tax levied and collected by Union Territories.

3. Legislative Framework

There is a single legislation CGST Act, 2017 - for imposing CGST. Similarly, Union Territories without Legislatures are governed by UTGST Act, 2017 for charging UTGST. States and Union territories with their legislatures have their own GST legislation for imposing SGST.

Read this GST simple explanation with the help of an example below:

  1. In Delhi, CGST and SGST are levied on the supply of goods or services or both.
  2. In Ladakh, CGST and UTGST are levied on the supply of goods or services or both.

4. Classification of goods and services

GST explanation can be taken further in terms of HSN or SAC, two types of codes. These codes are the same everywhere in India. They are used to categorise goods and services. The Harmonised System of Nomenclature (HSN) classifies the various goods. The Scheme of Classification of Services (SAC) classifies the various services under GST.

5. Composition Scheme

For suppliers of food articles, primary manufacturers, small traders, small businesses, etc., doing business only inside the state, a simple payment method is recommended, known as Composition Scheme. The government has extended the scheme for small service providers also.

6. Registration

Every supplier of goods and services must obtain registration in the State/UT, where their taxable supply of the aggregate turnover surpasses the threshold limit during a Financial Year. GST explanation related to the threshold limit for registration is distinct for different category of State/UT, as explained in the table below:

Also Read: GST Certificate Download Download from gst.gov.in

States with a threshold limit of Rs. 40 lakhs* for goods and Rs. 20 lakhs for services

States with a threshold limit of Rs. 20 lakhs for both goods and services

States with a threshold limit of Rs. 10 lakhs for both goods and services

Himachal Pradesh

Telangana

Tripura

Jammu & Kashmir

Puducherry

Nagaland

Assam

Uttarakhand

Mizoram

All other States

Sikkim

Manipur

 

Meghalaya

 

 

Arunachal Pradesh

 

*Persons engaged exclusively in the intra-State supply of goods.

7. Exemptions

GST gives relief to small-scale businesses. It also contains provisions for granting exemption from tax payment on essential goods and services.

8. Seamless flow of credit

Since GST is a destination-based consumption tax, the revenue of SGST goes to the consuming States. In other words, the revenue of SGST goes to the state where it is used. The Input Tax Credit (ITC) can be set off against output liability under GST, in the order explained in the table below:

ITC

Output IGST Liability

Output CGST Liability

Output SGST/UTGST Liability

IGST

  1. Set off against output IGST

(2) Set off In any order & in any proportion

(3) ITC of IGST must be exhausted entirely before proceeding

CGST

(5) set off against output IGST

(4) set off against output CGST 

Not Permitted

SGST/UTGST

(6) Only after the ITC of CGST has been used fully

Not Permitted

(7) The remaining credit can be set off

9. GST Common Portal

Before GST, the Central and State indirect tax systems worked under different formats, procedures, regulations, and laws. Their IT systems and infrastructure were also independent of one another.

The common GST Electronic Portal www.gst.gov.in is a website overseen by Goods and Services Network (GSTN). A common GST system links various Banks, Taxpayers, Central Tax authorities, State/ UT Commercial Tax Departments, and other stakeholders. Similarly, the common GST Electronic Portal for furnishing an electronic waybill is www.ewaybillgst.gov.in.

10. GSPs/ASPs

GSTN has chosen information technology, financial technology companies, and information technology-enabled Services companies, designated as GST Suvidha Providers (GSPs). A business can take the help of Application Service Providers (ASPs) to pay and file their GST returns.

11. Compensation Cess

A GST Compensation Cess at a predefined rate is included under the Goods and Services Tax (Compensation to States) Cess Act, 2017. It applies to demerit goods or specified luxury items, like motor cars, aerated waters (soda), tobacco, pan masala, etc. It is calculated on the value of the taxable supply. 

Compensation cess is leviable on inter-State supplies and intra-State supplies. It helps to pay compensation to the States for the loss of revenue arising from the GST implementation. Compensation Cess is to be provided to a State for five years from the date the State brings its SGST Act into force.

