Facts on GST

Submitted By : Amartya Mukherjee (Department of BBA, Batch :2017-2020)

GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017. The Act came into effect on 1st July 2017.

  1. What is GST?

Goods & Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.

In simple words, Goods and Service Tax is an indirect tax levied on the supply of goods and services. GST Law has replaced many indirect tax laws that previously existed in India.

GST is one indirect tax for the entire country.

  1. Journey of GST in India

The GST journey began in the year 2000 when a committee was set up to draft GST Law. It took 17 years from then for the Law to evolve. In 2017 the GST Bill was passed in the Lok Sabha and Rajya Sabha. On 1st July 2017 the GST Law came into force.

  1. Advantages of GST Advantages

1.GST eliminates the cascading effect of tax

GST is a comprehensive indirect tax that was designed to bring the indirect taxation under one umbrella. More importantly, it is going to eliminate the cascading effect of tax that was evident earlier.

Cascading tax effect can be best described as ‘Tax on Tax’. Let us take this example to understand what is Tax on Tax.

Example:

Non GST Regime

GST Regime

A manufacturer buys raw  materials of rupees 100.

A manufacturer buys raw  materials of rupees 100.(Inclusive of Rs 10 in Taxes

Add 30 rupees to make ready the dress. Now the value of the dress is (100+30)=130

Add 30 rupees to make ready the dress. Now the value of the dress is (100+30)=130

Assuming the rate of tax is 10%. Now the value the product is {130+(130*10%)}=130+13=143

Rs 13 can be offset against the tax paid on raw materials.

So, effective tax will be 13-10=3

The dress is sold to wholeseller at Rs.143

The dress is sold to wholeseller at Rs. 130 as there is no “tax on tax”

Wholeseller adds a margin of 20 rupees to this dress.Now the price of the product is 143+20=163

Wholeseller adds a margin of 20 rupees to this dress.Now the price of the  product is 130+20=150

Adding 10% tax. Now 163*10%=16.30

So, 163+16.30=179.30

@10% tax on 150

=15

Retailor buys the dress at rupees of 179.30

And adds his margin of Rs 10

Rs 15 will be offset against Rs13 tax paid earlier.GST incidence on the wholesaler will be Rs 2.

The value of the dress is 189.30

Adds Rs 10 margin

Add a tax of 10%=189.30*10%=18.93

Now the price is 160

So the final price is 189.30+18.93=208.23

10% tax on 160.

16 will be offset against Rs 15 tax paid earlier.

Now the price is 160+3+2+1=166

  1. Higher threshold for registration

Earlier, in the VAT structure, any business with a turnover of more than Rs 5 lakh (in most states) was liable to pay VAT. Please note that this limit differed state-wise. Also, service tax was exempted for service providers with a turnover of less than Rs 10 lakh.

Under GST regime, however, this threshold has been increased to Rs 20 lakh, which exempts many small traders and service providers.

Let us look at this table below:

Tax

Threshold Limits

Excise

1.5 crores

VAT

5 lakhs in most states

Service Tax

10 lakhs

GST

20 lakhs (10 lakhs for NE states)
  1. Composition scheme for small businesses

Under GST, small businesses (with a turnover of Rs 20 to 75 lakh) can benefit as it gives an option to lower taxes by utilizing the Composition scheme. This move has brought down the tax and compliance burden on many small businesses.

  1. Simple and easy online procedure

The entire process of GST (from registration to filing returns) is made online, and it is super simple. This has been beneficial for start-ups especially, as they do not have to run from pillar to post to get different registrations such as VAT, excise, and service tax.

Our ClearTax GST software is already on a roll filing GST returns

  1. The number of compliances is lesser

Earlier, there was VAT and service tax, each of which had their own returns and compliances. Below table shows the same:

Under GST, however, there is just one, unified return to be filed. Therefore, the number of returns to be filed has come down. There are about 11 returns under GST, out of which 4 are basic returns which apply to all taxable persons under GST. The main GSTR-1 is manually populated and GSTR-2 and GSTR-3 will be auto-populated.

  1. Defined treatment for E-commerce operators

Earlier to GST regime, supplying goods through e-commerce sector was not defined. It had variable VAT laws. Let us look at this example:

Online websites (like Flipkart and Amazon) delivering to Uttar Pradesh had to file a VAT declaration and mention the registration number of the delivery truck. Tax authorities could sometimes seize goods if the documents were not produced.

 Again, these e-commerce brands were treated as facilitators or mediators by states like Kerala, Rajasthan, and West Bengal which did not require them to register for VAT.

All these differential treatments and confusing compliances have been removed under GST. For the first time, GST has clearly mapped out the provisions applicable to the e-commerce sector and since these are applicable all over India, there should be no complication regarding the inter-state movement of goods anymore.

Read a more detailed analysis of the impact of GST on e-commerce.

  1. Improved efficiency of logistics

Earlier, the logistics industry in India had to maintain multiple warehouses across states to avoid the current CST and state entry taxes on inter-state movement. These warehouses were forced to operate below their capacity, giving room to increased operating costs.

Under GST, however, these restrictions on inter-state movement of goods have been lessened.

As an outcome of GST, warehouse operators and e-commerce aggregators players have shown interest in setting up their warehouses at strategic locations such as Nagpur (which is the zero-mile city of India), instead of every other city on their delivery route.

