Goods and Service Tax (GST) – Definition, Types, Registration

The evolution of Goods and Services Tax (GST) in India into a transformative taxation system was initiated in 2000. The genesis lies in the vision of then Prime Minister Atal Bihari Vajpayee, who commissioned a task force led by the finance ministry’s advisor, Vijay L. Kelkar. Recognising the potential to enhance India’s tax structure, Kelkar recommended the implementation of GST.

Initially proposed in 2006 with a target launch on April 1, 2010, the formal steps toward GST were taken in 2011 with the introduction of the Constitution Amendment Bill. Following this, Lok Sabha passed four supplementary GST bills, gaining cabinet approval. The culmination of these efforts resulted in the implementation of GST on July 1, 2017, marking a significant milestone in India’s fiscal landscape. This article takes a deeper dive into the journey and impact of GST in our exhaustive article.

What is GST in India?

Goods and Services Tax (GST) stands as a pivotal indirect tax in India, replacing an array of previous levies such as excise duty, VAT, and services tax. The comprehensive Goods and Service Tax Act, passed in the Parliament on March 29, 2017, marked a significant shift in India’s tax landscape, coming into effect on July 1, 2017.

GST operates as a multi-stage, destination-based tax, applying to the supply of goods and services. It is designed to be a unified, domestic indirect tax, streamlining the tax structure across the entire country. The GST regime involves levying taxes at each point of sale, distinguishing between intra-state and inter-state transactions. Intra-state sales attract both Central GST and State GST, while inter-state sales are subject to the Integrated GST.

Before the introduction of GST, the taxation framework in India followed a diverse pattern. However, implementing GST has ushered in a more unified and simplified approach to indirect taxation. It replaced various central and state-level taxes.

Central taxes that were replaced include:

• Service Tax
• Duties of Excise
• Central Excise Duties
• Cess and Surcharge
• Additional Duties of Excise
• Additional Duties of Customs
• Additional Duty of Customs

At the state level, GST services subsumed the following taxes:

• Entry Tax
• Purchase Tax
• Luxury Tax
• State VAT (Value Added Tax)
• Central Sales Tax
• Entertainment Tax
• Taxes on Advertisements
• State Cess and Surcharges
• Taxes on Gambling and Lottery

It’s worth noting that taxpayers with an annual turnover of up to Rs. 20 lakh are eligible for exemption from Goods and Services Tax, with a reduced threshold of Rs. 10 lakh for special category states. Additionally, the GST law introduced options such as the compounding scheme and threshold exemptions to provide flexibility for businesses in complying with the new tax system.

Different Stages of Taxation in GST

Under GST, the concept of multi-stage taxation is supremely important, tracing the journey of a product from its raw material stage to the ultimate sale to consumers. This multi-stage journey involves various key phases:

• Procuring the raw material
• Manufacturing or producing the final product
• Storing the final product
• Sale to the wholesalers
• Selling to the retailers
• Purchase of the product by the consumer

Goods and Services Tax is imposed at each of these stages, creating a multi-stage tax structure. This ensures that the tax is levied and collected at every point in the supply chain, capturing the cumulative value addition at each stage.

Value Addition in GST

The crux of GST lies in value addition. For instance, a biscuit manufacturer adds value by procuring raw materials, baking them, and packaging them. This process continues as the product moves through the supply chain, with each intermediary adding value through packaging, labelling, and marketing. GST is then applied to the monetary value added at each stage, reflecting the true economic value of the product.

Destination-Based Taxation

A distinctive feature of GST is its destination-based nature. Tax revenue is collected at the point of consumption, ensuring that the state where the final consumer resides receives the entire tax revenue. For example, if goods are manufactured in Maharashtra but consumed in Karnataka, the GST revenue will be directed to Karnataka, aligning with the destination-based principle.

Objectives of Goods and Services Tax (GST) in India

GST was introduced with a lot of expectations and problems it aimed to provide solutions for. Let’s review them one by one:

Achieving ‘One Nation, One Tax’ Ideology
GST embodies the vision of creating a unified taxation system across the nation. By replacing multiple indirect taxes, it ensures consistent rates for products and services, simplifying tax administration. Centralised governance enables the introduction of common laws, such as e-way bills and e-invoicing, fostering a streamlined and uniform system of indirect tax compliance.

