Goods and Services Tax GST: Meaning, Types & Overview
5paisa Research Team
Last Updated: 15 Jan, 2025 05:20 PM IST
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Content
- What is GST?
- History of GST
- Objectives of GST
- Dual GST Structure
- Types of GST
- How to Register for GST?
- Essential Documents for GST Registration:
- Calculating GST
- Benefits of GST
- New Compliances Under GST
- Conclusion
Imagine a world where buying goods or services involved navigating a maze of taxes, each varying across states and industries. Before 2017, India’s tax system was complex and fragmented, making it cumbersome for businesses and consumers alike. Enter GST, or Goods and Services Tax, a tax reform that promised to streamline taxation, eliminate cascading taxes, and unify the nation under a single tax structure. But what exactly is GST, and why is it such a game-changer? Let’s explore.
What is GST?
GST, or Goods and Services Tax, is an indirect tax that replaced multiple indirect taxes like excise duty, VAT, and service tax in India. It was introduced through the Goods and Services Tax Act, passed in Parliament on March 29, 2017, and implemented nationwide from July 1, 2017.
Simply put, GST is a comprehensive, multi-stage, destination-based tax imposed on the supply of goods and services. It is intended to encompass all value additions along the supply chain, resulting in a uniform domestic tax for the entire country.
Let’s say a manufacturer produces furniture and sells it to a wholesaler in the same state. Under GST, both the Central and State Goods and Services Tax (CGST and SGST) are levied. The wholesaler, in turn, sells it to a retailer in another state, where Integrated GST (IGST) is applied. The end consumer pays GST only on the final retail price, eliminating the cascading effect of taxes.
History of GST
The journey of GST in India began in the early 2000s with the vision of simplifying taxation. Below is a timeline of events that display the journey of goods and services tax:
2000: A group of State Finance Ministers was formed to explore GST.
2006: GST’s planned introduction was announced for April 1, 2010.
2009-2011: Draft legislation and discussion papers marked progress.
2013-2014: Political shifts delayed implementation, necessitating new amendments.
2015-2016: Parliament passed the GST law, and the GST Council was established.
July 1, 2017: GST was officially launched.
This long path demonstrates years of cooperation, planning, and overcoming obstacles to modernize India's tax system.
Objectives of GST
1. Achieving ‘One Nation, One Tax’ - GST replaced a number of indirect taxes with a unified system. This has ensured uniform tax rates across states, simplifying tax compliance and administration.
2. Eliminating the Cascading Effect of Taxes - Before GST, businesses paid tax on tax. For instance, excise duties during production couldn’t offset VAT at sale. GST, by taxing only the value added at each stage, removed this inefficiency.
3. Curbing Tax Evasion - GST’s stringent laws, including mandatory invoice matching and e-invoicing, have minimized tax evasion and fraud.
4. Increasing the Taxpayer Base - With consolidated tax thresholds, GST has expanded India’s tax net, bringing more businesses, including previously unorganized sectors like construction, into compliance.
5. Promoting Ease of Doing Business - GST’s online processes, from registration to filing returns simplify compliance, enhancing the business environment in India.
Dual GST Structure
The dual GST model represents a taxation framework where both the central and state governments impose taxes on the supply of goods and services simultaneously but operate under separate administrative systems. Unlike the Single National GST model, where the central government exclusively levies taxes and shares the revenue with states (as seen in countries like Australia), or the Single State GST model, where states hold the sole authority to tax (as in the USA), the dual GST system ensures shared taxation responsibilities.
In India, the dual GST structure consists of two components: the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST). These taxes are applied concurrently on a single transaction within a state, reflecting India's federal governance framework. This model allows both the central and state governments to legislate, collect, and administer their respective portions of the tax.
Types of GST
In India, there are two types of GST:
Intra-state GST
Central Goods and Services Tax (CGST):
CGST represents 50% of the total GST applied on the supply of goods and services within a single state or union territory. This applies when both the supplier (seller) and recipient (buyer) are located within the same state/UT. The central government levies and collects CGST.
State/Union Territory Goods and Services Tax (SGST/UTGST):
SGST/UTGST constitutes the remaining 50% of the GST on intra-state transactions. Like CGST, it is levied on the supply of goods and services within a state or union territory where both the supplier and recipient are situated in the same region. SGST is collected by the respective state governments, while UTGST is managed by the union territory administrations.
For example, Ms. R from Chennai sells electronics to Mr. S in Coimbatore. The GST rate for the product is 12%. Since both parties are located in Tamil Nadu, CGST at 6% and SGST at 6% will apply to the transaction.
Inter-state GST
Integrated Goods and Services Tax (IGST):
IGST is levied on the supply of goods and services between different states or union territories. When the supplier (seller) and recipient (buyer) are located in different states/UTs, the entire GST rate is applied as IGST. The central government collects IGST, which is later apportioned between the central and state governments as per the GST framework.