Reduction in unnecessary logistics costs is already increasing profits for businesses involved in the supply of goods through transportation.

Visit here to read more about the impact of GST on logistics.

  1. Unorganized sector is regulated under GST

In the pre-GST era, it was often seen that certain industries in India like construction and textile were largely unregulated and unorganized.

Under GST, however, there are provisions for online compliances and payments, and for availing of input credit only when the supplier has accepted the amount. This has brought in accountability and regulation to these industries.

4.Disadvantages Of GST

1. Increased costs due to software purchase

Businesses have to either update their existing accounting or ERP software to GST-compliant one or buy a GST software so that they can keep their business going. But both the options lead to increased cost of software purchase and training of employees for an efficient utilization of the new billing software.

ClearTax is the first company in India to have launched a ready-to-use GST software called  GST software. The software is currently available for free for SMEs, helping them transition to GST smoothly. It has truly eased the pain of the people in so many ways.

2. Being GST-compliant

Small and medium-sized enterprises (SME) who have not yet signed for GST have to quickly grasp the nuances of the GST tax regime. They will have to issue GST-complaint invoices, be compliant to digital record-keeping, and of course, file timely returns. This means that the GST-complaint invoice issued must have mandatory details such as GSTIN, place of supply, HSN codes, and others.

This will help every business to issue GST-compliant invoices to their customers. These same invoices can then be used for return filing through the platform.

3. GST will mean an increase in operational costs

As we have already established that GST is changing the way how tax is paid, businesses will now have to employ tax professionals to be GST-complaint. This will gradually increase costs for small businesses as they will have to bear the additional cost of hiring experts.

Also, businesses will need to train their employees in GST compliance, further increasing their overhead expenses.

4. GST came into effect in the middle of the financial year

As GST was implemented on the 1st of July 2017, businesses followed the old tax structure for the first 3 months (April, May, and June), and GST for the rest of the financial year.

Businesses may find it hard to get adjusted to the new tax regime, and some of them are running these tax systems parallelly, resulting in confusion and compliance issues.

5. GST is an online taxation system

Unlike earlier, businesses are now switching from pen and paper invoicing and filing to online return filing and making payments. This might be tough for some smaller businesses to adapt to.

Cloud-based GST billing software like the GST Billing Software is definitely an answer to this problem. The process for return filing on GST is very simple. Business owners need to only upload their invoices, and the software will populate the return forms automatically with the information from the invoices. Any errors in invoices will be clearly identified by the software in real-time, thus increasing efficiency and timeliness.

6. SMEs will have a higher tax burden

Smaller businesses, especially in the manufacturing sector will face difficulties under GST. Earlier, only businesses whose turnover exceeded Rs 1.5 crore had to pay excise duty. But now any business whose turnover exceeds Rs 20 lakh will have to pay GST.

However, SMEs with a turnover upto Rs 75 lakh can opt for the composition scheme and pay only 1% tax on turnover in lieu of GST and enjoy lesser compliances. The catch though is these businesses will then not be able to claim any input tax credit. The decision to choose between higher taxes or the composition scheme (and thereby no ITC) will be a tough one for many SMEs.

  1. What are the components of GST?

There are 3 taxes applicable under GST: CGST, SGST & IGST.

    CGST: Collected by the Central Government on an intra-state sale (Eg: Within Maharashtra)

    SGST: Collected by the State Government on an intra-state sale (Eg: Within Maharashtra)

    IGST: Collected by the Central Government for inter-state sale (Eg: Maharashtra to Tamil Nadu)

Example:

Let us assume that a dealer in Gujrat had sold the goods to a dealer in Punjab worth Rs. 50,000. The GST rate is 18% comprising of only IGST.

In such case, the dealer has to charge Rs. 9,000 as IGST. This IGST revenue will go to the Central Government.

The same dealer sells goods to a consumer in Gujrat worth Rs. 50,000. The GST rate on the good is 12%. This rate comprises of CGST at 6% and SGST at 6%.

The dealer has to collect Rs. 6,000 as Goods and Service Tax. Rs. 3,000 will go to the Central Government and Rs. 3,000 will go to the Gujarat government as the sale is within the state.

  1. Tax Laws before GST

In the pre-GST regime, there were many indirect taxes levied by both state and center. States mainly collected taxes in the form of Value Added Tax (VAT). Every state had a different set of rules and regulations.

Interstate sale of goods was taxed by the Center. CST (Central State Tax) was applicable in case of interstate sale of goods.  Other than above there were many indirect taxes like entertainment tax, octroi and local tax that was levied by state and center.

This lead to a lot of overlapping of taxes levied by both state and center.

For example, when goods were manufactured and sold Excise Duty charged by the center was charged by the center. Over and above Excise Duty, VAT was also charged by the State. This lead to a tax on tax also known as cascading effect of taxes.

The following is the list of indirect taxes in the pre-GST regime:

    Central Excise Duty

    Duties of Excise

    Additional Duties of Excise

    Additional Duties of Customs

    Special Additional Duty of Customs

    State VAT

    Central Sales Tax

    Purchase Tax

    Luxury Tax

    Entertainment Tax

    Entry Tax

    Taxes on advertisements

    Taxes on lotteries, betting, and gambling

All these taxes have been replaced with Central GST, State GST, and Integrated GST.

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