GST - Explained

What is the Goods and service tax (GST)? Introduction, GST's components, advantages, and disadvantages explained.

What is GST?

GST is an indirect tax that was introduced in India on the 1st of July, 2017.

Goods and service tax (GST) is an indirect tax that replaced the central government's taxes like service tax, customs duty, and excise duty, and state government taxes like purchase tax, luxury tax, VAT, octroi and clubbed them into a single tax system making it the biggest tax reform in India, establishing a common tax system across the nation.

GST is the tax that is levied on goods and services in India, and it is collected at the point of consumption. To understand GST well, let's look at the features of GST.

Features of GST

1. Multi-Staged: A product has to travel a long journey before reaching the final consumer. This journey is known as the supply chain. It involves various stages, from raw material to product. From manufacturers to distributors, wholesalers, and then trickles down to retailers. Every step in this process involves a value addition to the product. GST is to be levied at every step of value addition in this process.

For example:- Let us consider a supply chain of biscuits.

(a) Its journey begins with purchasing of raw materials by the manufacturer (like sugar and wheat), and GST is to be paid at the time of buying by the buyer itself. (Manufacturer may apply for a rebate here).

(b) Once the biscuits are prepared, they are packaged and ready to be sold to the distributors, GST will be levied once again (as the packaging is the value added to the ready product hence liable to charge GST on it) by the manufacturer and paid by the purchasing party (the distributor).‌

(c) When the distributor sells the goods to the wholesaler, the tax has to be paid by the wholesaler.

(d) Finally, when the wholesaler sells the goods to the retailers, the retailer will levy GST once again, which will be paid by the customer.

So here is a flowchart to represent the multi-staged GST.

Consider the journey from making a biscuit to reaching the final consumer.

Steps	Description	Tax Levied By	Tax Paid By
Step 1	Purchasing of raw materials for making biscuits	Raw Material seller	Manufacturer
Step 2	Selling of goods by the factory to the distributor	Manufacturer	Distributor
Step 3	The distributor sells goods to the wholesaler	Distributor	Wholesaler
Step 4	The wholesaler will sell it to the retailer	Wholesaler	Retailer
Step 5	The retailer sells it to the final consumer	Retailer	Consumer

This is how a single product is taxed multiple times, making GST a multi-staged tax.

2. destination-based tax:- GST is framed to be collected at the point of sales from the consumer.

Note:- When anyone in the supply chain pays tax at the time of purchasing the goods, they are eligible for the input tax credit, which means they would be paying tax just once, at the time of sales. In the end, the retailer will collect tax from the consumer, and thus making GST a consumption-based tax.

3. One country one tax: Before the introduction to GST, every state in India had a different tax structure which was making trading in India difficult. Also, different products were identified in different tax slabs, which lead to the accumulation of specific industries in specific states and vice versa.

For example, consider goods that are manufactured in Kerala and sold in Jammu and Kashmir. At the time of sales, the tax will be levied by the government of Jammu and Kashmir and not by the government of Kerala.

4. Goods and services considered same: In the GST regime, there is no separate system for tax on goods and services. They both are treated similarly.

5. No tax on tax: GST system is such that it avoids cascading effect of tax and provides input tax returns for the GST already paid in some other form.

Components of GST:

1. C-GST (Centre GST):- GST levied by the central government is called C-GST. C-GST applies to every inter-state transaction across India.

2. S-GST (State GST):- GST levied by the state government is known as S-GST. It is levied on every inter-state transaction.

3. UT-GST (Union Territory GST): GST levied by Union territory's government is called UT-GST.

4. I-GST (Integrated GST):- GST which is levied at the time of the intra-state moment of goods is called I-GST

Working of GST:- A business may be situated in a state or a Union territory. Let's have a look at both scenarios.

Business situated in a state‌

1. Selling the goods within the state:- When a business sells goods within the state, it has to pay state GST (S-GST) and center GST (C-GST).

2. Selling the goods outside the state: When we sell goods outside of the state, Integrated GST (I-GST) is levied.

3. Selling the goods outside the country (Exports): When we sell the goods outside the country, I-GST is levied on the time of sales, which will be later refunded by the government.

