GST (Goods and Service Tax)
Introduction to GST Structure
What is GST in India?
GST is known as the Goods and Services Tax. It is an indirect tax which has replaced many
indirect taxes in India such as the excise duty, VAT, services tax, etc. The Goods and Service
Tax Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017.
In other words, Goods and Service Tax (GST) is levied on the supply of goods and services.
Goods and Services Tax Law in India is a comprehensive, multi-stage, destination-based
tax that is levied on every value addition. GST is a single domestic indirect tax law for the
entire country.
Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales,
Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated
GST.
Multi-stage
An item goes through multiple change-of-hands along its supply chain: Starting from
manufacture until the final sale to the consumer.
Let us consider the following stages:
• Purchase of raw materials
• Production or manufacture
• Warehousing of finished goods
• Selling to wholesalers
• Sale of the product to the retailers
• Selling to the end consumers
The Goods and Services Tax is levied on each of these stages making it a multi-stage tax.
Value Addition
A manufacturer who makes biscuits buys flour, sugar and other material. The value of the inputs
increases when the sugar and flour are mixed and baked into biscuits.
The manufacturer then sells these biscuits to the warehousing agent who packs large quantities of
biscuits in cartons and labels it. This is another addition of value to the biscuits. After this, the
warehousing agent sells it to the retailer.
The retailer packages the biscuits in smaller quantities and invests in the marketing of the
biscuits, thus increasing its value. GST is levied on these value additions, i.e. the monetary value
added at each stage to achieve the final sale to the end customer.
Destination-Based
Consider goods manufactured in Maharashtra and sold to the final consumer in Karnataka. Since
the Goods and Service Tax is levied at the point of consumption, the entire tax revenue will go to
Karnataka and not Maharashtra.
The below picture explains this
2. The Journey of GST in India
The GST journey began in the year 2000 when a committee was set up to draft law. It took 17
years from then for the Law to evolve. In 2017, the GST Bill was passed in the Lok Sabha and
Rajya Sabha. On 1st July 2017, the GST Law came into force.
3. Advantages Of GST
GST has mainly removed the cascading effect on the sale of goods and services. Removal of the
cascading effect has impacted the cost of goods. Since the GST regime eliminates the tax on tax,
the cost of goods decreases.
Also, GST is mainly technologically driven. All the activities like registration, return filing,
application for refund and response to notice needs to be done online on the GST portal, which
accelerates the processes.
4. What are the components of GST?
There are three taxes applicable under this system: CGST, SGST & IGST.
• CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a
transaction happening within Maharashtra)
• SGST: It is the tax collected by the state government on an intra-state sale (e.g., a
transaction happening within Maharashtra)
• IGST: It is a tax collected by the Central Government for an inter-state sale (e.g.,
Maharashtra to Tamil Nadu)
In most cases, the tax structure under the new regime will be as follows:
Transaction New Old Regime Revenue Distribution
Regime
Sale within the CGST + VAT + Central Revenue will be shared equally between the Centre and the
State SGST Excise/Service tax State
Sale to another IGST Central Sales Tax + There will only be one type of tax (central) in case of inter-state
State Excise/Service Tax sales. The Centre will then share the IGST revenue based on the
destination of goods.
Illustration:
• Let us assume that a dealer in Gujarat had sold the goods to a dealer in Punjab worth Rs.
50,000. The tax rate is 18% comprising of only IGST.
In such a case, the dealer has to charge IGST of Rs.9,000. This revenue will go to Central
Government.
• The same dealer sells goods to a consumer in Gujarat worth Rs. 50,000. The GST rate on
goods is 12%. This rate comprises CGST at 6% and SGST at 6%.
The dealer has to collect Rs.6,000 as Goods and Service Tax, Rs.3,000 will go to the Central
Government and Rs.3,000 will go to the Gujarat government since the sale is within the state.
5. Tax Laws before GST
In the earlier indirect tax regime, there were many indirect taxes levied by both the state and the
centre. States mainly collected taxes in the form of Value Added Tax (VAT). Every state had a
different set of rules and regulations.
Inter-state sale of goods was taxed by the centre. CST (Central State Tax) was applicable in case
of inter-state sale of goods. The indirect taxes such as the entertainment tax, octroi and local tax
were levied together by state and centre. These led to a lot of overlapping of taxes levied by both
the state and the centre.
For example, when goods were manufactured and sold, excise duty was charged by the centre.
Over and above the excise duty, VAT was also charged by the state. It led to a tax on tax effect,
also known as the cascading effect of taxes.