Let’s say, Ms. R from Hyderabad sells furniture to Mr. T in Bengaluru. The GST rate for the product is 18%. Since the supplier and recipient are in different states, IGST at 18% will be applied to the transaction.
How to Register for GST?
Before beginning the GST registration process, it is essential to determine whether your business meets the eligibility criteria, such as turnover thresholds or specific business activities. To register, businesses must follow the steps below:
1. Visit the GST portal and provide the required details and documents.
2. Submit the application for GST registration along with Aadhaar authentication.
3. Upon submission, the portal generates an Application Reference Number (ARN) to track the application status.
Essential Documents for GST Registration:
- PAN of the applicant
- Aadhaar Card
- Proof of business (e.g., Incorporation Certificate)
- Address proof of the applicant and business
- Bank account details (statements or canceled cheque)
- Digital signature
- Authorization letter (e.g., Board Resolution for companies)
After successful verification, the GST portal issues a GST Registration Certificate along with a 15-digit GST Identification Number (GSTIN), unique to the registrant’s state and PAN.
Calculating GST
Calculating GST involves applying the applicable GST rate to the transaction value. The formula is straightforward:
GST = Transaction Value × Applicable GST Rate
For example, if a product costs Rs. 1,000 and the GST rate is 18%, the GST amount would be Rs. 180, making the total price Rs. 1,180.
GST Rates in India
GST rates in India vary across different categories of goods and services, ensuring affordability and equity. The major rate slabs are:
0%: Essential goods like food grains.
5%: Basic commodities like packaged food items.
12% and 18%: Standard rates for most goods and services.
28%: Luxury items and sin goods.
Benefits of GST
GST offers numerous advantages for businesses and consumers by streamlining tax processes and reducing complexities.
- Elimination of Cascading Effect: GST removes the tax-on-tax system of the previous regime, simplifying business operations.
- Uniform Threshold: It standardizes a ₹20 lakh threshold across states, replacing varied thresholds under earlier indirect tax systems.
- Digitized Processes: GST enables online registration, return filing, and compliance, eliminating the need for multiple registrations and manual interventions.
- Support for Small Businesses: The composition scheme under GST reduces compliance burdens for small enterprises and start-ups.
- Simplified Returns: GST consolidates various taxes into a single return, replacing the complex multi-tax system of the past.
- Focus on E-commerce: GST requires e-commerce platforms to collect and deposit 1% tax collected at source (TCS) on every transaction, ensuring better tracking of online sales.
- Formalizing the Unorganized Sector: The GST framework introduces rules for compliance and payment, bringing accountability to the unorganized sector.
New Compliances Under GST
The Goods and Services Tax (GST) framework has introduced various systems aimed at streamlining compliance, aside from requiring online filing of GST returns.
e-Way Bills
A centralized system of waybills, known as e-way bills, was introduced under GST. This system was implemented on April 1, 2018, for inter-state goods movement and on April 15, 2018, for intra-state goods movement, in a phased rollout.
Manufacturers, traders, and transporters can now generate e-way bills online for goods transportation using a unified portal. This system has simplified logistics, reduced delays at checkpoints, and minimized tax evasion, benefiting both businesses and tax authorities.
e-Invoicing
The e-invoicing system was rolled out in phases starting October 1, 2020, and as of August 1, 2023, it applies to businesses with an annual turnover exceeding ₹5 crore since 2017-18.
Under this system, businesses must upload their B2B invoices to the GSTN’s Invoice Registration Portal (IRP) to obtain a unique Invoice Reference Number (IRN). The IRP verifies the invoice’s authenticity, digitally signs it, and generates a QR code.
This system reduces data entry errors and allows seamless sharing of invoice data between the IRP, GST portal, and e-way bill portal, streamlining compliance processes like filing GSTR-1 and generating e-way bills.
Conclusion
GST has transformed India’s tax system, simplifying compliance, curbing tax evasion, and promoting economic growth. While challenges remain, its benefits for businesses and consumers are undeniable. With continuous reforms, GST continues to evolve, paving the way for a more efficient taxation regime.
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Frequently Asked Questions
Generally, the supplier of goods or services is responsible for paying GST. In specific cases like imports or notified supplies, the recipient may bear liability under reverse charge.
GST and VAT differ in scope and structure. While VAT focuses on goods, GST applies to both goods and services, offering a unified and comprehensive taxation system.
India's GST has four components: Central GST (CGST), State GST (SGST), Integrated GST (IGST), and Union Territory GST (UTGST), designed for easy tax administration across regions.
GST has reduced the tax burden on various goods and services by eliminating the cascading effect of taxes. This has lowered production costs, resulting in more affordable prices for consumers.