GST-Introduction, Applicability, Benefits, and Components

Introduction to GST

Goods and Service Tax introduced by the government of India is a comprehensive indirect tax policy for several Indirect Taxes in India. GST came into existence from 1 July 2017 with the concept of ‘One Nation One Tax’.  GST is an indirect tax applicable to the supply of goods and services. This tax regime has surpassed several policies to become the best tax collection policy in India.

As per the GST regime, tax is imposed at every point of sale. Like for sales within state premises, Central and State GST is charged and for sales outside state premises, integrated GST is charged.

Let’s begin with the main mechanism of GST:

How does the GST work?

GST is a 'comprehensive tax' that is imposed at ‘multiple stages’ and is charged as per the 'destination of the consumer'. It adds to the value of the product.

Multiple Stages

Several steps are involved from making to delivering the end product to the consumers. Like buying raw materials, producing the item, storing/preserving the item in the warehouse, selling it to the wholesaler, wholesaler selling it to the retailer and retailer giving it to the consumer.    

At every step, GST is levied and that is why it is a multi-stage tax policy. 

Adding on to the Value of Product

Let’s take up an instance, a biscuit is made up of flour, sugar, etc., the value of the end product i.e.biscuits enhances if the sugar and flour are mixed together and converted into the biscuits. 

The biscuits are then sold in huge quantities to the warehouse agent who labels under his own brand name. Then the warehouse sells the biscuits to the retailer (brand name is an add on to the value after which the product is sold to the retailer). 

The retailer then invests his time and resources in the marketing of those biscuits and ultimately gets the potential buyers (consumers) for purchasing the biscuits (this is another add on to the value of the product as the retailer has invested in the marketing of the product).

GST is imposed with every step of progress, i.e. the money is added with each phase until the final product reaches the consumer who is the ultimate chain breaker.  

Consumer Based

If the product manufactured in Rajasthan is sold to the end-consumer in Maharashtra then the Goods and Service Tax shall be levied at the consumer’s side and the revenue will go to Maharashtra, not Rajasthan. 

GST - Case Study

The idea of GST was taken up in 2000 when the committee was set up to design the framework of GST laws and their applicability. Finally, in 2017, the GST bill was passed in Lok Sabha and Rajya Sabha. Then it was on 1 July 2017, the law was legally incorporated in the constitution of India as an Indirect Tax Collection Mechanism. The law was effective in every state of the country.

GST - Benefits

• Eliminated the Cascading effect - Cascading of Tax or taking ‘tax on tax’. With the elimination of cascading affect the cost of goods received by the consumer has decreased.  GST does not follow the policy of tax on tax, the end product is much cheaper with no compromise in quality. 

• No Face to Face Interaction - GST has reduced the need for taxpayers to go to the office for every simple compliance. A full-fledged digital mechanism that allows everything from Gen GST return filing and billing software to apply for refund or reply of any tax-related notice, etc. through an integrated GST Online Portal. Single Window Solution for any tax compliance. 

GST - Components

There are three taxes applied under GST:

• CGST - Tax is collected by the Central Government. Central Goods and Service Tax, is applicable to the invoice of sales taking place within the state premises.    

• SGST - Tax is collected by the State Government. State Goods and Service Tax is applicable to the invoice of sales taking place within the premises of the state. 

• IGST - Tax is collected by the Central Government. IGST is applicable for inter-state invoices (like a supply of any goods from Rajasthan to Maharashtra). 

Read Also: Major Tax Updates Regarding GST Dues, Tea Exports & More

For Instance:

If a supplier in Punjab sells the goods worth Rs. 50,000 to the consumer in Gujarat. IGST will be applicable to such supply.  IGST on such sales will be 18%. 18% of 50,000 is 9000. The supplier has to collect 9000. The amount will ultimately be credited to the Central Government. 

On the contrary, if the supplier in Punjab sells the goods worth Rs. 50,000 to the purchaser from Punjab itself. GST on goods will be 12%. That will be shared among the Centre and State (6% CGST and 6% SGST).

The supplier has to collect Rs. 6000 as tax from which Rs. 3000 will go to the Central Government and Rs. 3000 to the State Government.