Subsuming Diverse Indirect Taxes
GST addresses the complexity of India’s previous indirect tax structure by subsuming various levies like service tax, Value Added Tax (VAT), and Central Excise. This consolidation reduces the compliance burden for taxpayers and streamlines tax administration, offering a centralised tax approach for both goods and services.

Eliminating the Cascading Effect of Taxes
A key objective is eradicating the cascading effect of taxes prevalent in the previous system. GST ensures that tax credits can be offset across different stages of the supply chain, eliminating inefficiencies and promoting a seamless flow of input tax credits for both goods and services.

Curbing Tax Evasion
Stringent GST laws aim to minimise tax evasion. With input tax credits dependent on valid supplier invoices, the risk of claiming credits based on fake invoices is significantly reduced. The implementation of e-invoicing further fortifies these efforts, providing a centralised surveillance system that enhances the efficiency of detecting and dealing with tax defaulters.

Increasing Taxpayer Base
GST contributes to expanding the tax base by unifying the threshold limits for registration based on turnover. The consolidated tax structure, covering both goods and services, has brought more businesses under the tax net. Stricter regulations regarding input tax credits have also compelled certain unorganised sectors, like the construction industry, to comply with tax requirements.

Streamlining Online Procedures
GST revolutionises tax procedures by digitising nearly all processes. These tasks are conducted seamlessly online, from registration to return filing, refunds, and e-way bill generation. This not only simplifies taxpayer compliance but also enhances the overall ease of doing business in India.

Improving Logistics and Distribution
The single indirect tax system reduces documentation requirements, minimises transportation cycle times, and enhances supply chain efficiency. The introduction of the e-way bill system has eliminated interstate checkpoints, leading to improved transit and destination efficiency and ultimately reducing logistics and warehousing costs.

Promoting Competitive Pricing and Consumption
GST has contributed to competitive pricing by eliminating the cascading effect of taxes, making prices more competitive globally and across states. This has led to increased consumption and indirect tax revenues, aligning with the overarching objective of fostering economic growth and development.

Advantages of GST

There have been several advantages to introducing GST in India. Some of them have been reviewed for you below:

• GST has effectively eradicated the cascading effect on the sale of goods and services, significantly reducing the cost of goods. Eliminating the tax-on-tax scenario has decreased the overall cost of goods.
• The GST regime is characterised by its technological prowess, requiring all activities, including registration, return filing, refund applications, and responses to notices, to be conducted online through the GST portal. This technologically driven approach accelerates and streamlines various processes.
• The implementation of GST has raised the threshold for GST registration, providing relief to smaller businesses. This higher threshold ensures that businesses with a lower turnover are not burdened with unnecessary compliance obligations.
• GST offers simplified online facilities for compliance, making it easier for businesses to adhere to regulatory requirements. The online platform facilitates seamless interaction with the tax authorities, reducing paperwork and enhancing overall efficiency.
• The GST framework involves relatively fewer compliances compared to the previous tax structure, simplifying the overall compliance burden for businesses. This reduction in compliance requirements contributes to a more business-friendly environment.
• GST provides a well-defined treatment for e-commerce activities, bringing clarity and structure to the taxation of online transactions. This ensures fair and consistent taxation practices in the growing e-commerce sector.
• The implementation of GST has played a crucial role in regulating unorganised sectors. By bringing various sectors under the tax net, GST has promoted transparency, accountability, and fair competition, contributing to the formalisation of businesses.
• GST has led to increased efficiency in logistics by minimising the complexity of interstate transactions. The introduction of the e-way bill system and the removal of interstate checkpoints have streamlined the movement of goods, reducing transit times and associated costs.

Components of GST

The GST system comprises three distinct taxes, each serving a specific purpose within the framework:

Central Goods and Services Tax (CGST)

• Nature: Tax collected by the Central Government.
• Applicability: Imposed on intra-state sales (transactions within a single state).
• Example: Applicable to transactions occurring entirely within Maharashtra.

