GST is touted as one of the biggest tax reforms of independent India. In my opinion, GST is in fact “The biggest tax reform“. GST is 101st Constitutional Amendment Act. Before GST, the State and Centre Govt. were levying separate taxes i.e. taxation powers were demarcated. For example, Service Tax was levied by the Centre Govt. and the VAT was levied by the State Govt.
The Goods and Services Tax allow State and Centre Govt. to levy the unified tax. All the state and Centre Govt. taxes like excise duty, VAT, Service Tax, entertainment tax, entry tax, sales tax etc are merged into one i.e. Goods and Services Tax. In short, GST will replace 17 indirect taxes. Currently, two products are outside GST preview i.e. Alcohol (Only for human consumption) and Petroleum.
GST – Basic Framework
In layman terms, GST mean One Nation One Tax though in current form/structure it is not 100% correct. Maybe gradually we will move towards more simplified tax structure in future. With the diverse country like India, It is not that easy to implement unified tax framework. Still, it is commendable job to restrict the no of levies to only three i.e.
- Central GST (CGST): Centre Govt. will levy on supply of goods and services within a state
- State GST (SGST): State Govt. will levy on the supply of goods and services within a state. The SGST bill will be passed by the respective State Govt. and it will be similar to CGST Bill.
- Integrated GST (IGST): Centre Govt. will levy on the inter-state supply of goods and services. IGST will also be levied on (i) imports and exports & (ii) Supplies to and fro from SEZ’s i.e. Special Economic Zones.
Here 3 important points to be noted are
(a) For a specific Good or Services, IGST should be equal to the sum of CGST and SGST. For example, for product A, assuming SGST is 12% and CGST is 6% for supply within a state. In this case for inter-state supply, IGST will be 18%. The consuming state will get 12% share from the IGST and 6% i.e. equivalent to CGST will be retained by the Centre.
(b) IGST will be levied by the Centre Govt. and will be apportioned to the state where the Good or Service is consumed. Therefore, in my opinion, consumption-oriented states like UP, MP, Rajasthan etc will benefit more from GST compared to manufacturing states like Tamil Nadu, Maharashtra, Gujarat etc.
(c) The liability to pay GST on goods and services will be at the time of issue of invoice or receipt of payment, whichever is earlier.
GST – Tax Rates
The tax rates are also referred as RNR i.e. Revenue Neutral Rate. It’s a 3 tier structure
(a) 12% – Lower Rate for items consumed by poor people
(b) 18% – Standard Rate. It will cover most of the goods and services
(c) 40% – Demerit Rate. This Rate is for luxury items basically to tax the rich people
As i mentioned earlier, the slab based structure defeat the whole purpose. The GST means one nation one tax rate for all the goods and services. In the original GST proposal, it was proposed to tax all the goods and services at a unified rate of 12%.
You may also note that
(i) There is a maximum limit of 20% on CGST and SGST so that CGST + SGST should not exceed 40%. Similarly, there is a maximum limit of 40% on IGST.
(ii) An additional cess can be levied on goods and services to compensate for state revenue loss.
(iii) CGST has a provision to levy composition levy i.e. a flat rate on turnover for taxpayers with less than 50 Lakh turnover. The composition levy is capped at 2.5%. It will be beneficial for small businesses.
Please Read: GST – How it will affect your monthly budget
GST – Supply of Goods and Services
As a layman, it is important to understand the concept of supply of goods and services. Earlier, the goods and services were taxed at the origin (Supply) but under GST, the taxability will shift to the destination (Consumption).
(i) Place of supply of Goods: Here by Place means the State. In the case of physical movement of the goods, the final destination of the goods or where the good is received by the recipient will be the place of supply of goods. For example, a product is dispatched from Punjab to Tamil Nadu. In this case, the place of supply of goods is Tamil Nadu.
(ii) Place of supply of Services: This section is tricky. The place of supply of services will depend on the nature of the service. For example, place of supply of services for interior designer will be the location of immovable property. Therefore, if I am interior designer based out of Mumbai and providing services in Hyderabad. In this case, place of supply of service will be Hyderabad. It might be an operational nightmare for me. The reason being under GST i need to register at both the places.
GST – Six Important Points
1. If your turnover is more than 20 Lakh then you have to register under GST. For special category states like Himalayan and NE states, this limit is 10 Lakh.
2. Please note that you have to register in each state separately in which you conduct the business. I explained this in Place of supply of services example.
3. If you are engaged in multiple business verticals in a state then multiple registrations are required. For example, if I operate 3 businesses in 5 states then total 15 registrations are required. In short, separate registration for each business per state.
4. Under GST, you need to self-assess and file monthly returns besides annual return.
5. Input tax credit: Assuming a taxpayer has to pay a GST of Rs 5,000 on output. The supplier of the raw material already paid GST of Rs 4,000 on input. In this case, the taxpayer needs to pay only Rs 1,000 as GST and can take credit for taxes already paid. The only exceptions are
(a) Vehicle purchase for personal use
(b) Supply of food, health services etc provided they are not used to make further supply
6. Compliance Rating Score: Every taxpayer will be assigned a GST compliance rating based on the past track record of compliance with provisions of the GST. It will be available in the public domain. Therefore, if I am covered under GST then anyone can check my compliance rating score.
Benefits of GST
In opinion, the major benefits of GST are
1. Ease of Doing Business: Current tax structure is too complex for businesses. For example, there are 17 indirect taxes or the VAT Rate is different for each state. Though the GST will not eliminate 100% anomaly due to slab based tax rates but still it helps in streamlining to large extent.
2. Improved Tax Compliance: Today how many of us get a bill from neighborhood Kirana store or flea markets. It causes huge revenue loss to the Govt. The Goods and Services Tax will improve tax collection. The reason being, to claim input tax credit, everyone will start demanding the invoice or payment receipt.
For example, if I am a taxpayer and before implementation of Goods and Services Tax, I was not insisting on invoice or payment receipts. The reason being there was NO INCENTIVE for me. GST is major tax change. There is a 360-degree shift in point of taxation i.e. from the origin (supply) to the destination (consumption) therefore to claim input tax credit even the last mile will demand invoice/payment receipt. In case any taxpayer will decide not to claim input tax credit then he/she has to bear the loss equivalent to GST on input. Therefore, GST will drastically improve tax compliance.
3. Beneficial for small businesses: From various initiatives taken by the Govt. on the tax front, it seems that the focus of Govt. is on taxpayer earning more than 50 Lakh rather small businesses. This no of “50 Lakh” is very crucial and I come across this figure multiple times. For example
(a) Taxpayer earning more than 50 Lakh has to declare net worth
(b) Taxpayer with turnover of less than 50 Lakh can take advantage of composition levy that is capped at 2.5%
(c) Professionals with gross receipts of less than 50 Lakh can take benefit of presumptive taxation scheme i.e. they can consider 50% as income/profit and pay income tax
Therefore, the whole objective is to bring big fishes into the tax net. It seems that Govt. feel that non-tax compliance issues/instances in case of small businesses are less.
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