Basic Introduction to GST in India Explained with example

Basic Introduction to GST in India Explained with example

Basic Introduction to GST in India Explained with example

Basic Introduction to GST in India Explained with example

The Goods and Services Tax (GST) is one of the most significant tax reforms implemented in India on July 1, 2017. It is a value-added tax, which means that the tax is only paid on the value added during the manufacturing process. GST can also be defined as a destination-based tax, where the tax is collected at the point of ultimate consumption.

Why was GST introduced into the system?

There are various taxes that must be paid at each stage, which are collected differently by the state and central governments, and their rates vary from one state to the other state.

India is a legal country with 30 different taxation laws.

  • Almost every state had a different tax regime, causing confusion and procedural gaps in the taxation structure.
  • The flow of tax credit was restricted, and a tax on tax was imposed.

When we talk about GST, it will include all taxes, making it easier to provide services and goods across the country because no additional state taxes will be imposed.

How Will GST Aid?

  • The tax structure will be simplified, with multiple taxes reduced to a single tax structure.
  • Tax revenue will increase.
  • Simple tax payment and filing
  • Tax evasion has been reduced.

Who is required to comply with GST?  

  • A person who supplies goods and/or services worth more than INR 20 lakh in a fiscal year.
  • To anyone who makes an interstate taxable supply of goods or services.
  • E-commerce operator
  • Person who supplies goods and/or services other than branded services via e-commerce operator
  • Non-Resident Taxable Person
  • Person required to deduct/collect tax (TDS/TCS)
  • Input Service Distributor
  • Person required to pay tax under Reverse Charge
  • Person supplying goods on behalf of another taxable person (e.g. Agent)

Who is exempt from GST compliance?

  • Agriculturists
  • Persons who are solely engaged in the business of supplying goods and/or services that are not taxable or are entirely exempt from tax under this Act

How does GST Function?

Before a product reaches the end user, it must passthrough several stages, and several taxes must be paid at each stage. However,under the GST regime, this situation will change. Here's an example to help you understand:

Stage 1: Manufacturing

Consider shirt manufacturing and the applicable GST rate of 10%. The manufacturer purchases materials worth INR 5000, which includes INR 500 in GST (10 percent of 5000). He then adds INR 500 to the materials, bringing the total gross value of the product to INR 5500.

Now, the total tax on the output of the Shirt is INR 550(10 percent of 5500). The manufacturer would be required to pay a tax of INR550 under the current tax system; however, under GST, he can set some of his tax off because he already paid it when purchasing the raw materials. As a result, the final GST to be paid will be INR 50 (550-500) (total tax amount minus tax already paid)

Stage 2: Wholesale

The shirt is transferred from the manufacturer to the wholesaler at a gross value of INR 5500, inclusive of GST. The wholesaler then adds his value (margin) of INR 500, for a total of INR 6000 (5500 + 500). This brings the total tax on the final bill to INR 600. (10 percent of 6000). The wholesaler can also deduct this tax amount, making the final GST payable for the wholesaler INR 50 (600 - 550).

Stage 3: Retailer

In this final step, the retailer purchases the shirt from the wholesaler for INR 6000, inclusive of INR 600 in GST (10 percent of 6000).He then adds his INR 500 margin, bringing the total cost of the goods to INR 6500. The GST applicable in this case is INR 650 (10% of 6500), but because the retailer already paid a tax when purchasing the goods, he can deduct it. As a result, the retailer's final GST incidence would be INR 50 (650 - 600).

Finally, because the retailer will sell at INR 6500, the customer will  pay INR 650 (10% of 6500).

Thus GST can be a win-win scenario that will benefit the entire value chain and make it easier for both businesses and consumers.

GST Most Important Component

In its Dual or concurrent model, the government has implemented GST. As a result, both the federal and state governments will levy GST at the same time. The implemented GST structure is divided into four sections, namely -

  • IGST - Integrated Goods and Services Tax - A tax levied by the Central Government on both intrastate and interstate supplies of goods and services.
  • CGST - Central Goods and Services Tax - Tax levied by the Central Government on intrastate supplies of both goods and services.
  • SGST - State Goods and Services Tax - A tax levied by the state government on intrastate supplies of both goods and services.
  • UGST - Union Territory Goods and Service Tax - Tax levied by the Government of Union Territory on intrastate supplies of both goods and services.

Nobody knows whether it makes products cheaper for ordinary people like you and me. However, this will have an impact on our lives, our businesses, and the overall economic environment.

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