State Goods and Services Tax (SGST)

• Nature: Tax collected by the state government.
• Applicability: Imposed on intra-state sales (transactions within a single state).
• Example: Applicable to transactions occurring entirely within Maharashtra.

Integrated Goods and Services Tax (IGST)

• Nature: Tax collected by the Central Government.
• Applicability: Imposed on inter-state sales (transactions between different states).
• Example: Applicable to transactions from Maharashtra to Tamil Nadu.

Comparison of the Tax Structures

Under the new GST regime, the taxation system simplifies the structure by combining CGST and SGST for intra-state transactions, providing more clarity and ensuring equitable revenue distribution between the Central and State governments. For inter-state sales, IGST streamlines the process, reducing complexity and promoting consistency in revenue sharing based on the destination of goods.

Illustration of GST Calculation

Let’s take an example to understand the calculation of Goods and Services Tax (GST) for both inter-state and intra-state transactions

Inter-State Transaction (Dealer in Gujarat to Dealer in Punjab)

• Transaction Value: Rs. 50,000
• Tax Rate: 18% IGST
• IGST Calculation: 18% of Rs. 50,000 = Rs. 9,000
• Revenue Distribution: Entire IGST amount of Rs. 9,000 goes to the Central Government.

Intra-State Transaction (Dealer in Gujarat to Consumer in Gujarat)

• Transaction Value: Rs. 50,000
• GST Rate on Goods: 12% (CGST 6% + SGST 6%)
• CGST Calculation: 6% of Rs. 50,000 = Rs. 3,000
• SGST Calculation: 6% of Rs. 50,000 = Rs. 3,000
• Total GST Collected: CGST + SGST = Rs. 6,000
• Revenue Distribution: Rs. 3,000 goes to the Central Government (CGST), and Rs. 3,000 goes to the Gujarat Government (SGST) as the sale is within the state.

This example illustrates the application of GST in both inter-state and intra-state transactions, showcasing how the tax amount is calculated and distributed between the Central and State governments based on the nature of the transaction.

A Pre-GST Tax Landscape

Before the advent of Goods and Services Tax (GST), the Indian tax landscape was characterised by several indirect taxes imposed by both state and central governments. The states primarily collected Value Added Tax (VAT), each having its own set of rules and regulations, leading to a lack of uniformity.

Inter-state sales were subject to Central State Tax (CST), contributing to the complexity of the tax structure. Indirect taxes, such as entertainment tax, octroi, and local tax, were concurrently levied by both state and central authorities, resulting in significant overlaps.

The pre-GST era featured a multitude of indirect taxes, including but not limited to;

1. Central Excise Duty
2. Duties of Excise
3. Additional Duties of Excise
4. Additional Duties of Customs
5. Special Additional Duty of Customs
6. Cess
7. State VAT
8. Central Sales Tax
9. Purchase Tax
10. Luxury Tax
11. Entertainment Tax
12. Entry Tax
13. Taxes on Advertisements
14. Taxes on Lotteries, Betting, and Gambling

This complex tax structure led to a cascading effect, known as the tax-on-tax impact. For instance, excise duty and VAT were charged sequentially on the same goods, exacerbating the tax burden.

With the introduction of GST, a comprehensive transformation occurred, consolidating and replacing all the aforementioned taxes. The GST framework includes Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST), and Integrated Goods and Services Tax (IGST), streamlining the taxation system.

However, certain taxes, such as the concessional rate of 2% GST on inter-state purchases through the issuance and utilisation of ‘Form C,’ still apply to specific non-GST goods, including petroleum crude, high-speed diesel, motor spirit, natural gas, aviation turbine fuel, and alcoholic liquor for human consumption. This concession is applicable only in cases of resale, use in manufacturing or processing, and specific sectors like telecommunication, mining, electricity generation, or power distribution.

Impact of GST on Price Reduction

Before GST, the taxation system in India led to the cascading effect of taxes, where every purchaser, including the final consumer, incurred tax on tax, resulting in an increased cost of goods. GST, with its structured approach, has significantly contributed to the reduction of prices by eliminating the cascading effect.

