What is GST?
Goods and Services Tax is a comprehensive, indirect tax levied across the country, from July 1, 2017. It replaced the central taxes and state taxes into a sole united tax, thereby making the tax structure easier. GST is charged on the supply of goods and services all across countries under different heads like CGST (Central), SGST (State), and IGST (Interstate). Also, a business is eligible for input tax credit so that a tax is paid only on added value at each level of the supply chain, which ensures cascading effects of multiple taxes are minimised.
How does GST work?
GST is a multi-state and destination-based approach, levied on the supply of goods and services at every step of the supply chain. Here is how it works:
- Multi-Stage Taxation:
The GST is applicable at every level of production and selling, starting from the manufacturer right through to the ultimate consumer. Every entity in this supply chain charges GST on the value he adds to the product or service. - Input Tax Credit (ITC):
The input tax credit system is a core feature of GST, which allows businesses to adjust the paid GST on purchases (inputs) against payable GST on sales (outputs). This avoids the cascading effect of taxes, which is nothing but tax on tax. - Destination-Based Tax:
GST is a destination-based tax. This means that the tax is collected at the point of consumption rather than the point of origin. Thus, the state where the goods or services are consumed gets the tax revenue. - GST Returns and Compliance:
The registered businesses are required to furnish periodical returns regarding GST, indicating the sales, purchases, and the money collected and the amount paid off as GST. The returns are for the reconciliations of the tax credits and its payment, and compliance under the GST laws. - Tax Slabs :
GST rates charged on various goods or services are at different slabs: zero percent, 5%, 12%, 18%, and 28% tax rates. In these slabs, the latter two are some general rules with the above categories: essential items from eatables to other total thirty-two items along with certain luxury items are eligible for the lower or even zero percentage slabs, whereas luxury items though come under the former but carry higher rates.
Different types of GST
The various kinds of GST in India are distributed to ensure tax revenue is properly shared between the Central and State governments. The nature of the transaction determines in what manner each kind of tax must be apportioned. In India, there are four kinds of GST. They include:
- Central GST (CGST)
- Applicability: The applicability of CGST is on the part of the Central Government and is imposed on intra-state supplies of goods and services, which belong to the same state.
- Revenue: CGST actually gets the revenue for the central government.
- Example: Within the state supply of the goods, for example, in the state of Maharashtra—here the state GST will be applied, that is SGST; consider GST at 18%—here CGST will be 9%, and 9% will be SGST.
2. State GST (SGST):
- Applicability: It is levied by the State government on intra-state supplies of goods and services.
- Revenue: The revenue so collected is directly attributable to the State Government.
- Example: From the above example, for an intra-state sale in Maharashtra- when GST rate is 18%, CGST of 9% and SGST of 9% is charged. The SGST part is collected by the Maharashtra State Government.
3. Integrated GST (IGST):
- Applicability: IGST is one central government-levied tax that applies to inter-state trade in both goods and services and on imported goods to the country of India.
- Revenue Division: The revenue collection arising out of IGST would be divided between the Central and State governments. In the context of inter-state trade, a partial fraction accrues to the state where a product is finally used.
- Example: If a business in Maharashtra sells products to a business in Karnataka, then in place of CGST and SGST, the tax charged would be IGST. In case of the GST rate being 18%, then the full 18% will be charged as IGST.
4. Union Territory GST (UTGST):
- Applicability: UTGST is analogous to SGST and is applied in all Union Territories without a Legislative Assembly, which are Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli and Daman and Diu, Chandigarh, and Ladakh.
- Revenue: Excise and VAT/TOD revenues will be collected as UTGST by the respective Union Territory administration.
- Example: In the case in point being an intra-UT goods supply within Chandigarh, the GST amount would be divided between CGST and UTGST, not between CGST and SGST.
Mechanism of these types of GST:
Intra-state supplies involve the collection of both CGST and SGST or UTGST, whereby the total GST rate is divided equally between the Central and State/UT.
For inter-state transactions, IGST is applied, with the revenue being divided between the Central Government and the State where the goods or services are consumed.
All these create four types of GST, synchronising into an efficient tax system, which would allocate the right tax to the different levels of government—these being central and state—based on the premise of keeping up free flow of goods and services across the nation.
Benefits of GST Registration
1. Legal Recognition:
- Benefit: Under GST, it gives legal recognition to the business; this adds to the credibility of the firm among customers, suppliers, and government authorities.
- Impact: The registered businesses are free to issue tax invoices. This would provide legitimacy and a sense of trustworthiness in the market.
2. Input Tax Credit (ITC):
- Benefit: Another major benefit of registering under GST is that the businesses can avail input tax credit on the GST paid for purchases, thus reducing their overall tax burden.
- Impact: Output taxes are of the kind that the tax paid on inputs can be adjusted against the tax payable on outputs. Thus, costs come down.
3. Interstate Trading:
- Benefit: There will be no restrictions in trading across state borders under GST registration.
- Impact: It increases market reach for businesses since they can now operate pan-India with a unified tax system.
4. Eligibility for Government Tenders:
- Benefit: Most of the government tenders and contracts demand GST registration as a prerequisite to participate in them.
- Impact: The registration of the business under GST opens up possibilities of participating in the bidding process for government projects, which is very useful.
5. Easy Compliance:
- Benefit: GST makes the tax structure easier and more organised because it brings along several indirect taxes into one, lowering compliance burden. This burden can also be reduced by the help of GST Billing Softwares.
- Impact: Because of a single online portal for returns, payments, and registration, the burden associated with compliance has been ironed out for businesses.
6. Lower Taxes for Small Business:
- Benefit: Under GST, inclusion in the Composition Scheme is offered to small businesses, including options to pay lower rates of tax with easier compliance requirements.
- Impact: It facilitates lightening the tax burden on small businesses and running operations effectively.
7. Avoidance of Penalties:
- Benefit: Getting timely registration under GST ensures that the business is legally compliant and saves from fines and penalties for non-compliance.
- Impact: Businesses are saved from unnecessary legal hassles and financial penalties in this regard.
8. Simplified Filing of Returns:
- Benefit: Most of the GST billing software is integrated with the GST portal, which makes it easier to file returns like GSTR-1, GSTR-3B, and annual returns, increasing the business efficiency.
- Impact: This makes filing of returns easier, less time-consuming, and less labour-intensive for compliance, with returns submitted on time.
9. Improving B2B Business:
- Benefit: Businesses like to deal with enterprises that have GST registration, as through this they will be able to get back the input tax credit on purchase.
- Impact: GST registration brings more attractions for other businesses towards your business and improves partnership and sales prospects.
10. Single Country-Wide Taxation System:
- Benefit: GST registration makes any business comply with a single tax structure for the country, duly eliminating multiple registrations under indirect taxes.
- Impact: It creates an easier, streamlined tax environment for any business to carry on their operation across the country without much hassle regarding state tax laws.
These benefits underline the need for registration of businesses under GST, a step toward growth, efficiency, and compliance within India.
