GST 101- definition, Terms, Framework & how it Works

GST is the acronym for Goods & Services Tax. It is a form of indirect tax that will combine the different taxes charged by the State and Central government into one comprehensive Tax. GST has been introduced under 122^nd amendment of the Indian Constitution as “The Constitution Act 2017”. The GST Council, chaired by current Union Finance Minister Arun Jaitley, has been bestowed with the governance of GST. It has been  officially launched all across India on July 1  by our honorary PM Narendra Modi online trademark registration .

What is GST?

GST can be defined as a comprehensive, indirect, multi-stage & destination-based tax which would be implemented on each value addition. Under the new tax act, goods & services would be taxed at different rates i.e. – 0 percent, 5 percent, 12 percent, 18 percent and 28 percent. 0.25 percent would be levied on rough semi-precious & precious stones. 3 percent GST would be implied on gold. GST would be applicable to all the businesses, irrespective of size and industry.

GST will combine all these following taxes-

• Commercial Tax
• Central Excise Duty
• VAT or Value Added Tax
• CST or Central Sales Tax
• Food Tax
• Octroi
• Entry Tax
• Entertainment Tax
• Luxury Tax
• Purchase Tax
• Advertisement Tax

Major terms related to GST-

• GST– Goods & Services Tax.
• Indirect Tax- the tax whose liability is shared with others.
• Multi-stage tax– Tax that applies to each stage of value addition i.e., right from manufacturing to final sale.
• Destination-based tax– GST framework would vary between inter-state and intra-state level transactions.
• CGST– The acronym for Central Goods & Services Tax. In this case, it’s the Central government which will collect the revenue.
• SGST– The acronym for State Goods & Services Tax. In this case, it’s the State government which will collect the revenue.
• IGST– The acronym for Integrated Goods & Services Tax. In this case, it’s the Central government which will collect the revenue for the inter-state sales.
• GST Compliance Rating– refund claims made under GST would be considered on the basis of merit. It would be processed depending on registered taxpayer’s compliance rating.
• GSTIN– It is the acronym for Goods & Services Tax Identification Number. It will be a unique 15 digit code that would be assigned to each businesses falling under GST regime.

GST has introduced two new terms:

• Mixed Supply– Two or multiple individual goods/services supplies, made together by taxable individual for single price. But each item here carries the capacity of being supplied and taxed separately.
• Composite supply-naturally grouped supply made of 2 or multiple goods or services. One would be the principal supply. Unlike mixed supply, the items do not carry the capacity of being supplied separately Immigration services Integrating highly skilled tax preparation with reliable and personalized service, Unidos Tax & Immigration Services helps Visalia residents achieve their financial goals...

GST Framework:

• India will practice dual GST framework
• CGST (Central Goods & Services Tax) & SGST (State Goods & Services Tax) would be levied at intra-state level transactions
• Only IGST (Integrated Goods & Services Tax) would be levied inter-state level transactions
• Exports & SEZ supplies would be zero-rated
• Imports would be processed as inter-state supply

How will GST work?

As we can see from the GST framework above, GST would comprise of 3 taxes- CGST, SGST and IGST.

Let’s see how the GST  structure  works and how would it differ from the existing tax structure:

• Intra-state sale

Existing taxation system

The taxation system for intra-state sale under existing taxation system comprises of VAT + Service Tax/Central Excise.

Under GST taxation

The taxation system for intra-state sale under GST taxation system would comprise of CGST + SGST.

Result

From  1^st July, revenue would be shared in between State and Center.

• Inter-state sale

Existing taxation system

The taxation system for inter-state sale under existing taxation system comprises of Central Sales Tax+ Service Tax/Excise.

Under GST taxation

The taxation system for inter-state sale under GST taxation system would comprise of IGST.

Result

From  1^st July, there would be just one single tax.

Let us check this with an example:

Say, an electronic goods dealer in West Bengal sold a high end speaker system to an individual consumer within the state at Rs. 10,000. The GST rate here would be 18%- 9% CGST & 9% SGST. The dealer will collect something like Rs. 1800, of which Rs. 900 would go to West Bengal government & the other Rs. 900 would go to Central government.

Now, let’s say he sold the same item to some dealer in Orissa at Rs. 10,000. GST rate would be 18% and the dealer here would collect something like Rs. 1800- but as IGST. The IGST would go straight to Center. No longer, he would have to pay both SGST & CGST.

Significance of GST implementation- Input Tax Credit

First of all, we must understand the framework of existing indirect tax structure in India. Since GST too is an indirect tax, the comparison would be easy to understand once you gather an idea about the existing  indirection taxation system in the country

As mentioned earlier (check GST Terms), Indirect Tax is the one where the tax liability is shared with others. It means, when a seller pays VAT, he passes on his VAT liability to his buyer. Thus, under the existing system, the customer needs to pay for the product he buys and also for VAT -so that the seller is able to submit his VAT to government. More precisely, added to price of the purchased item, the consumer shares seller’s tax liability as well, that altogether hikes up his overall buying price.

It’s because, the seller had to pay a tax while he purchased the item from wholesaler. To recover the tax & also the VAT that he would pay to government, the seller makes his consumer pay an additional amount. Under the existing taxation system, it’s the only way for this seller to recover the sum that he paid out of own pocket. Thus he passes the liability on to his buyer.

But GST would change the scene for better. It comes with the facility of Input Tax Credit that would permit a shopkeeper to claim tax paid to wholesaler. As a result, the burden of tax burden that he would share with his buyer would decrease.