Do you want to understand what is GST in simple layman language? Yes, there are already hundreds of pages on the internet talking about GST but sometimes we just want to learn things without extra effort – we get it.
Here, we will take you from the basics like GST full form and GST meaning to its deeper layers like the types of GST and what’s included in GST and what’s not. Also, we will tap on some important questions like why is GST implemented and how GST helps reduce prices.
What is GST in India?
First of all, let us start with the basics, i.e. the GST full form – Goods and Services Tax. It was implemented on the 1st of July 2017 in India.
Now, the meaning of GST –
GST is an indirect tax that is levied on the sale and purchase of goods and services in the country. It is noteworthy that GST is levied only when there’s a value addition in a certain good or service. Thus, it’s also known as a multi-stage value-addition tax. This furthers the explanation: GST is applicable at every stage of value addition.
Let’s understand this with the following example:
(1)A packet of plucked tea leaves & other components bought (Raw Materials) > (2) Processed & packed tea leaves (Manufacturer)> (3) Sold to Wholesaler > (4) Sold to Retailer > (5)Finally sold to consumer (End)
At every step in the above example of tea leaves, GST is added, except at the first stage.
|Did You Know?
GSTN, the online platform to file GST Return is made solely by
Infosys Ltd. – the Indian IT Company.
Features of GST
The four main features of GST are explained below:
- Comprehensive: It is a mixture of various indirect taxes like Central Excise Duty*, Service Tax, VAT (except consumable alcohol, electricity, etc.), Entry Tax, Octroi, Central Sales Tax etc. Also, GST is applicable all over India. Thus, it is called comprehensive tax.
- Multi-State: It is applicable at all stages of production and eliminates VAT or CENVAT. Thus, removing the cascading effect of indirect tax on goods and services.
- Value-Added: The above-mentioned multi-stages tax application is only on the value addition of the good/service and not on the total cost. This means that GST does not include the tax paid at the previous stage.
- Destination-based: It means that the tax benefit will be given to the destination state and not where the production happened or in-transit. This negatively affects states like Punjab, Gujarat and Tamil Nadu where mostly demand comes from other states for the goods manufactured in these states. Here, the tax is finally levied by the destination state. So, in GST consumer state enjoys the tax benefit, not the producer state.
*(only for goods and services included in the gambit of GST)
Did You Know?
GST is not applicable on petroleum products, electricity and alcohol for human consumption. That’s why last time you paid VAT on that peg of whiskey at your favourite restro-bar!
Why was GST introduced?
Before diving deep into GST, it is important to understand what was the need to introduce and implement GST – the biggest amendment in the Income Tax Laws of India. This maybe slightly time-consuming but if you give a few extra minutes, you will be able to finally say that yes, I understand why GST was required. Don’t worry, we will not bore you with dates.
Before GST came into effect, we had VAT and earlier to VAT, we had Single Point Tax Collection System. In Single Point Tax Collection System, tax was paid on tax at every point of production. The total tax on tax burden was put on the final consumer of the product and that consumer paid the tax at the end.
Of course, it made the product very expensive for the end consumer as the final tax was actually paid by the consumer only.
This effect of tax on tax is called as the “Cascading Effect”. We’ll talk more about it later in this section.
Then came VAT or Value Addition Tax System. In VAT, tax was calculated only at the cost of the product and the value added to it, not the tax paid in the previous stage of production.
For ease, let’s take VAT rate @ 10%.
A paid a tax of Rs 10 (Sales Tax) on raw material of Rs 100 and added value of Rs 40 by manufacturing the product. A kept the price of this product at Rs 140. A sold this to B at Rs 140. Now, the tax in the next stage was calculated on Rs 100 + Rs 40, i.e. Rs 140. So the tax was 10% of Rs 140 and not Rs 150 (where Sales Tax of Rs 10 is included). Tax of Rs 10 paid by A was NOT added in the tax calculation at the next stage. And this would go like this.
Naturally, this reduced the price of the final product and the product became fairly inexpensive to the end consumer.
So, by this example, it is safe to say that VAT was a smaller version of GST. As explained in the previous section, GST is a value-addition tax and so is VAT. So, why introduce GST? How is GST different than VAT?
Let’s see how and why:
1. Although VAT system was way better than the Single Point Tax Collection System, there were still separate taxes for goods and services, viz. excise duty on goods and service tax on services. And if there was a production which involved goods and services both, two different taxes were levied.
In addition to this, many times to avoid higher tax rates, manufacturers would label their products either as goods or services, depending on the tax rate. Whichever was lower, they would want to slip their product in that category.
2. Next, there was still cascading effect between excise duty at central level (or CENVAT) and VAT at state level. For example in soft drinks production and selling, there was excise duty paid to centre for production and then VAT was collected from the end consumer by the State government for selling the product. Although there wasn’t multi-stage cascading effect, there was still tax on tax due to Centre and State.
3. Now, apart from State and Centre cascading effect, there were different VAT rates for states. This was possible because states had the right to decide the tax rate on VAT. This was problematic at production level as well as consumer level, depending on the neighboring states.
Therefore, in short, GST was introduced to tackle these shortcomings of VAT:
- to make single tax for goods and services
- to eliminate centre and state level cascading effect
- to implement same tax rates across the states
Note: The cascading effect as well as different VAT rates on consumable alcohol, petroleum products and electricity are still prevalent.
