Basics of Goods and Services Tax

What is GST?

Goods and Services Tax is known as GST.

It is an indirect taxation system that has replaced numerous indirect taxes in India like services tax, VAT, the excise duty, etc.

The Goods and Services Tax was passed in the Indian Parliament on March29th, 2017, and came into effect on July 1st, 2017.

In other words, GST (Goods and Service Tax) is levied on the supply of services and goods.

Goods and Services Tax (GST) Law in India is a destination-based, multi-stage, comprehensive tax levied on every value addition.

Now let’s discuss the definition of GST, as mentioned above in detail.

  • Multi-Stage- A product goes through multiple stages along its supply chain- Starting from the manufacturer himself to the customer’s final sale. 

Do consider the following stages-

  1. Raw materials purchased
  2. Manufacturing or production
  3. Warehousing of finished goods
  4. Selling to wholesalers
  5. Sale of the items to the retailers
  6. Purchase made to the end customers

Thus, GST is levied on each of the stages mentioned above, making it a multi stage tax system.

  • Value Addition- Consider a case of a manufacturer who produces biscuits. He/she has to buy sugar, flour, and other materials. The value of the inputs become more as the flour and sugar are mixed and baked into biscuits.

The manufacturing unit/ company sells these biscuits to the warehousing agents who pack large quantities of biscuits in big boxes and label them.

After this, the sale is made to the retailer by the warehousing agent.

The retailer then packages the biscuits in smaller units and invests in the marketing of the product.

Goods and Service Tax is levied and collected on the additions of value, i.e., the monetary value added at each step to attain the final sale to the end consumer.

  • Destination based- Now consider the case when the goods or the products are manufactured in Uttar Pradesh and sold to the final customer in Madhya Pradesh. The entire tax revenue collected goes to the state of Madhya Pradesh and not Uttar Pradesh as the Goods and Services Tax is levied at the point of end consumption.

Therefore, GST is a single domestic tax law for the whole nation.

Under the Goods and Service Tax, the tax is levied on every point of sale.

State GST and Central GST are charged in the case of intrastate sales.

All the interstate sales are chargeable to the Integrated Goods and Services Tax.

The Journey of GST in India

The Goods and Services Tax began its journey in India in 2000 when a committee was set up to draft the law about it.

From then, it took 17 years for the law to evolve.

In the year 2017, the Goods and Services Bill was passed in the Rajya Sabha and Lok Sabha.

On July 1st, 2017, the Goods and Services Law came into force in India. 

Constitutional Framework for GST

The Constitution contains the state list and the union list within which the power to levy separate taxes is given to the states and center, respectively.

Goods and Services Tax was to be levied so that both the states and the center received the power to collect and levy it.

Further, the legislation had to remain consistent across the various states, union territories, and the center legislatures.

To provide for this, an amendment in the Constitution was required.

Constitution (101st Amendment) Act, 2016

To suitably implement the Goods and Services Tax legislation, this Act resulted in the amendment, deletion, and insertion of the Constitution’s specific articles.

The following matters were dealt with as a result of changes:

  1. The way of giving compensation to states for loss of costs on account of the Goods and Services Tax
  2. The discontinuation of the existing taxes to provide a way for the Goods and Services Tax
  3. The duties, powers, and Constitution of the GST Council
  4. The way of appointment of costs from Goods and Services Tax among states and center
  5. The scope and the applicability of the GST law
  6. The delineation of powers to make laws and to levy them concerning GST

Article 246A: Special Provision for GST

This article was inserted to provide power to the respective center and union legislatures and the Parliament to make laws on Goods and Services Tax, respectively, imposed by them.

However, the Indian Parliament is given the exclusive power to make laws concerning interstate supplies.

The Integrated Goods and Services Tax deals with the inter-state supplies.

Thus, the power to make laws under the Integrated Goods and Services Tax Act will rest exclusively with the Indian Parliament.

Further, this article excludes the below-mentioned items from the scope of Goods and Services Tax until a date suggested by the Goods and Services Tax Council-

  1. Aviation Turbine Fuel
  2. Natural Gas
  3. Motor Spirit
  4. High-Speed Diesel
  5. Petroleum Crude

Article 269A: Collection and Levy of Goods and Services Tax for Inter-State Supply

While Article 246A gives the Parliament the exclusive power to implement inter-state supplies laws, the distribution of costs from such supplies between the state and center is covered in this article.

It also allows the Goods and Services Tax Council to formulate rules in this regard.

The import of services and goods will also be called as inter-state supplies.

This provides the center the power to levy Integrated Goods and Services Tax on import transactions.

The import of goods was subject to CVD (Countervailing Duty) in the earlier taxation scheme.

Integrated Goods and Services Tax levy helps a taxpayer to get the IGST credit paid on import along the supply chain, which was not possible earlier.

Article 279A: Goods and Services Tax Council

This article provides power to the president to constitute a joint forum of the states and the Goods and Services Tax Council center.