• In the pre-GST regime, the cascading effect of taxes was prevalent. Taxes were applied at each stage of the supply chain, leading to an accumulation of tax liability at every transaction. The final consumer bore the brunt of this cascading effect.
• GST has revolutionized the taxation system, primarily through the removal of the cascading effect. Tax is now calculated only on the value-addition at each stage of the transfer of ownership, resulting in a more streamlined and cost-effective structure.

Comparative Example

Let’s compare the tax calculations under the earlier regime and the current GST regime using an example of a biscuit manufacturer:

Earlier Regime

Current Regime

Key Observations

• Under the earlier regime, the cascading effect resulted in higher tax liability at each stage, leading to a final customer price of Rs. 2,244.
• In the current GST regime, the structured approach allows for a way to claim input tax credit, reducing the tax burden. The final customer price is reduced to Rs. 1,980.

New Compliances Introduced Under GST

The implementation of Goods and Services Tax (GST) not only changed the tax structure but also brought forth several new compliances to ensure efficiency and transparency in the taxation system. Here are key additions to the compliance framework under GST:

e-Way Bills

Introduced under GST, the centralised system of waybills known as “E-way bills” became operational on April 1, 2018, for inter-state movement of goods and on April 15, 2018, for intra-state movement in a phased manner. This system allows manufacturers, traders, and transporters to generate e-way bills on a common portal, facilitating the seamless movement of goods from origin to destination. The implementation of e-way bills has proven beneficial by reducing time at check-posts, enhancing tracking capabilities, and contributing to the prevention of tax evasion. It has streamlined the logistics and transportation of goods, ensuring a more efficient and transparent process.

E-invoicing

Implemented from October 1, 2020, for businesses with an annual aggregate turnover exceeding Rs. 500 crore, the e-invoicing system was later extended to those with a turnover exceeding Rs. 100 crore from January 1, 2021. Businesses are required to obtain a unique invoice reference number for each business-to-business invoice by uploading it to the GSTN’s invoice registration portal. The portal verifies the correctness and genuineness of the invoice, authorising it with a digital signature and QR code. The e-invoicing system brings several benefits, including enhanced interoperability of invoices, reduction of data entry errors, and seamless integration with the GST portal and e-way bill portal. This integration minimizes manual data entry during the filing of GSTR-1 and aids in the generation of e-way bills, contributing to a more streamlined and technologically advanced invoicing process.

Other Resources for Understanding GST

• Gst.gov.in: The official GST portal providing comprehensive information and services related to GST compliance.
• GST Council: The governing body responsible for decision-making and policy formulation related to GST.
• EWay Bill Guide: A guide outlining the rules and procedures for generating e-way bills.
• GSTN Login Guide: Information on how to log in to the GSTN (Goods and Services Tax Network) for various activities.
• GST Registration: Guidelines and procedures for businesses to register under the GST regime.
• Best GST Software in India: Information on software solutions to assist businesses in GST compliance.
• GST Return: Overview of the GST return filing process.
• New GST Returns: Information about the new GST return filing system introduced under GST reforms.
• e-Invoicing: Details about the e-invoicing system, its benefits, and the implementation process.

GST Registration

Under the GST regime, businesses that are liable to pay service tax, VAT, or central excise are required to register under the Goods and Services Tax (GST). The GST registration process can be initiated through the GST portal. Upon submission of the application, the portal generates an Application Reference Number (ARN) instantly.

The ARN serves as a reference for tracking the application status. Applicants can conveniently check their status and address any queries they may have. Typically, taxpayers receive their GST registration certificate and GST Identification Number (GSTIN) within a week of ARN generation.