The following is the list of indirect taxes in the pre-GST regime:
• Central Excise Duty
• Duties of Excise
• Additional Duties of Excise
• Additional Duties of Customs
• Special Additional Duty of Customs
• Cess
• State VAT
• Central Sales Tax
• Purchase Tax
• Luxury Tax
• Entertainment Tax
• Entry Tax
• Taxes on advertisements
• Taxes on lotteries, betting, and gambling
CGST, SGST, and IGST have replaced all the above taxes.
However, certain taxes such as the GST levied for the inter-state purchase at a concessional rate
of 2% by the issue and utilisation of ‘Form C’ is still prevalent.
It applies to certain non-GST goods such as:
i. Petroleum crude;
ii. High-speed diesel
iii. Motor spirit (commonly known as petrol);
iv. Natural gas;
v. Aviation turbine fuel; and
vi. Alcoholic liquor for human consumption.
It applies to the following transactions only:
• Resale
• Use in manufacturing or processing
• Use in certain sectors such as the telecommunication network, mining, the generation or
distribution of electricity or any other power sector
6. How Has GST Helped in Price Reduction?
During the pre-GST regime, every purchaser, including the final consumer paid tax on tax. This
condition of tax on tax is known as the cascading effect of taxes.
GST has removed the cascading effect. Tax is calculated only on the value-addition at each
stage of the transfer of ownership.
The indirect tax system under GST will integrate the country with a uniform tax rate. It will
improve the collection of taxes as well as boost the development of the Indian economy by
removing the indirect tax barriers between states.
Illustration:
Based on the above example of the biscuit manufacturer, let’s take some actual figures to see
what happens to the cost of goods and the taxes, by comparing the earlier GST regimes.
Tax calculations in earlier regime:
Action Cost (Rs) Tax rate at 10% (Rs) Invoice Total (Rs)
Manufacturer 1,000 100 1,100
Warehouse adds a label and repacks at Rs.300 1,400 140 1,540
Retailer advertises at Rs. 500 2,040 204 2,244
Total 1,800 444 2,244
The tax liability was passed on at every stage of the transaction, and the final liability comes to a
rest with the customer. This condition is known as the cascading effect of taxes, and the value
of the item keeps increasing every time this happens.
Tax calculations in current regime:
Action Cost (Rs) Tax rate Tax liability to Invoice
at 10% be deposited Total (Rs)
(Rs) (Rs)
Manufacturer 1,000 100 100 1,100
Warehouse adds label and repacks at Rs. 300 1,300 130 30 1,430
Retailer advertises at Rs. 500 1,800 180 50 1,980
Total 1,800 180 1,980
In the case of Goods and Services Tax, there is a way to claim the credit for tax paid in acquiring
input. The individual who has already paid a tax can claim credit for this tax when he submits his
GST returns.
In the end, every time an individual is able to claims the input tax credit, the sale price is reduced
and the cost price for the buyer is reduced because of lower tax liability. The final value of the
biscuits is therefore reduced from Rs.2,244 to Rs.1,980, thus reducing the tax burden on the final
customer.
7. What are the New Compliances Under GST?
Apart from online filing of the GST returns, the GST regime has introduced several new systems
along with it.
e-Way Bills
GST introduced a centralised system of waybills by the introduction of “E-way bills”. This
system was launched on 1st April 2018 for inter-state movement of goods and on 15th April
2018 for intra-state movement of goods in a staggered manner.
Under the e-way bill system, manufacturers, traders and transporters can generate e-way bills for
the goods transported from the place of its origin to its destination on a common portal with ease.
Tax authorities are also benefited as this system has reduced time at check -posts and helps
reduce tax evasion.
E-invoicing
Recently, the e-invoicing system has been launched on a trial basis starting from January 2020
and applicable from October 2020. This system requires large businesses with an annual
aggregate turnover of more than Rs.100 crore to comply with some requirements.
They must obtain a unique invoice reference number for every business-to-business invoice by
uploading on the GSTN’s portal known as the invoice registration portal. The portal verifies the
correctness and genuineness of the invoice. Thereafter, it authorises using the digital signature
along with a QR code.
E-invoicing allows interoperability of invoices and helps reduce data entry errors. It is designed
to pass the invoice information directly from the IRP to the GST portal and the e-way bill portal.
It will, therefore, eliminate the requirement for manual data entry while filing ANX-1/GST
returns and for the generation of part-A of the e-way bills.
