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Basic Concepts of GST in India

As we all know that GST is coming in realty very soon. But I feel that there is a general lack of awareness about GST as a basic concept among the business owners who are primarily going to get effected by this law.

I am summarizing the basic concept of GST law to help general business owners a basic understanding about the upcoming tax structure of India.

The knowledge about the basic structure is a very important aspect of doing business in India. It is correctly said that GST is not a tax reform, in reality it is a business reform. All business segments, the SME’s, manufacturers, retailers, wholesalers, C & F Agents, contractors and many others who are going to get impacted by this major change in Indirect Tax Structure in India.

The Current Indirect Tax structure in India

The following is the current Indirect Tax structure in India.

Central Level Indirect Taxes State Level Indirect Taxes
– Central Excise Duty

– Basic Custom Duty

– Counter Vailing Duty (CVD)

– Special Additional Duty (SAD)

– Service Tax

– CST

– VAT

– Luxury Tax

– Entry Tax

– Octroi

– Entertainment Tax

– Purchase Tax

 

 

How current taxes are levied?

On import of goods Basic Custom Duty, CVC and SAD is levied

On Manufacturing of Goods, Central Excise Duty is levied

On Intra State (Within State) sale of goods, VAT is levied

On Inter State sale of goods CST is levied

On sale of services, Service Tax is levied

In various special cases, entry tax, Luxury tax, Entertainment Tax, Purchase tax etc are levied.

On which taxes input tax credit is available?

Out of above on following types of taxes, credit of input tax is available

All India Credit Availability Within State Credit availability
Central Excise

Service Tax

Within a State VAT

 

As you can see that out of the taxes levied by both centre and state, only on few taxes input tax credit is available. Thus the present system is generating a cascading effect on the cost of goods and services. Cascading effect means tax on tax. Tax element becomes a part of the cost of goods. The tax credit does not free flow on an all India basis.

What are the drawbacks of current tax structure?

  1. Cascading effect of taxes (Tax on Tax)
  2. No free flow of input tax credit on All India Basis
  3. Multiple Laws to follow if anyone wants an all India business
  4. Multiple categorization of goods in different states. One product may be taxed by a name in a state and by a different name in another state.
  5. Complexity of compliance

Now the main question, How GST will work in India?

Now, let’s understand the basic theme, the basic concept on which whole GST Law is framed. A normal business owner must only understand the basic concepts of the tax. If you can understand the basic concept, you can correctly comply with the Law. If you don’t understand the basic concept, you will make mistakes.

GST – “One Nation One Tax”

Government of India is rigorously promoting GST as “One Nation One Tax”.

This is correct to an extent.

GST will replace all major Indirect Taxes applicable in India.

GST will also make both the “Goods and Services” at par. Technically, there will be no difference between supply of Goods and supply of Services.

The date on which GST becomes applicable following taxes will no longer be charged in India.

Taxes that are going to end

  • Excise Duty
  • Service Tax
  • GST
  • CVC, SAD
  • VAT
  • Entry Tax
  • Luxury Tax
  • Purchase Tax
  • Entertainment tax

However, some taxes are still going to haunt you even after introduction of GST.

Taxes that are not going to end

  • Basic Custom Duty
  • Stamp Duty
  • Electricity Duty
  • State Excise Duty

 

GST – “One Nation One Tax” is also a “Myth”

Saying that GST is “One Nation One Tax” is also a myth. The complete story is “One Nation Four Taxes”. This is how it works.

Due to federal structure of Indian Constitution, the 4 layers of GST are introduced. This is done out of compulsion, not out of choice. Our constitution does not permit the concept of “One nation one Tax” as prevalent in most of the countries.

4 Layers of GST

  1. Central GST (CGST)
  2. Integrated GST (IGST)
  3. Union Territory GST (UGST)
  4. State GST (SGST)

Now let us discuss the 3 Basic Concepts of GST

The GST can be divided into following 3 basic concepts.

  1. What will be the taxable event?
  2. Which GST will be charged (CGST, IGST, UGST, SGST)?
  3. How input tax credit will flow under GST?

Basic Concept No. 1 : What will be the taxable event in GST?

In tax laws, taxable event is the time on which tax becomes due to the government.

For example;

In Excise, taxable event is manufacture of goods

In Service Tax, taxable event is provision of service

In VAT and CST, taxable event is Sale.

In GST, the taxable event will be “Supply”.

For GST, taxable event will be supply. You can supply either goods or services or both. There is no distinction whether you are a manufacturer, trader, retailer, wholesaler, contractor, job worker, principle, agent, depo, branch, head office, service provider, works contractor, consignor, consignee. You name any term, there will be no difference in levy of GST as long as the transaction is “Supply”.  If you are a supplier as per provisions of GST law, GST will be applicable.

Basic Concept No. 2 :  Which GST will be applicable?

For the purpose of GST concept, there will be 4 types of transactions.