GST Rates, 2022
There are currently four tax slabs under which GST rates are classified. These rates are the same for goods as well as services. Also, these GST rates are applicable throughout India.
|Revised GST Rates 2022
|1) 5% (2.5% each of CGST and SGST)
2) 12% (6% each of CGST and SGST)
3) 18% (9% each of CGST and SGST)
4) 28% (14% each of CGST and SGST)
Types of GST
Keeping in mind the federal structure of India, GST is classified into four parts, Central GST, State GST, Integrated GST and UT-GST. Let’s learn about these in further layers:
1) Central GST or CGST includes
- Central Excise Duty
- Duties of Excise (Medical & Toilet Preparations)
- Additional Duties of Excise (Goods of Special Importance AND Textiles and Textile Products)
- Additional Duties of Customs (commonly known as CVD or Countervailing Duties)
- Special Additional Duty of Customs(SAD)
- Service Tax
- Cess and Surcharge (related to the supply of goods and services only).
2) State GST or SGST includes
- State Value Added Tax (VAT)
- Luxury Tax
- Purchase Tax
- Central Sales Tax
- All types of Entry Tax
- Tax on Advertisements
- Entertainment Tax and Amusement Tax (not including taxes levied by local bodies)
- Tax on lotteries, betting & gambling
- State Cess and Surcharge (related to the supply of goods and services only)
Please note: The indirect taxes mentioned above are not deleted from the Indian Tax System. These taxes have been merged in GST and that also only where GST is applicable. For goods and services where GST is not applicable, these indirect taxes are still applicable as per the tax laws.
3) The third wheel of GST is Integrated GST, as explained below:
Integrated Goods and Services Tax or IGST is applicable on the transaction of goods that happen inter-state. This means that if a product for instance, a car, is manufactured in Tamil Nadu and sold in Delhi, Integrated GST will be applicable.
IGST is collected by the central government and benefits the central and the state government, both.
4) The last type of GST is UT-GST or Union Territory GST. It is levied on all intra-state supply of goods and services at the applicable rates not exceeding 20%.
UTGST is applicable to:
- Andaman & Nicobar Islands
- Daman & Diu
- Dadra & Nagar Haveli
- or other territory
Earlier, there was a long list of indirect taxes such as service tax, purchase tax, State VAT and entertainment tax. With the implementation of GST on 1st July 2017, most of the indirect taxes, along were subsumed into GST. Let’s learn about it these in our next section.
Indirect Taxes Merged (Included) into GST
At the Central level:
- Central Excise Duty
- Additional Excise Duty
- Service Tax
- Additional Customs Duty
- Special Additional Duty of Customs
At the State level:
- State VAT/ Sales Tax
- Entertainment Tax*
- Central Tax (which is levied at the Centre but collected by the States)
- Purchase Tax
- Luxury Tax
- Octroi & Entry Tax
- Taxes levied on lottery, betting and gambling (legal)
Please note that it doesn’t meant that with GST the above-stated indirect taxes do not exist anymore. They do exist but are not separately applicable – these are now simply included in the gambit of GST.
Also, it should be noted that not all goods and services are included in GST. Products like petrol, diesel and electricity are outside the GST periphery.
Basics of Indirect Taxes in India
GST Registration is PAN based and state specific. This means that the supplier has to furnish their PAN and then register in each of the states where they supply goods/services.
To get the GST benefit, logically every supplier must be registered under GST. The below mentioned suppliers are not mandatorily required to register for GST:
Small businesses with all India aggregate turnover of:
- less than Rs 40 lakh (in case of exclusive supply of goods)
- less than Rs 20 lakh for businesses in north-eastern states
- less than Rs 20 lakh for businesses Puducherry, Telangana and Uttarakhand
- less than Rs 20 lakhs in case of services or mixed supply of goods & services
That said, if someone wants to register as a supplier in GST Network irrespective of their annual turnover, they can do so.
Why Should You Register as Supplier under GSTN?
When someone registers for GST, they are legally recognised as a supplier of goods and/or services in India and get authorised to collect taxes from their customers.
Also, a GST registered supplier can claim input tax credit and avail lower their tax liability on their purchases.
GSTIN – GST Identification Number
The full form of GSTIN is Goods and Services Tax Identification Number. This is a unique 15-digit number which is generated when someone registers as a supplier under the GST Network. If you know the GSTIN of a business, you can know their legal name, date of registration and other public details using the “Search Tax Payer” tool in the GST official website.
Goods and Services Tax (GST): FAQs
GST full form – Goods and Services Tax.
GST meaning: Any tax levied on goods and services except for consumable liquor is called as Goods and Services Tax in India. This is an indirect tax and is applicable across the nation.
1st July of every year is marked as GST Day in India – the day when GST was fully imposed in India.
GST return can only be submitted online. There is no other way to file your GST return. The website for GST return in GSTN or GST Network.
GST came into full effect on 1st July 2017 in India.
Yes. GST is applicable across the nation.18% and 28%.
Types of GST: State GST (levied & collected by the State Govt.), Central GST (levied & collected by the Central Govt.) and Integrated GST (shared by the Centre and State both).
No. GST is not applicable on petrol, diesel, natural gas, etc.
Integrated GST is a destination-based indirect tax which comes under the purview of GST. IGST is levied when there’s an inter-state movement of goods or services. IGST is collected by the Centre but benefits Centre and the destination State, equally.
GST is not applicable when alcohol is not served in packed bottles. If you’re ordering, for example, a glass of whiskey or rum, you’ll be charged with VAT and bot GST. The same goes for petrol.