Goods and Services Tax (GST): What & How Complete Analysis

The Goods and Services Tax (GST) is a landmark reform in the Indian taxation system, introduced to simplify and unify the indirect tax structure. It has fundamentally changed the way businesses operate, impacting every sector of the economy. This article delves into what GST is, the different types of GST, and how it’s calculated.

What is GST?

GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. In simpler terms, it is a single indirect tax for the entire country, replacing multiple taxes levied by the central and state governments, such as excise duty, VAT, service tax, etc.

GST was introduced on July 1, 2017, with the objective of eliminating the cascading effect of taxes. The cascading effect occurs when a tax is levied on a product at each stage of the production process without deducting the tax paid at earlier stages. This results in the consumer paying a tax on a tax, which GST aims to eliminate.

Types of GST

GST in India is categorized into four types, depending on the nature of the transaction:

Central Goods and Services Tax (CGST):

Levied by the Central Government on intra-state transactions (within the same state).
For instance, if a company sells a product in Karnataka, both CGST and SGST (State Goods and Services Tax) will be applied.

State Goods and Services Tax (SGST):

Levied by the State Government on intra-state transactions.
The revenue collected from SGST goes directly to the respective state government.

Integrated Goods and Services Tax (IGST):

Levied by the Central Government on inter-state transactions (between two states) and on imports.
For example, if goods are sold from Maharashtra to Gujarat, IGST is applicable. The Central Government collects the IGST, and it is later divided between the central and the state governments.

Union Territory Goods and Services Tax (UTGST):

Levied on transactions taking place in Union Territories such as Chandigarh, Lakshadweep, and Andaman and Nicobar Islands.
Similar to SGST but applicable only in Union Territories.

The GST Council

The GST Council is a governing body that makes recommendations to the Central and State Governments on issues related to GST. It is chaired by the Union Finance Minister and includes representatives from all states and union territories. The council’s primary responsibilities include deciding tax rates, exemptions, thresholds, and resolving disputes related to GST.

How is GST Calculated?

GST is calculated by multiplying the taxable value of the goods or services by the applicable GST rate. Here’s a step-by-step breakdown:

Determine the Taxable Value:

The taxable value is the price at which the goods or services are sold. It excludes the GST amount but includes other charges like transportation, packaging, and insurance.

Apply the GST Rate:

GST rates in India are categorized into five slabs: 0%, 5%, 12%, 18%, and 28%. Essential items like food grains are taxed at 0%, while luxury goods fall under the 28% slab.

Calculate the GST Amount:

Once the taxable value and applicable GST rate are known, the GST amount can be calculated using the formula:

GST Amount = Taxable Value X GST Rate
For example, if the taxable value of a product is ₹1,000 and the applicable GST rate is 18%, the GST amount would be ₹180.

Add GST to the Taxable Value:

The final price charged to the consumer will be the taxable value plus the GST amount.
Using the previous example, the final price would be ₹1,000 + ₹180 = ₹1,180.

Input Tax Credit (ITC)

One of the key features of GST is the availability of Input Tax Credit (ITC). ITC allows businesses to claim a credit for the tax paid on purchases of goods or services used in the course of business. This means that the tax a business pays on its inputs can be deducted from the tax it collects on its sales, thereby reducing the tax liability.

For example, if a manufacturer buys raw materials worth ₹10,000 and pays 18% GST (₹1,800), and then sells the finished product for ₹20,000 and charges 18% GST (₹3,600), the manufacturer can claim an ITC of ₹1,800. Therefore, the net GST payable to the government would be ₹3,600 – ₹1,800 = ₹1,800.

GST Compliance and Filing

Businesses registered under GST are required to file monthly, quarterly, and annual returns based on their turnover and the nature of their business. The most common returns include:

GSTR-1:

A monthly return that contains details of outward supplies (sales) made during the month.

GSTR-2A:

A view-only return that contains details of inward supplies (purchases) made during the month. It is auto-generated based on the GSTR-1 filed by the supplier.

GSTR-3B:

A monthly return that provides a summary of outward supplies, input tax credit claimed, and GST payable.

GSTR-9:

An annual return that consolidates the details provided in monthly/quarterly returns during the financial year.

Timely filing of returns is crucial to avoid penalties and interest. Businesses must also ensure that the details provided in the returns are accurate and match with the supplier’s data to claim ITC smoothly.

Benefits of GST

GST has brought several benefits to the Indian economy:

Elimination of Cascading Effect:

By allowing ITC, GST eliminates the tax-on-tax effect, reducing the overall cost of goods and services.

Simplified Tax Structure:

GST replaces multiple indirect taxes with a single tax, making the tax system simpler and more transparent.

Boost to Economic Growth:

By creating a unified market, GST has enhanced ease of doing business and boosted interstate trade.

Increased Revenue for Government:

With a wider tax base and efficient tax collection mechanisms, GST has contributed to higher revenue for both central and state governments.

Challenges of GST

While GST has numerous benefits, it also comes with challenges:

Complexity in Compliance:

The multiple returns and reconciliation processes can be cumbersome, especially for small businesses.

Technical Glitches:

The GSTN (Goods and Services Tax Network) portal has faced technical issues, leading to delays and difficulties in filing returns.

Classification of Goods and Services:

Determining the correct GST rate for certain goods and services can be challenging, leading to disputes and confusion.

Impact on Small Businesses:

The compliance burden and the requirement to file multiple returns can be overwhelming for small businesses, especially those with limited resources.

Conclusion

The introduction of GST in India has been a game-changer in the indirect tax landscape. It has streamlined the tax system, eliminated the cascading effect, and created a unified market across the country. However, like any major reform, it has its share of challenges, particularly in terms of compliance and technical issues. As the system matures, it is expected that these challenges will be addressed, further simplifying the tax process for businesses and consumers alike.

Understanding GST, its types, and how it is calculated is crucial for businesses to ensure compliance and take full advantage of the benefits offered by this revolutionary tax system.