  1. Import of goods and services
  2. Intra State supply of goods and services (Intra State means transaction between parties within a state)
  3. Inter State Supply of goods and services (Inter State means transaction between parties of two different states)
  4. Export of goods and services.

 

The above nature of transaction will determine which layer of GST will be applicable on a particular transaction.

Now please remember the following table.

Nature of Transaction Taxes Applicable

 

Import of Goods Basic Custom Duty and Integrated GST (IGST) will be applicable

 

Intra State Supply of Goods and Services Central GST(CGST) and State GST (SGST) will be applicable simultaneously

 

In case of Union Territories GST (UGST) will be applicable

 

Inter State supply of Goods and Services Integrated GST (IGST) will be applicable
Export of Goods and Services GST will not be applicable

 

 

Import of Goods

Basic Custom Duty and IGST will be applicable. As discussed above, the Basic Custom Duty is not going to end. This is also necessary to protect the interest of domestic industries. So in case of import of goods, the Basic Custom Duty and IGST will be charged.

Intra State Supply of Goods and Services

On all Intra State supply of Goods and Services, CGST and SGST will be charged simultaneously.

This will be a very new concept for most of the business owners. In the present tax structure, only excisable manufacturers charge dual taxes. The excisable manufacturers charge Central Excise Duty which is a Central Tax and also charge VAT/CST which is a State Tax.

In the GST regime, all the taxable persons, who are making Intra State supply of goods and services will charge both CGST and SGST on the same value of goods and Services.

Let’s understand it with the help of an example.

Case of a Trader

PRE GST POST GST
Value of Goods Rs. 10000/- Value of Goods Rs. 10000/-
VAT / CST  (@5%*) Rs. 500/- SGST  (@5%*) Rs. 500/-
Total Invoice Value Rs. 10500/- CGST (@5%*) Rs. 500/-
Total Invoice Value Rs. 11000/-

*Tax rates are assumed in both the examples.

Case of an Excisable Manufacturer

PRE GST POST GST
Value of Goods Rs. 10000/- Value of Goods Rs. 10000/-
Central Excise Duty (@12%*) Rs. 1200/- SGST  (@5%*) Rs. 500/-
Sub Total Rs. 11200/- CGST (@5%*) Rs. 500/-
VAT/CST (@5%*) Rs. 560/- Total Invoice Value Rs. 11000/-
Total Invoice Value Rs. 11760/-

*Tax rates are assumed in both the examples.

Please don’t judge the effect of GST on inflation by these examples. These are only given to provide an understanding on how the tax will be levied in GST regime.

You can see in above example, there is no difference in tax structure whether you are a trader or manufacturer. GST doesn’t differentiate the transactions by its nature.

Inter State Supply of Goods and Services

On all Inter State Supply of Goods and Services, Integrated GST (IGST) will be charged. The rates of IGST will be notified by the government on an all India basis. On a principle basis, the rate of IGST will be sum of rate of CGST and SGST.

Export of Goods and Services

In GST, exports are considered to be zero rated supplies and hence no GST will be levied on exports.

Basic Concept No. 3 :  How input tax credit will flow in GST?

Now the 3rd and the most important concept of the GST. This is the heart of the GST regime. Input Tax Credit.

Availability of Input Tax Credit

In GST regime, the input tax credit will be available on all Goods and Services which are used by the taxable person for “Furtherance Of His Business”. Certain exceptions will be there as per details given in actual law, but overall this is the thumb rule. For the first time in the history of Indian Taxation, a beautiful concept has been introduced. “Furtherance of Business”. All the goods and services used during the course of business will be eligible for input tax credit.

How input tax credit will be availed and utilised

As a business owner, you will be having 3 types of input tax credit available for use.

  1. Input tax credit of CGST or UGST
  2. Input tax credit of SGST
  3. Input tax credit of IGST

Now there are certain rules for utilising these input tax credit against your out put GST liability.

Again remember the following table

Type of Input Tax Credit How it will be utilised
Credit of CGST / UGST 1st with output liability of CGST/UGST

2nd if balance still available output liability of IGST

 

Credit of SGST 1st with output liability of SGST

2nd if balance still available output liability of IGST

 

Credit of IGST 1st with output liability of IGST

2nd if balance available with output liability of CGST

3rd if balance still available output liability of SGST

 

Special Notes – Input tax credit of SGST cannot be used for output liability of CGST

– Input tax credit of CGST cannot be used for output liability of SGST

 

Let’s understand this with following examples;

Case – 1 You are a businessman who procures goods from within the state and also sell goods within a state On goods and services procured by you locally, you will be claiming CGST and SGST input tax credit.

On goods sold by you locally, you will be charging CGST and SGST on your sales

You can utilise the input tax credit of CGST & SGST available with you on goods and services procured by you with the output GST liability of your sales.

Case – 2 You run a business who procures goods from another state and sell goods within a state On goods and services procured by you from another state, you will be claiming IGST input tax credit.

