The single biggest tax reform in the history of the nation has finally become a reality. Goods and Services Tax has become a matter of our lives for ever.
This overhaul of the country’s tax regime is believed to unify the entire population of 1.3 billion and the economy of the country worth US$ 2 trillion into one unified common market.
It’s no mean matter that GST is the topic of discussion for everyone. In a scenario where everyone has a comment on this subject, let us really understand the gist of the matter.
What is GST: GST is a destination based tax which means that the tax is collected at the time of sale of the product or service. It follows a multi-stage taxation mechanism where tax is to be paid at every stage of sale. Irrespective of the destination across the country, the tax rate on the particular product or service remains the same.
Input Tax Credit: To eliminate the cascading impact of tax, i.e. the tax-on-tax, the tax paid at the previous stage is available as credit for set off at the next stage. The seller needs to pay the tax collected from his buyer after taking input credit of the tax paid by him to his seller, the benefit of which will be passed on by him to his customer. What is means as a benefit to the end consumer of the product or service is that he will bear the GST charged only at the last stage in the supply chain.
Anti-profiteering mechanism: The million dollar question which passes every mind is whether the seller will honestly pass on the benefit of the input tax credit to the buyer so that the final consumer is required to bear the tax burden of only the last stage. To ensure that it is done, an anti-profiteering clause has been provided in the Act which makes it mandatory to pass on the benefit of the tax reduction due to input tax credit to the final consumer.
GST Tariff: The tariff varies from different products and services and has been classified into broadly four tax rates, 5%, 12%, 18% and 28%. While almost all types of services fall under the blanket classification of 18%, some essential goods and services have been exempted while specified luxury and sin goods attract the highest rate with an additional cess over and above the specified rate. A separate tax rate of 3% has been specified for precious metals like gold.
Registration and payment of Tax: Any person carrying on business with an annual turnover of above INR 20 lakhs needs to register under GST and pay the taxes and file returns. The turnover ceiling is INR 10 lakhs for a few special category states. An optional composition scheme allowing payment of tax at a flat rate without input credit is also available to some kind of businesses having an annual turnover of up to INR 75 lakhs.
Reverse Charge Mechanism: With the exemption from registration granted to businesses having turnover less than the ceiling limit, it does not mean that their turnover is exempt from GST. Instead of the seller of the goods or services being put through the hassle of registration and filing of returns, the GST on transactions with such persons shall be the responsibility of the buyer of the goods or services.
Inventory in transition: Understanding that it wasn’t practically possible to dispose all the stock bought under the earlier tax regime before the GST roll-out, the sellers of goods (not applicable to services) have been allowed to set off up to 60% of the input tax paid by them under the old tax regime for a period of 90 days.
The Jargon: CGST, SGST, IGST; the different types of GST levied is not that confusing as it sounds. Tax levied by the Central Government is called the Central GST (CGST), that levied by the State Governments and Union Territories is called the State GST (SGST) and that levied on inter-state supply is called the Integrated GST (IGST).
Imports: Import of goods and services from out of the country will be treated as inter-state supplies and would be subject to IGST. An important thing to be noted here is that IGST would be in addition to the applicable customs duty which has been retained and not brought under the ambit of GST.
Exports: Exports are considered to be zero-rated supplies. Treated at par with those goods and services which are subject to nil rate of GST, export of goods and services shall not attract any tax. Since there is no tax payable on their sale; exporters can claim the input tax credit as a refund.
Stock Transfers: Stock transfers, i.e. movement of goods from one location to another location in the country of the same seller without actually selling the goods to a buyer was exempt from payment of tax in the earlier regime by furnishing certain documentation. However, under GST, such stock transfers will also attract tax thus reducing the paperwork. This does not mean any loss to the businessman since the entire input tax credit can be availed.
Not joining the party: Apart from customs duty still being retained, some goods have still not been brought under the ambit of GST. The GST council will take a decision on these products at a later stage and till then petroleum products like petrol, diesel and ATF will attract separate tax. For the tipplers, the sad news is that even liquor has been kept outside the purview of GST due to a constitutional requirement.
Single window assessment: The administrative control of 90% of taxpayers having turnover of less than INR 1.50 crores will vest with the state governments and the remaining 10% with the central government. For those having turnover above INR 1.50 crores, it will be divided equally between the central and state governments. Any loss of revenue to the state governments will be compensated by the central government for a period of 5 years.
GST Council: All decision making authority vests with the council which will be headed by the Union Finance minister and having the finance ministers of all the states as its members, decision to be taken with 75% majority. All states put together will have 2/3rd weightage of the votes cast while the centre will have 1/3rd weightage which makes it necessary to have the Centre and at least 20 states to approve a decision to implement it as a law.
GiST of the matter:
It is believed that the implementation of GST shall add around 0.4% to 2% to the nation’s GDP growth. Let’s wait and watch as how this transition into a single, nationwide tax on goods and services will streamline business and boost the economy by breaking down the geographical barriers between the 31 states and Union territories.
As for now, let us break down our barrier of misconception and embrace GST as part of our lives henceforth.