Goods and Services Tax is a revolutionary law introduced by the government to create India into one nation – one tax – one market. It transformed India of 2.6 trillion GDP with 1.3 billion population into one single market. GST removed several indirect taxes from the previous tax law and brought all those taxes under one rule. It’s a complex law that has many aspects that need some learning to understand. Small pieces of information such as what is invoicing, filing returns, igst full form, or the different tax slabs are known to almost everyone.
Still, for a better grip on what GST is, there needs to be a good understanding of different aspects and rules of this law. As it is complicated and not easy to grasp, there has been a continuous debate about various effects like the impact on GDP, the benefits on the input tax credit, or the direct GST impact on the economy. There are some challenges and shortcomings, GST, since its implementation is successful in setting a new path for the country to deal with taxes.
GST and its structure:
Goods and Services Tax is a comprehensive, multi-level, destination-based indirect tax system. Under this regime, levying of taxes is on (Multi-level) every step of supply on the value addition of a product. However, it gets refunded to all the parties involved in the different levels of supply except the final consumer. There are three basic levies of taxes under GST on the supply of goods and services, the CGST, SGST, and IGST.
In the previous regime, there were several taxes, such as Central Excise, Central Sales Tax, Value Added Tax, etc. With all the taxes levied on a product, a supplier had to take care of different taxes, and as the levy of taxes was on the value of the complete product and not just value-addition, the price of the goods and services would become costlier. Because of tax on value addition and not on the total value of the product, goods and services become cheaper.
Tax Slab Structure: Goods and Services are divided into different tax slabs under GST depending on various factors. There is a four-tier tax slab under GST that is 5%,12%, 18% and 28%. For goods that are exempted, or the 0% tax rate goods and services, there is no levy of taxes. In the recent GST council meeting, it’s decided that cut and semi-precious stones will bear 0.25% taxes, and there will be a 3% tax on gold. Petroleum products, alcoholic drinks, and electricity are not taxed under GST. For these goods and services, state governments will levy taxes separately.
The state government and central government share taxes on almost all goods and services, Through the CGST( Central Goods and Services Tax), SGST (State Goods and Services Tax), and IGST ( Integrated Goods and Services Tax). For example, If a shoe falls under the tax rate of 12%, then the share of taxes will be 6% CGST and 6% SGST. If a product is supplied on an interstate level, then IGST will levy on such goods and services. IGST is remitted to the central government and shared with the state government; Depending on the agreement between the central government and the respective state.
Goods that are essential for every household come under 0% tax rate meaning such products are exempted from taxes so that necessary goods can reach every household across all sections of society.
Components of GST:
Reverse Charge Mechanism: Unlike the regular payment of taxes where the supplier pays taxes, under the reverse charge mechanism, the recipient pays the taxes. It is applicable when an unregistered supplier, supplies goods to a registered individual, then the reverse charge would apply on that individual, and the tax will be directly paid to the central government by that individual instead of the supplier. The individual will be required to do self-invoicing on the purchase. For the purchase of goods on an intra-state level, CGST and SGST have to be paid by the individual, and if it is Inter-state purchase of products, then the individual will have to pay IGST.
Cascading Tax Effect: In the previous law, a consumer would pay tax-on-tax of a product because the tax was levied on the total value of the product, including the tax paid by the supply chain. But with GST, the cascading effect is removed. Now the consumer will only need to pay tax on the value addition. For Example, If the value of a product is Rs.200 and the value-added tax levied on that product is Rs.20, then the consumer will only have to pay tax only on Rs. 20. Earlier, the consumer was required to pay tax on the whole amount that is Rs.200+20= Rs.220. This would inflate the prices of goods and services, and the result is goods and services becoming costly than its real value.
Composition Scheme: This scheme is mainly for small businesses. Under this scheme, a small business or taxpayer can choose to do away with the tiresome GST rules of paying taxes every month and can choose to pay a fixed tax on turnover quarterly. This scheme is applicable for only those businesses and taxpayers whose turnover is less than Rs. 1.5 crore. Earlier, the threshold for the composition scheme was only Rs. 1 crore. Still, in the recent GST council, they considered various aspects connected to this and declared that the threshold for composition would be Rs. 1.5 crore.
Input Tax Credit: Claiming the credit under GST, that is paid on the purchase of goods and services is known as Input Tax Credit. In other words, it’s a tax that is paid on a purchase, which can be used to reduce tax liability after it makes a sale. For example, If a manufacturer is liable to pay a tax of Rs. 500 and the tax paid is Rs.350, then the input tax credit the manufacturer can claim is Rs.350, and the final tax they pay is Rs. 200.
Like any tax regime, there are advantages and disadvantages to Goods and Services Tax law. The biggest concern for many is the GST impact on economy and the change it has brought to the Indian market. Still, the most significant reform GST has made is the ease of paying taxes through its online portal, where there is not only the interface to pay taxes or file returns on the go but also to know more about GST law. The FAQ section may not have answers for novice queries such as igst full form or how to keep records. But there are a plethora of questions that are pre-answered on the portal.