On goods sold by you locally, you will be charging CGST and SGST on your sales.

You can utilise the input tax credit of IGST available with you on goods and services procured by you with the output GST liability on your sales.

Case – 3 You run a business who procures goods locally within a state and sell goods to another state On goods and services procured by you locally from within a state, you will be claiming CGST and SGST input tax credit.

On goods sold by you to another state, you will be charging IGST on your sales.

You can utilise the input tax credit of both CGST and SGST in your output tax liability of IGST on your sales.

Case – 4 You run a business who procures goods from another state and also sell goods to another state On goods and services procured by you from another state, you will be claiming IGST input tax credit.

On goods sold by you to another state, you will be charging IGST on your sales.

You can use the input tax credit of IGST available with you in your output tax liability of IGST on your sales.

 

As you can see from the above examples, the input tax credit flows freely in GST regime from one party to another party. IGST is the connecting link, a bridge between the states to pass on the input tax credit to another state. The major drawback of the present taxation system has been addressed by this new concept called IGST.

Now let’s discuss the bonanza, the general business owners will get in the GST regime.

This bonanza is “Availability of input tax credit” on all goods and services which are used for furtherance of business.

In the PRE GST REGIME in general following input tax is available.

Nature of Business Available input tax Credit Non available input tax credit Conditions attached
Manufacturer – CENVAT and VAT on Raw Material

– CENVAT and VAT on Semi Finished goods

– CENVAT and VAT on Capital Goods

– CENVAT on services

– CENVAT and VAT on other items used in business which are not covered in Raw Material, processing materials etc.

 

– Items on which input tax credit is claimed must be used for manufacturing of end product.
Trader – VAT on trading goods – CENVAT on trading goods

– Service Tax on input Services

– CENVAT and VAT on capital goods used for business

– CENVAT and VAT on other business expenditures

Service Provider – Service Tax on input Services

– CENVAT on Capital Goods

– VAT on Capital Goods

– CENVAT and VAT on other business expenditure

– Input service must be used for provision of output service

 

In the POST GST REGIME in general following input tax will be available.

Nature of Business Available input tax Credit Non available input tax credit Conditions attached
Manufacturer – Input tax on raw materials, processing materials and semi finished goods.

– Input tax on capital goods

– Input tax on input services

– Input tax on all goods and services used for the furtherance of business

– Input tax on goods and services used for non business purpose.

– Exceptional items as specified in the law.

– Goods and services on which input tax credit is claimed must be used for furtherance of business
Trader – Input tax on trading goods

– Input tax on capital goods

– Input tax on input services

– Input tax on all goods and services used for furtherance of business

– Input tax on goods and services used for non business purpose.

– Exceptional items as specified in the law.

– Goods and services on which input tax credit is claimed must be used for furtherance of business
Service Provider – Input tax on input services

– Input tax on capital goods

– Input tax on all goods and services used for furtherance of business

– Input tax on goods and services used for non business purpose.

– Exceptional items as specified in the law.

– Goods and services on which input tax credit is claimed must be used for furtherance of business

 

As you can see from the above table that primary conditions for taking Input Tax Credit in the GST regime is that such goods or services must be used for the purpose of “Furtherance of Business”. Which means that in GST regime a business owner will be able to get credit of GST paid by him in the course of his business unilaterally across the board.

Just think about the impact that it is going to create for the business owner.

For Manufacturers

– All the taxes which you pay for the business on purchase of various materials, repairs & maintenance items, various services on which credit is currently denied, will be available to you.

For Traders

– You will be getting credit of most of the capital goods i.e. Furniture, Equipment, Air Conditioners, on which you are not getting any input in the current system

– You will be getting credit of all the tax paid on services consumed by you.

For Service Providers

– You will be getting credit of the goods procured by you for your business, on which you are not getting any input in the current system

– You will be getting credit of most of the capital goods i.e. Furniture, Equipment, Air Conditioners, on which you are not getting any input in the current system

You can easily identify the impact the GST is going to create on your business. It is very important to understand these basic concepts of GST and you yourself can assess the impact GST is going to do on your business.

 

Amit Mundhra FCA

The author is a fellow member of ICAI and he can be reached at amit.mundhra@gmail.com

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8 Responsesso far.

  1. Gopal Rathi says:

    Very well explain and Kindly again given example for further better understanding input tax credit

  2. Ankit jain says:

    Great job..
    Nice summary on gst for business people or non professional, thanks to writer, keep the good jobs up.

  3. Hardik says:

    Very good information given with easy examples.Great job

  4. nainesh mishra says:

    very clear understanding .thanks a lot sir

  5. Karan kurra says:

    Great

  6. DHARMESH says:

    Traders excise credit avable in books of a/c. GST

  7. PANKAJ KUMAR SHARMA says:

    VERY CLEARLY UNDERSTANDING.. THANK YOU SIR

  8. SONAL says:

    VERY NICE SUMMARY ON GST

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