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What is GST in India? Goods & Services Tax

What is GST in India_ Goods & Services Tax Explained

What is GST?

GST means tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption

Hence

Further, GST is a Value added tax on the supply of goods and/or services. GST is a single tax at a national level to be levied at all stages right from manufacturing to final consumption. Under GST every person is liable to pay tax on his output and is entitled to get input tax credit (ITC) on tax paid on its inputs, input services and capital goods. Therefore, it is a tax on the value addition only. Ultimately the final consumer shall bear the burden of tax under GST.

Understand from following example:

Milestones in the advent of GST

  1. France was the first country to implement GST in the year 1954. In the last 63 years, more than 160 countries across the world have adopted GST.
  2. In India the genesis of the concept of taxing the value addition only can be dated back to the concept of MODVAT under Central Excise law which was introduced in the year 1986 but it allowed credit of excise duty paid on inputs only against the excise duty liability of Central excise. From 01-03-1994, the credit under MODVAT was introduced for capital goods also but there were distinct rules for inputs and capital goods, which were later unified in the Budget of the year 2000 and formed as Cenvat Credit Rules, 2001. The rules for allowing credit of service tax were separately constituted in the year 2002.
  3. Old Cenvat Credit Rule and Service Tax Credit Rules were unified in the year 2004 to allow cross credit of excise and service tax on all inputs and input service against the manufacturing of goods or provision of services under Cenvat Credit Rules 2004.
  4. Value added Tax (i.e. VAT) was introduced between 2003 to 2008 in a staggered manner by the states levying tax on value addition between intra state sale and purchase of goods. Central Sales Tax leviable on interstate sales was kept outside the purview of value added tax i.e. VAT

Legislative History of GST in India

  1. The idea of GST in India was first mooted by the Kelkar Task force in 2004.
  2. In 2006, the then Finance Minister set out a goal for GST to be implemented in India by 2010, but the deadline could not be met.
  3. The first discussion paper on GST in India was published by the empowered committee of State Finance Ministers on 10 November 2009, which provided the present dual tax model of GST.
  4. The report of the Task Force on GST constituted by 13th Finance Commission also contributed to the development of the concept of “flawless” GST.
  5. In the year 2011, the 115th GST Constitutional Amendment Bill was framed but could not be placed before the Houses of Parliament.
  6. Goods and Services Tax Network (GSTN), a non-profit company was constituted on 28-03-2013 to provide Information Technology infrastructure and services to the Central and State Governments, tax payers and other stakeholders for implementation of the Goods and Services Tax (GST).
  7. In 2014, 122ndConstitutional Amendment Bill was introduced in Lok Sabha on 19-12-2014 and was passed by Lok Sabha on 06-05-2015 and sent for concurrence to Rajya Sabha.
  8. Rajya Sabha passed the Constitutional Amendment Bill with amendments on 03-08-2016 and returned the bill to Lok Sabha and the amended Bill was passed by Lok Sabha on 08-08-2016 with 443 votes cast in favor of the Constitutional Amendment Bill and none against it.
  9. After ratification of the Bill by more than 50% States, the Bill was sent to President for his assent. Presidential assent was given on 08-09-2017 and thus the 122nd Constitutional amendment Bill became the 101st Constitutional Amendment Act 2016. This Constitutional Amendment Act was implemented w.e.f. 16-09-2016. The laws not in concurrence with GST were allowed to operate for 1 year from the date of implementation of Constitutional Amendment Act i.e. till 15-09-2017. The GST Council was also constituted w.e.f. 12-09-2017 by notification dated 10-09-2017.
  10. While the Constitutional amendment bill was pending for consideration before Rajya Sabha, different business processes of GST like registration process, return process, payment process, refund process, revenue neutrality structure were framed by the Joint Committee constituted by Empowered Committee of the State Finance Ministers.
  11. In June 2016, the different business processes so framed gave way to the Model GST law which was revised in November 2016 and final act was passed on 12-04-2017.
  12. The provisions relating to Administration, Composition levy and registration under GST were implemented with effect from 22-06-2017.
  13. Remaining provisions except provisions relating to deduction of tax (TDS) and collection of tax at source (TCS) under GST law were implemented w.e.f. 01-07-2017.
  14. TDS and TCS provisions have been made applicable from 01-10-2018.

Tax Structure before GST

Nature of Duty Taxable Event Tax Rate
Central Excise Duties Manufacture 12.5%
Service Tax Provision of Service 15%
Customs Duty on Imports Import 10%
Central Sales Tax Sale of Goods in the course of Interstate trade or commerce 2% against declaration of registered buyer. Where declaration is not available commodity rate of the state applies
State Tax Sale of Goods other than in course of Interstate trade or commerce Varies from State to State. However generally, it is: 1% on precious metals 5-6% on Merit Goods 12.5-14.5% on Remaining Goods

Comparison between old and new structure

Old Structure GST Structure
Supply of Goods with in State Vat SGST + CGST
Inter State Supply of Goods CST IGST
Supply of Service with in State Service Tax SGST + CGST
Supply of Service in the course of Interstate trade or commerce Service Tax IGST
Import of Goods BCD + CVD+ SAD BCD +IGST
Import of Service Service Tax under Reverse Charge IGST
Export of Goods No Tax No Tax
Export of Service No Tax No Tax

Shortcomings of previous tax structure leading to introduction of GST

1 Piecemeal Credit of Taxes on Inputs/Input services

2 No credit of Central Sales Tax against the sale of goods

In pre GST Era, no credit was allowed in respect of central sales tax paid on interstate purchase of goods.