The Goods and Services Tax Council which is implemented by the Article 279A is the top member committee to procure, reconcile, or to modify any regulation or law based on the context of GST in India.

Article 286: Restrictions on Imposition of Tax

This was an existing article that restricted states from passing any law, which provides them to collect tax on purchase or sale of products either in import transactions or outside the state.

It was further amended to restrict the passing of legislationin case of services too. Further, the term ‘supply’ replaces ‘purchase or sale.’

Article 366: Addition of Important/ Essential Definitions

Article 366 was existing was an existing article which is amended to include the below-mentioneddefinitions-

  1. State and Union Territories with the legislature
  2. Services refer to anything other than products
  3. GST infers the tax on supply of services, goods, or both. It is essential to note that the supply of alcohol or liquor for human beings’ consumption is excluded from the purview of Goods and Services Tax.

Compensation to the states under Goods and Services Tax

This Act also has a provision to provide relief to the states on account of the decrease in revenues to the states arising due to the implementation of the Goods and Services Tax.

It has a validity of five years. The GST Act (Compensation to States) 2017 was born as a result.

What does the Seventh Schedule State?

The Seventh Schedule to article 246 contains three lists, which consists of the matters under which the state and the union governments can implement laws.

  1. List 1- Union List
  2. List 2- State List
  3. List 3- Concurrent List

GST Model- CGST, IGST, SGST, UTGST

To administer Goods and Services Tax in a nation like India, a model was designed to implement both States and Centre.

This is done because India is a federal nation. Here, both the states and the center have the powers to collect and levy taxes through their respective legislations.

Accordingly, a Dual Goods and Services Tax model was implemented to distribute and assign powers to both the states and the center to levy the charges concurrently.

And therefore, depending upon the nature of supply, components of the Goods and Services Tax are as follows-

  • Integrated GST (IGST)
  • Union Territory GST (UTGST)
  • State GST (SGST) and
  • Central GST (CGST)

CGST- Central Goods and Services Tax

CGST, or Central Goods and Services Tax, is an indirect tax collected and levied directly by India’s central government on the inter-state supplies.

Note- Such supplies do not include alcohol or liquor for the consumption of human beings.

The Central Goods and Services Tax levy is governed by the Central Goods and Services Act, 2017.

And such a tax is levied on the transaction value of the services and goods supplied as per section 15 of the Central Goods and Services Act, 2017.

The transaction value is the cost/ price payable or paid for the said supply of services and goods.

State Goods and Services Tax (SGST)

State Goods and Services Tax is an indirect tax collected and levied by the state governments on the intrastate supplies.

Note- Such supplies do not endorse alcohol or liquor for the consumption of human beings.

The State Goods and Services Tax is governed by the State Goods and Services Act 2017 or SGST 2017.

And this tax is levied on the transaction value of the services or goods supplied as per section 15 of the State Goods and Services Tax Act.

The transactionvalue is the cost or price, which is payable or paid for the said supply of services or goods.

Integrated State Goods and Services Tax (IGST)

Integrated State Goods and Services Tax (CGST) is an indirect tax collected and levied by the Central Government on the interstate supply of services or goods.

Note- Such supplies do not include alcohol or liquor for the consumption of human beings.

The Integrated State Goods and Services Tax (CGST) levy is governed by the Integrated Goods and Services Tax Act 2017. And the same is apportioned between state and center governments.

Union Territory Goods and Services Tax (UTGST)

Union Territory Goods and Services Tax (UTGST) is an indirect tax collected and levied by the Union Territory on the intrastate supply of services or goods.

Note- Such supplies do not include alcohol or liquor for the consumption of human beings.

Union Territory Goods and Services Tax levy is governed by the Union Territory Goods and Services Act (UTGST) 2017.

The transaction value is the price payable or paid for the said supply of services or goods. 

Advantages of GST

Goods and Services Tax has mainly removed the cascading effect on the sale of services and goods.

The removal of the cascading effect has impacted the cost of goods since the Goods and Service Tax regime eliminates the tax on tax; its cost decreases.

Also, the Goods and Services Tax is primarily technologically driven.

All the activities, such as application for response and refund to notice, return filing, and registration, need to be done online on the Goods and Services Tax Portal, accelerating the processes.

The following are the advantages of GST-

  • Regulating the organized sectors
  • Increased efficiency in logistics
  • Defined treatment for E-Commerce activities
  • Relatively lesser compliances under GST
  • Simpler Online Facilities for GST Compliance
  • Composition scheme for small businesses
  • Higher threshold for GST registration
  • Removing the cascading effect of tax
  • Implementing the same tax structure across the country
  • Seamless flow of credit of all taxes
  • More transparency in doing businesses
  • Creating competitiveness in the industry
  • More control over tax evaders and fewer chances to avoid taxes will help in better administration
  • Decreased cost of collection and more revenue collection due to the use of GSTIN
  • Prices of services and commodities will reduce eventually due to the reduction in seamless credit