12. GST levied & taxes brought into GST.

GST applies on all goods and services, except for

  1. Natural Gas
  2. Aviation Turbine Fuel
  3. Petrol
  4. Diesel
  5. Petroleum Crude
  6. Alcoholic Liquor for Human Consumption

Within GST or outside GST?

Goods and Services

            Applicability

Tobacco

Comes under GST, with power to levy excise duties.

Entertainment tax levied by local bodies

The power to levy tax remains with the local bodies.

Five petroleum products petroleum crude, diesel, petrol, aviation turbine fuel and natural gas

GST Council to decide the date from which GST will be applicable

Alcohol for human consumption

The power to tax remains with the State.

Following taxes were brought into GST:

Brought into GST

Central Taxes

State Taxes

Central surcharges and cess  on the supply of goods & services

Taxes on advertisements

Central Sales Tax

Luxury Tax

CVD & Special CVD

VAT/ Sales tax

Excise Duty under Medicinal & Toilet Preparation Act

Entry Tax (All Forms) & Purchase Tax

Service Tax

Tax on lottery, betting and gambling

Central Excise Duty & Additional Excise Duties

Entertainment Tax (except those levied by local bodies)

 

State surcharges and cesses in so far as they relate to supply of goods & services

 

Benefits of GST

GST has brought benefits to the whole country. It carries advantages to everyone, from businesses to the customer to the government and intermediaries in between. The benefits of GST are mentioned in the table below: 

Benefits of GST

 

Benefits to the economy

Increased investment and employment

Boost to Make in India initiative

Creation of a unified national market

Simplified tax structure

Certainty in tax administration

Easy to do business

Easy tax payment and filing

[2] Easy to pay GST and file the return

Automated procedures with greater use of IT

 

Advantages for  business

Benefits to small traders and businesses

Removal of tax on tax

Benefits to the industry

 

1. Benefits to the economy:

Increased investment and employment: GST brought the various Central and State taxes into a single system. It made set-off of input tax possible on goods and services. Removing Central Sales Tax (CST) has diminished the cost of locally manufactured goods and services.

Boost to Make in India initiative: GST has given a significant lift to the government’s ‘Make in India' program by making India’s goods and services competitive in the national and worldwide market.

Creation of a unified national market: GST has made India a unified market with the same tax rates and laws.

 2. Simplified tax structure:

Certainty in tax administration: Uniform policies and rules for goods and services across the nation.

Ease of doing business: A more comfortable tax system with fewer exclusions. A decrease in the variety of duties under GST has enabled uniformity and simplified the tax structure.

 3. Easy tax compliance

Reduction in costs: The many forms, returns, filings under the previous system are not required anymore. Therefore GST replaces the multiple records of the old system.

Automated procedures with greater IT use: There are automated and simplified procedures for various processes such as tax payments, refunds, returns, and registration.

 4. Advantages for trade and industry

Benefits to small businesses: GST has expanded the GST registration threshold for small businesses, making it advantageous to small businesses.

Reduction of ill-effects of tax on tax: It helps in improving the cash flow of the businesses, improving competition, and removing the previous tax on tax system.

Benefits to the industry: The simple chain of set-offs’ extends the tax base and consistency brings down the tax rate.

 

 

Simple and easy tax

The current framework of indirect taxation with GST is simple, easy to understand. It also allows for the input tax credit to be set off against output tax liability. It prevents the tax on tax effect. GST makes tax easy, even for small businesses.

Also Read: 7 Ways Goods and Service Tax benefits the Economy

FAQs

What is GST?

GST is a value-added destination based consumption tax on the supply of goods and services.

Does GST apply to all the goods and services?

GST applies to all goods and services, except for natural gas, aviation turbine fuel, petrol, diesel, crude petroleum and alcoholic liquor for human consumption.

Does GST have any benefits?

Yes, it has brought many benefits to businesses by combining previous taxes by making it simpler. It has also made one nation, one tax rate, among other benefits.

Will GST increase my costs?

No, GST rates are at a rate similar to the combined rates under the old system.

If GST is a single tax, why do I have to pay CGST, SGST, UTGST and IGST?

It is one tax but collected separately. CGST and SGST/UTGST are collected on intra-state sales and in union territories, whereas IGST is on interstate sales.

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