It’s important to note that GSTIN is a crucial 15-digit code assigned to each taxpayer registered with GST. For businesses with an annual turnover exceeding Rs. 20 lakh, obtaining GSTIN is mandatory

Documents Required for GST Registration

For a seamless GST registration process, different eligible entities are required to submit specific documents. Here is a breakdown of the documents needed based on the type of entity:

Individual or Sole Proprietor

• PAN (Permanent Account Number)
• Address proof
• Aadhaar card of the owner
• Bank account details
• Photograph of the owner

LLP and Partnership Firms

• PAN
• Address proof of partners and the business location
• Bank account details
• Copy of the partnership deed
• Registration certificate or board resolution (for LLP)
• Photographs of authorised signatories and partners
• Proof of the appointment of an authorised signatory

Hindu Undivided Family (HUF)

• PAN of the HUF
• Address proof
• Bank account details
• Photograph of the owner
• Aadhaar card and PAN card of the Karta (head of the family)

Company (Both Indian and Foreign, Public and Private)

• PAN of the company
• Bank details
• Address proof of the principal place of business
• PAN and Aadhaar card of authorised signatories
• PAN and address proof of directors
• Articles of Association or Memorandum of Association
• Proof of appointment of an authorised signatory
• Photographs of directors and the authorised signatory
• Certificate of incorporation provided by the Ministry of Corporate Affairs

GST Registration Fees

It’s essential to understand that the government does not impose any GST registration fees when individuals choose to register through the online GST service tax portal. The registration process on the portal is free of charge. However, if individuals opt for professional assistance from an authorised chartered accountant or GST practitioner to facilitate the GST registration process, they may incur a fee for availing of these professional services. The government does not directly charge individuals for the registration itself, but fees may be applicable when seeking external professional assistance for guidance and support during the registration procedure.

GST Login for Existing Users

Accessing GST service details is a straightforward process through the GST portal for existing users. The GST bill and its associated online platform have streamlined registration and payment procedures, giving users easy access to essential details such as their allotted GSTIN, orders, and notices. Users need their GST login credentials, including a username and password to log in.

Here’s a step-by-step guide:

• Step 1: Visit the official Goods and Services Tax portal.
• Step 2: Navigate to the right-hand corner of the homepage.
• Step 3: Click on the ‘Login’ button.
• Step 4: Enter your username, password, and CAPTCHA code, and click on the ‘Login’ button.
• Step 5: After completing the GST login, you will be redirected to the dashboard. Here, you’ll find a summary of GST credit, the ‘Pay Tax’ tab, the ‘File Returns’ tab, Annual Aggregate Turnover (AATO), saved forms, notices received, and more.

If you happen to forget your login credentials, the GST services portal offers a simple solution. Click on the ‘Forgot Password’ button on the login page and follow the subsequent steps to retrieve or reset your credentials.

This user-friendly process allows existing users to seamlessly access and manage their GST-related information and transactions through the online portal.

GST Rates in India

In the Indian Goods and Services Tax (GST) structure, there are four tax slabs aimed at ensuring that essential items and services receive lower tax rates while luxury goods and services fall into higher brackets. These GST slabs are 5%, 12%, 18%, and 28%, with special categories for gold at 3% and semi-precious/rough precious stones at 0.25%.

5% Slab

• Goods: Includes items such as apparel up to Rs. 1,000, agarbatti, coir mat, cashew nuts, edible oils, footwear up to Rs. 500, hearing aids, medicines, packed paneer, roasted coffee beans, and more.
• Services: Encompasses services like road transport by cabs, radio taxis, tour operators, and restaurants with a turnover of up to Rs. 50 lakh, and economy class air travel.

12% Slab

• Goods: Covers ayurvedic medicines, almonds, apparel above Rs. 1,000, butter, exercise books, frozen meat products, mobile phones, namkeen, non-AC restaurants, and more.
• Services: Includes hotels, guest houses, inns with a tariff between Rs. 1,000 and Rs. 2,500 per night, and business class air tickets.

18% Slab

• Goods: Involves items like biscuits, branded clothing, CCTV cameras, furniture, instant food mixes, ice cream, pasta, printers, steel products, and more.
• Services: Encompasses telecom services, AC hotels serving alcohol, IT services, and hotels with room tariffs between Rs. 2,500 and Rs. 5,000 per night.

28% Slab

• Goods: Includes aerated water, personal use aircraft, automobiles, ceramic tiles, chocolates without cocoa, dishwasher, paint, shaving cream, vacuum cleaners, and more.
• Services: Attracts 28% GST for 5-star hotels, gambling/betting in race clubs, hotels with room tariffs of Rs. 5,000 and above, and cinema/entertainment services.