E.g. If goods purchased are for Rs. 1000 + Rs. 20 (2%) = Rs. 1020/- and the within the State for Rs. 1200/- , where the tax rate on sale is 12.5% and hence output tax liability is Rs. 150/-. No credit of Rs 20/- is allowed while making payment of Rs. 150/- and hence the dealer has to pay Rs. 150 as State tax.goods are sold.

3 No credit of VAT paid in one State against the VAT payable in the other State

Although credit of tax paid on purchases is allowed against intra State sales of goods and tax against every sale within State is paid only on the value addition of goods when the goods travel to some other state, the credit of taxes paid in one State does not get transferred to the other State.

E.g. In Maharashtra goods are sold by Mr A to Mr. B for Rs. 1000/- charging tax @ 12.5%= Rs. 125. Mr. B sells goods to Mr. C in Punjab for Rs. 1500 charging tax @ 2%= Rs. 30/-. Hence the tax that has been deposited in Maharashtra is Rs. 125+30=Rs. 155. When Mr. C sells these goods, he is not entitled to credit of taxes paid in Maharashtra.

4 Cascading Effect of tax by charging VAT on value of goods including Excise Duty

State Vat i.e. Value added tax was being charged on the value of goods after including excise duty. Hence, not only the excise duty credit paid on purchase was being denied on the sale of same goods but also against the same sale transaction, Vat was being levied on the excise duty leviable on the manufacture of goods

E.g. If goods are manufactured for Rs. 1000/- and excise duty is payable @ 12.5% and vat is payable say @ 14.30%, the Billing was being done as under:

Assessable Value of Goods under Excise lawRs. 1000
Excise Duty @ 12.5% Rs. 125Rs. 125
Taxable Value for VatRs. 1125
Vat @ 14.30%Rs. 160.88
Total Invoice ValueRs. 1285.88

5 No system of matching the Indirect tax turnover with Direct tax turnover was available

In Income tax law, also the assessees possess PAN. Under the excise and service tax also the registration of the assesse is PAN based. Under the State laws, though the possession of PAN was pre requisite to apply for Vat registration, the registration numbers were not PAN based. Hence the IT systems could not configure the matching of turnover figures furnished by the same assesse to the different departments. This was posing a great threat to the internal control systems of the Government to check revenue leakages under GST.

6 Assessable value being more than the value of goods and or services

In case of indivisible works contracts, where the value of goods and service was not determinable separately, service tax was being charged on 40% to 70% of the value of works contract and vat was chargeable on 70% of the value of works contract. Hence for a contract value of Rs. 100/- the tax was being charged at 110% to 140% of the value. [Note: Generally speaking, Works Contracts are the composite contracts which involve both supply of goods as well as services]

Similarly, for the supply of food and beverages, service tax was chargeable on 40% of the value in case of restaurants, 60% in case of outdoor catering and 70% in the case of bundled contract of lodging in hotels along with supply of meals. Vat was chargeable on 100% of the value of supply of food and beverages. Hence tax was being charged at 140% to 170% of the value.

Taxes Subsumed into GST

Following Central and State taxes have been subsumed into GST

Central TaxesState Taxes
Central excise duty (Cenvat)State VAT/Sales Tax
Additional duties of exciseCentral Sales Tax [levied by Centre but collected by State]
Excise Duty under Medicinal and Toilet Preparation ActOctroi and Entry Tax
Service TaxLuxury Tax
Additional Customs Duty (CVD)Taxes on Lottery, Betting and Gambling
Special Additional Duty of Customs (SAD)State Cess and Surcharge
Central Surcharge and Cess

Note:

  1. CVD and SAD are customs duties charged on import of goods but in lieu of excise duty and vat respectively.
  2. Amongst Customs duties, only CVD and SAD have been subsumed into GST, but basic customs duty has not been subsumed into GST.

Taxes not subsumed into GST

Only the taxes mentioned here in above have been subsumed into GST. All other taxes are outside the purview of GST. To name a few:

  1. Basic Customs Duty
  2. Electricity Duty
  3. Taxes on alcoholic liquor for human consumption
  4. Tax on Sale of land and Building
  5. Tax on Securities
  6. Fee chargeable under State laws like fee chargeable for sale of agriculture produce popularly known as Mandi fee.