4. Purchasing of the goods within the state:- When a business purchases goods within the state, it has to pay state GST (S-GST) and center GST (C-GST).

5. Purchasing the goods outside the state: When we Purchase goods outside of the state, Integrated GST (I-GST) is levied.

6. Purchasing the goods outside the country (Imports): Imports are treated just like inter-state purchasing of goods and I-GST will be levied.

Old tax system vs GST-

Old System	GST Regime
Indirect taxes consisted of those levied by the state like purchase tax, luxury tax, Value added tax, and octroi, and those levied by the central government like excise duty, customs duty, and service tax.	Under the new GST system, all the indirect taxes are replaced by a single tax system, GST.
States could freely decide tax that they would levy, without consulting from the center.	Now, the states have to follow the GST system which has fixed tax slabs and pre-defined systems.
Clustering of companies in only a handful of states, which offered tax advantages	Under one nation one tax system, GST will lead to the opening of factories all over India, and not in few states as before. Also, one tax helps India in ranking up its position in ease of doing business, which will eventually benefit the country.
Earlier tax system said that goods & services produced in a particular state will be taxed by that particular state.	GST a destination-based tax. Now taxes are collected by the state in which goods are sold.

Advantages of GST (Customers, Business, State and country)

Advantages of GST (To the business)

1. GST will not be applicable on businesses with less than 40 Lakh of turnover, initially which was 40 Lakhs before.

2. It will help us eliminate the tax on tax, which is also known as cascading effect of tax.

3. Paying the GST is a simple, online, and easy process, as compared to previous versions of indirect taxes in India.

4. Clear and well-defined framework for e-commerce platforms.

5. GST will not be applicable on businesses with less than 40 Lakh of turnover, initially which was 40 Lakhs before.

Advantages of GST (To the state)

1. When I-GST is applied, it gives half of the tax to the receiving state (State in which the goods and services are sold). It will benefit both the states and the center. The goods-producing state will earn from labor, resources, etc. The center gets half of I-GST, and the receiving state gets half of the I-GST back to the state, eventually benefitting all three parties involved.

2. GST will aid in the regulation of the unorganized sectors.

3. As explained above, GST will motivate businesses to move their big factories to small factories in different states, which will ultimately lead to more GST collection, and also labor and manpower resources that will be used will ultimately benefit the state.

4. Before GST, states had the power to decide the tax rate on and service tax, which often lead to the clustering of companies in some few states like Maharashtra and Gujrat. But now, after GST, it seems no benefit of tax to the producing state. This will eventually lead to the opening of smaller factories all over India to cater to the demand of the particular state.

5. GST is a single platform to cater to all the taxes that will be collected from any part of the country in any form. This makes managing the taxes in a better way.

Advantages of GST (To our country)

1. Before GST, states had the power to decide the tax rate on and service tax, which often lead to the clustering of companies in some few states like Maharashtra and Gujrat. But now, after GST, it seems no benefit of tax to the producing state. This will eventually lead to the opening of smaller factories all over India to cater to the demand of the particular state.

2. GST is a single platform to cater to all the taxes that will be collected from any part of the country in any form. This makes managing the taxes in a better way.

Disadvantages of GST

Disadvantages of GST (To the business)

1. GST will have to be paid while selling the goods to another state. The exemption of business under 40 Lakh will not be applicable there.

2. Businesses operating online will have to pay GST, and the exemption will also not be applicable there.

3. To manage GST, there has to be dedicated software installed on a physical device, which increases the cost for business.

4. Not understanding the system properly or having no proper clarity about last dates may make a business suffer penalties, which may eventually lead to reduced profit.

Disadvantages of GST (To states)

1. States will not have enough motivation to call the companies in their state, because the selling of the goods outside the state will eventually not benefit the producing state in any way, other than wages and raw material.

2. States can not decide their tax rates anymore. They have to follow the framework by the center.

Disclaimer: This article is intended for general consumption only. The information in the article was accurate at the time of publication, but it is subject to change due to changes in government rules and regulations. The contents of the blog may not be copied unless prior permission is obtained.

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