Additionally, certain goods fall under a 0% GST rate, making them zero-rated supplies, which means they are exempt from GST. These measures aim to categorise products and services effectively, ensuring a fair and balanced tax structure.

Calculating GST in India

GST in India is computed by summing up the GST payable on reverse charge, inward supplies, and output supplies. This calculation is done on a monthly basis, and the resulting amount must be paid while filing monthly GST returns. As a taxpayer, it’s crucial to consider various factors, including reverse charge, exempted supplies, inter-state sales, and eligible/non-eligible Input Tax Credit (ITC), to ensure accurate GST calculation. Failure to meet the actual obligation may incur an 18% interest.

Steps to Calculate GST

• Take into account elements like reverse charge, exempted supplies, and inter-state sales.
• Analyse eligible and non-eligible Input Tax Credits (ITC).
• Utilise the GST calculator on the Government of India’s GST portal.
• Input necessary details such as return filing month, current ledger balance, tax liability under RCM, etc.
• The calculator will provide your total tax liability.

GST Calculation Formula

• GST amount = (Original price x GST rate) / 100
• Net price = Original price + GST amount

Example of GST Calculation

Consider selling a commodity from Mumbai to Kolkata for Rs. 10,000 with a GST rate of 12%.

• GST amount = (10,000 x 12) / 100 = Rs. 1,200
• Net price = 10,000 + 1,200 = Rs. 11,200

GST Return Filing

GST return filing is a fundamental obligation for taxpayers under the Goods and Services Tax (GST) regime. A GST return, known as GSTR, is a document submitted to the tax administrative authority, encompassing details of income, sales, purchases, expenses, and aiding in the computation of an entity’s tax liability.

Components included in GSTR:

• Sales
• Purchase
• Output GST
• Bank account details
• Input tax credit

As per GST norms, registered dealers, particularly regular businesses with an annual aggregate turnover exceeding Rs. 5 crore, must file one annual and two monthly returns. This totals 25 returns annually through the online GST platform.

However, the filing frequency may differ under the Quarterly Return Monthly Payment (QRMP) scheme. For quarterly GSTR-1 filers, the requirement is nine GST returns in a year, inclusive of the annual return and GSTR-3B. Special cases, such as composite dealers, necessitate filing GSTR five times a year.

Understanding the specific filing requirements based on business characteristics is crucial for ensuring compliance with GST regulations and avoiding penalties.

New Compliances Introduced under GST

In addition to the online filing of Goods and Services Tax (GST) returns, the GST regime has implemented several new systems to enhance efficiency and transparency in tax processes.

E-way Bills

Launched on April 1, 2018, for inter-state and on April 15, 2018, for intra-state movement of goods, the centralised E-way Bills system has streamlined the transport of goods. Traders, manufacturers, and transporters can easily generate E-way Bills, facilitating smoother movement. The system has reduced time at check-posts and has proven effective in curbing tax evasion, benefitting both businesses and tax authorities.

E-Invoicing

Applicable to businesses with an annual turnover exceeding Rs. 100 crore, the E-invoicing system mandates obtaining a unique invoice reference number for all B2B invoices. This is achieved by uploading invoices on the GSTN’s online invoice registration portal.

The portal verifies invoice accuracy and authenticity, authorising businesses with a digital signature and QR code.

E-invoicing offers advantages such as reduced data entry errors, enhanced interoperability of invoices, instant transfer of invoice information from IRP to the GST platform and E-way Bill portal, and the elimination of manual filing of GSTR-1.

HSN Code Requirements

Effective from April 1, 2021, businesses are mandated to mention their SAC/HSN code on all goods or services supplies tax invoices. For B2B supplies with an aggregated turnover of up to Rs. 5 crore, a 4-digit HSN code is required, while entities exceeding Rs. 5 crore turnover must mention a 6-digit HSN code. Any changes in the mentioned codes must be detailed under Table 12 of the GSTR-1 form.

These new compliances contribute to the GST system’s overall efficiency and promote accuracy, transparency, and ease of compliance for businesses across various turnover categories.

FAQs about GST