Taxes deferred to be included into GST

Taxes on following items are yet to be bought into the GST net and may be subsumed into GST at a later date:

Duty of excise and tax on sale or purchase of

  • petroleum crude;
  • high speed diesel;
  • motor spirit (commonly known as petrol);
  • natural gas;
  • aviation turbine fuel; and
  • Taxes on entertainment which were earlier collected by State shall after GST be collected by local authorities like Panchayat or a Municipality or a Regional Council or a District Council.

Model of GST adopted in India

Since India is a union of states, dual model of GST has been adopted.

  • State Taxes to be Subsumed in SGST (State Goods and Services tax)/UTGST (Union territory GST) for intra (within) State or Union Territory supplies of goods or services
  • Central Taxes to be subsumed in CGST (Central Goods and Service Tax) for intra state supply of goods or services.
    1. While SGST directly goes to the State, CGST is directly collected by the Central government. However in terms of the recommendation of 14th Finance Commission, 42% of the CGST also is required to be disbursed to the State.
  • While CGST, UTGST and SGST are charged for intra State supply of goods and/or services, IGST (Integrated Goods and Service Tax) is chargeable for:
    1. Inter-State supplies (supply between two different States),
    2. Imports, and
    3. Exports
  • Apart from CGST, SGST/UTGST, IGST compensation cess is leviable on certain luxury goods. Exports are however, zero rated.

GST Council

Commencement of GST Council

According to Article 279A of the Constitution, the GST Council has to be constituted by the President within 60 days of the commencement of Article 279A. The notification for bringing into force Article 279A with effect from 12th September, 2016 was issued on 10th September, 2016.

Members of GST Council

The GST Council is a joint forum of the Centre and the States, and consists of the following members:

  1. Chairperson– Union Finance Minister
  2. Vice chairperson– to be chosen from amongst the members of Ministers of State government
  3. Members-
    • The Union Minister of State, in-charge of Revenue/Finance
    • The Minister In-charge of finance or taxation or any other Minister nominated by each State Government

Quorum for GST Council Meetings

  • The quorum of GST council is 50% of total members
  • Decision is taken by 3/4th majority (75%), wherein-
    1. the Central Government would have the weightage of 1/3rd of the total vote cast, and
    2. the State Governments would have a weightage of 2/3rd of the total votes cast.

Functions of the GST Council

GST Council is basically entrusted with task to make recommendations on the different aspects of GST to the Union as well as states.

GST Council under the Constitution is required to make recommendations on the following:

  • the taxes, cesses and surcharges which may be subsumed in the goods and services tax;
  • the goods and services that may be subjected to, or exempted from the goods and services tax;
  • model GST Laws, principles of levy, apportionment of IGST and the principles that govern the place of supply;
  • the threshold limit of turnover below which goods and services may be exempted from goods and services tax;
  • GST rates including floor rates;
  • any special rates for a specified period, to raise additional resources during any natural calamity or disaster;
  • special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and
  • any other matter relating to the GST, as the Council may decide.

The GST Council shall also recommend the date on which GST will be levied on petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.

GSTN

  • The common GST Portal www.gst.gov.in has been developed by GSTN as the front-end of the overall GST IT eco-system.
  • Goods and Services Tax Network (GSTN) is a Section 8 (not for profit company), non-Government, private limited company. It was incorporated on March 28, 2013.
  • Under GST, the registration of taxpayers will be common under Central and State GST and hence one place of filing application for the same i.e. the Common GST portal.
  • Query of tax authorities, if any and their final decision will be communicated to GST portal which in turn will communicate the same to the taxpayer.
  • The Common GST Portal, is the single interface for all taxpayers from any part of the country.

Functions of GSTN and its portal

Creation of common and shared IT infrastructure for functions relating to taxpayers has been assigned to GSTN and these are:

  1. Functions relating to Tax Payers
    • Filing of registration application
    • Filing of return
    • Creation of challan for tax payment
  2. Functions relating to Government
    • Settlement of IGST payment (like a clearing house)
    • Generation of business intelligence and analytics
  3. Functions relating to Tax Officials
    • All statutory functions to be performed by tax officials under GST like-
      1. approval of registration,
      2. assessment,
      3. audit,
      4. appeal,
      5. enforcement etc.

GST Rates

Under GST following rates have been prescribed for goods and services

1NIL Rated
20.25%
33%
45%
512%
6
18%
728%

Under the Composition scheme, applicable to taxable persons having turnover up to Rs. 1 crore, following rates have been prescribed

1%Traders
1%Manufacturers
5%Persons engaged in supply of food and beverages

Who shall pay GST?

The Taxable person is required to pay GST.

Taxable person means a person who is:

  • registered, or
  • liable to be registered

When is a person liable to be registered:

A person is liable to be registered under following circumstances:

COMPULSORY REGISTRATION IN CERTAIN CASES (IRRESPECTIVE OF THRESHOLD LIMIT)

Voluntary Registration

A person who is not liable to be registered can also make an application for being registered voluntarily and can thereby acquire the status of taxable person.

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