GST 101 - Introduction & Advantages of GST

By Ancita Gonsalves and Shaivin Shettigar

The taxation system as it is known today has always been present in history in one form or the other. The first written account of an organized taxation system dates back to Egypt around 3000 BC. Since then, they’ve always formed a major source of revenue for the governments. In this blog, we are going to give you an overview of GST in India (Goods and Services Tax) and describe the advantages of GST.

What is Tax?

Tax is often described as a compulsory financial charge or levy imposed on a legal entity or individual by the government to fund their various public expenditure activities. They are classified into two categories- Direct Taxes and Indirect Taxes. The former is levied on income or activities conducted by a person and paid directly by him as he cannot shift the burden of payment to another. For example- Income Tax, Property Tax, Wealth Tax, etc. Indirect Taxes, on the other hand, are levied on products and services. Though it is paid by one directly to the government, he recovers the same from another, i.e. customer. For example- Custom Duties, GST.

Origin of GST

The idea regarding the adoption of GST was first brought up in the year 2000 by the Atal Vajpayee Government. For the purpose of framing a Taxation Policy on Inter-State Supplies, Thresholds limits, and Exemptions, a committee was formed under the presidency of the Finance Minister of West Bengal, Mr. Asim Dasgupta with representatives from both Centre and States. In the Budget session of 2005-06, the then Finance Minister of India P. Chidambaram put forward a medium to long term goal of implementing a uniform tax structure called GST across the country.

Advantages of GST

The next year, it was announced that GST would be introduced from the Financial Year 2010-11. However, it missed the deadline and the idea died down until it gained momentum again in 2014. Later, the Constitution (122nd Amendment) Bill of 2014, was laid before the parliament and finally, on 8th September 2016, the bill was assented by the President. It became The Constitution (101st Amendment) Act 2016, which paved the way for the implementation of GST in India.

Drawbacks in Pre-GST Regime:

When GST was introduced on 1st July 2017, it absorbed various taxes that existed earlier. Central Taxes like Central Excise Duty, Service Tax, and State Taxes like VAT, Entertainment Tax, Luxury Tax, Taxes on betting, lottery, and gambling were all subsumed. So why was this tax reform introduced? The main reasons can be summarised as below

1. CENVAT credit and VAT credit could not be used interchangeably.
2. Multiple Taxes were levied on the same goods.
3. Difficulty in Returns filing as separate returns had to be filed under each law.
4. Confusion as to whether a transaction fell into the category of Good or Service and hence taxed under both leading to Double Taxation.
5. Intense competition among states to set lower tax rates to attract customers from other states.

In the Pre-GST era, Central Excise Duty was levied on Manufacture of goods by Central Govt while Central Sales Tax was levied on interstate sale of goods by Central Govt. On the other hand, Customs Duties were levied on the import & export of goods by the Centre. The Centre enjoyed the sole benefit of exclusively levying Service Tax. Only the power to levy and collect VAT was given to the State Govts.

Therefore, the benefit of Excise Duty Input Tax Credit (ITC) was available against Excise Duty & Service Tax. While the Service Tax ITC could be taken against both Excise Duty & Service Tax. On the other hand, ITC on State VAT could be set off only against the VAT of the same state. But the credit on Central Sales Tax was not allowed against any other Tax.

Advantages of GST:

India has adopted dual GST which is imposed both on State and Central simultaneously on goods & services supplied within the states while interstate supplies being taxed only by the Centre. The advantages of GST have been mentioned below.

1. The HSN – Harmonised System Nomenclature is used for classifying goods and SAC- Service Accounting Code is used for classifying services.
2. For the convenience of small businesses, an optional composition scheme is made available.
3. The GST system is primarily digital as regards to the registration, payment, and returns filing done through ‘GST Common Portal’. Check it out at www.gst.gov.in

GST Portal

4. GST has helped create a common national market by eliminating multiple taxes and double taxation.
5. GST offers a continuous chain of Tax Credits thereby reducing the burden of persons in the supply chain while reducing the overall price of the product.
6. Tobacco, Petroleum crude, Diesel, Petrol, Aviation fuel & Natural Gas are a few items on which GST will be applicable on a future date and Excise Duty & VAT still apply.
7. However, Alcohol and Liquors do not attract GST, only State Excise Duty is applicable.

GST Council:

To quote Article 279A of the Constitution of India, “The President is empowered to constitute a GST council”.

It is a joint forum of the Centre and State finance ministers (or any other nominated minister). The Union Finance Minister is its chairman. The council makes recommendations on tax rates, exemptions, Registration limits, etc. Every decision of the council is taken by a majority of at least 3/4th of the total members present. Also, to note that the Centre has a weightage of 1/3rd of the total votes and all States Govts together have a weightage of 2/3rd.

Goods and Services Tax Network:

GSTN was set up as a private company in 2013 by the Government. It offers front-end services of registration, payment, and returns to taxpayers. GSTN has identified 34 IT and Financial Technology companies and tagged them as GST Suvidha Providers (GSPs). These organisations will develop applications that will be used by taxpayers as they interact with GSTN.

Registration for GST:

Prior to GST, manufacturers were required to register under Central Excise as well as Service Tax Law. On the flip side, Service Providers were to be registered under Service Tax, while the Traders were required to register under VAT law and Central Sales Tax Act. These registrations were not linked to PAN except Central Excise and Service Tax.

Under the new Indirect Tax regime, every supplier of Goods and/or Services is required to obtain registration in the state or union territories from where he makes a taxable supply. However, registration is compulsory only if the aggregate turnover exceeds a certain threshold limit. Nevertheless, registration is required for claiming the benefit of Input Tax Credit, to collect taxes from customers, for payment of tax and filing of returns.

Today, the registrations are compulsorily linked to PAN and one registration is sufficient for all the three laws i.e., CGST, SGST & IGST. Also, a person having multiple places of business may obtain  separate registration in respect of each place of business.

Registration is compulsory in the case of – Interstate Suppliers, Non-Resident Taxable Person (NRTP), Casual Taxable Person (CTP), Person who supply goods on behalf of another Taxable Person (agent), Persons receiving supplies on which tax is payable on Reverse Charge basis and other persons notified by the Central and State Government. However, those persons engaged in supplying goods and services which are either exempted or not liable to tax and agriculturist who sells produce cultivated by him are not liable for registration.

Application for Registration:

A person who is liable to be registered under GST has to submit the application in the state or union territory he undertakes taxable supply within 30days from the date on which he becomes liable to registration. But, a CTP or a NRTP should apply for registration at least 5 days prior to the commencement of business.

Threshold Limits for Registration:

If the aggregate turnover in a financial year exceeds the following limits, registration is mandatory.

  1. States with Rs. 10 Lakhs for both goods & services: Manipur, Mizoram, Nagaland & Tripura.
  2. States with Rs. 20 lakhs for both goods & services: Arunachal Pradesh, Meghalaya, Sikkim, Uttarakhand & Tripura.
  3. States with Rs. 20 lakhs for services and Rs. 40 lakhs for goods: Jammu & Kashmir, Assam, Himachal Pradesh, and all other States.

The GST Portal can be accessed using the www.gst.gov.in. Around 30 forms/formats have been prescribed for application for registration, acknowledgment, query, rejection, registration certificate, show cause notice for cancellation, reply, etc.

Thus, GST has been a revolution in the field of Indirect Taxation, successfully creating a scenario of “One Nation One Tax”.

About the Author:

Ancita Gonsalves and Shaivin Shettigar are both pursuing their dreams of being Chartered Accountants. They met working as Accountants at Market Bird and this is their very first blog.