What is GST?
Traditionally taxation in India has been a complex system due to the number of Indirect Taxes imposed on the sale of a single product. The Goods and Service Tax (GST) was designed to do away with a majority of Indirect Taxes, providing a simple and clear taxation system to create a more transparent environment for businesses to operate within. GST has been in development since 2000, but the Goods and Service Tax Act was passed in the Parliament on 29th March 2017. The Act was brought into effect on 1st July 2017.
The flowchart below represents the process of taxation under the previous tax regime
The GST is levied at every point of Value Addition during the complete manufacturing process. Both Central GST and State GST are charged to intra-state sales. For inter-state sales an Integrated GST or IGST is applicable. The IGST is a combination of the SGST and CGST which is paid to the center. Under the VAT Regime, there was a similar tax called Central Sales Tax (CST), this is now been replaced by the IGST. The advantage of IGST is that the tax paid by the seller can be set off by the input tax paid. IGST is applicable to imports as well.
Features of GST
One of the definitions of GST is that it is a comprehensive, destination-based, multi-stage tax that is levied at every stage of value addition. Let’s see what “Destination-based” and “Multi-stage” taxes are.
A multi-stage tax is one that is charged at every stage of production. There are a number of stages raw material go through to end up on supermarket shelves, let’s have a look at each of these stages.
- Procurement/Purchase of Raw Materials
- Storage/Warehousing of the finished product
- Sale to a wholesaler/distributor
- Sale to a retailer
- Sale to that final consumer
At each of these stages, there is some value addition to the product, GST is levied at each instance of value addition. The below flow chart is designed to provide a clearer understanding of multi-stage taxation and value addition under the GST regime.
In the above flowchart, you can see that value is added to a product in 4 stages.
Stage 1: The purchase of raw material to manufacture a product adds value to the raw material.
Stage 2: Value is added to the raw material through the production process to turn them into specific products.
Stage 3: The products are labeled at the warehouse, adding further value to the product.
Stage 4: The labeled products are sold to a retailer who markets the product, thereby, adding more value to the product.
A Destination-based tax implies that the tax will be charged to the recipient. Tax for goods manufactured in location A and sold in location B will be payable at location B as it is the destination.
Example: For goods manufactured in Uttar Pradesh and sold in Tamil Nadu the tax revenue will be collected by Tamil Nadu.
Advantages of GST
One of the main reasons for the implementation of GST was to remove the tax-on-tax for goods. The elimination of tax-on-tax reduces the cost of production, thereby, reducing the cost of goods. GST is heavily technology driven to make it as efficient and accurate as possible. Most processes like registration, applications for a refund, filing of returns etc. can be done on the GST Portal. There are lots of advantages to GST some have been mentioned below:
- Removal of tax-on-tax
- Efficient logistics through a technology-driven system
- Regulation of the unorganized sector
- Composition scheme to encourage small business
- Faster and simpler registration procedures
- Removal of duplicates
Components of GST
GST has three components, these components have been explained below:
CGST: Central Goods and Service Tax (CGST) is collected by the Central Government for intra-state sales. (Transactions taking place within a state)
SGST: State Goods and Service Tax (SGST) is collected by the State Government for intra-state sales. (Transactions taking place within a state)
IGST: Integrated Good and Service Tax (IGST) is collected by the Central Government for inter-state sales. (Transactions taking place between two states/Import of goods)
CGST and SGST have been put in place to replace VAT and Central Excise/Service Tax. The revenue for CGST and SGST is shared equally between the state government and central government.
IGST has replaced Central Sales Tax and Central Excise/Service Tax. The center shares this tax the destination state of the goods/services.