Goods and Services Tax

The Goods & Service Tax (GST) came into effect on July 1, 2017 in India. It is an indirect tax that has replaced many indirect taxes such as the excise duty, VAT, Service Tax, etc. It is a comprehensive, multi-stage and destination-based tax that is levied on every value addition. GST is a single domestic indirect tax law for the entire country.

It is technically paid by suppliers, but it is actually borne by consumers. Under GST, input tax credit is provided throughout the value chain for creditable acquisition.

In India GST rate for various goods and services is divided into four slabs i.e. 5% GST, 12% GST, 18% GST, & 28% GST.

Here are the examples of a few products on which different GST rates are applicable:

5% - Household necessities such as edible oil, sugar, spices, tea, and coffee (except instant) are included. Coal, Mishti/Mithai (Indian Sweets), Accessories/parts for carriages designed for differently abled individuals, Coir mats, matting and floor covering, Walking-sticks, Life-saving drugs are also covered under this GST slab.

12% - Computers, Corrective spectacles, Intraocular lens, Two-way radio (Walkie talkie) used by defence, police and paramilitary forces etc., exercise books, note-books and processed food.

18% - Hair oil, toothpaste and soaps, Televisions/Monitors (up to 32 inches), Bamboo furniture, Instruments for measuring length, for use in the hand (for example, measuring rods and tapes, micrometers, callipers), Baby carriages, CCTV including CCTV with video recorders, Printers other than multifunction printers, capital goods and industrial intermediaries are covered in this slab.

28% - Luxury items such as small cars, consumer durables like AC and Refrigerators, premium cars, cigarettes and aerated drinks, High-end motorcycles are covered in this slab.

India is a federal country where both the Central and the States have been assigned the powers to levy and collect taxes through appropriate legislation. GST in India is a dual based model, which means that both the Federal and the State government levy taxes on the supply of goods and services based on the nature of the transaction.

There are three taxes applicable under GST, namely:

• Central Goods and Service Tax (CGST)- levied and collected by the Central Government
• State Goods and Service Tax (SGST)- levied and collected by State Governments/Union territories with State Legislatures
• Union territory Goods and Service Tax (UTGST)- levied and collected by Union territories without State Legislatures on Intra-state supplies of taxable goods and/or services
• Integrated Goods and Service Tax (IGST)- levied and collected by the Central Government on Inter-state supplies of taxable goods and/or services

The kind of tax paid under GST depends on the nature of supply.

There can be two types of supply – Intra-State and Inter-State.

1. Intra-State supply

   Any supply where the location of the supplier and the place of supply are in the same State or Union Territory. In such cases, a seller has to collect both CGST and SGST. Thereafter, the CGST part is deposited with the Central Government and the SGST portion is deposited with the respective State Government.

2. Inter-State supply

   Any supply where the location of the supplier and the place of supply are in:

   • two different States
   • 2 Different Union Territories
   • a State and a Union Territory

   Additionally, any supply in a taxable territory, that is not an Intra-State supply is deemed an Inter-State supply. The following supplies are also treated as Inter-State supplies:

   • Supplies to or by Special Economic Zones (SEZs)
   • Goods or services imported to India
   • Services or goods exported outside India

   • Supply of goods or services to international tourists

   Thus, on the Inter-State supply of goods or services, only IGST is levied and collected by the Central Government.

Input tax credit (ITC) mechanism in GST

ITC forms the backbone of the GST regime in India. The ITC mechanism helps the seamless flow of tax-credits throughout the value-chain, and across boundaries of States.

GST is essentially a tax on value addition at each stage of the supply chain; every supplier, who is the person supplying the goods and/or services or an agent acting as such on behalf of such a supplier, can claim credits. The credits can be claimed over input taxes paid at each stage of the supply chain in the subsequent stages of value addition. A continuous chain of set off is established from the original producer’s or service provider’s to the retailer’s level, thus, eliminating the burden of double taxation.

Suppliers at each stage are permitted to set off the GST paid on the purchase of input goods and services against GST to be paid on the supply of goods and services.

It is important for dealers to note that no cross utilization of the ITC is permitted between the state and federal levy. This means that the credit of CGST paid on inputs may be used only for paying CGST on the output, while the credit of SGST on inputs may be used only for paying SGST, except in the case of inter-State supply of goods.

There are certain conditions to fulfill to access input tax credit:

• The dealer holds a tax Invoice, a debit note issued by the registered supplier, or any such tax paying documents as prescribed
• Details of such tax invoice or debit note must have been furnished by the supplier in GSTR-1
• The said goods or services have been received
• The return forms have been filed (Form GSTR-3B)
• The supplier has paid the due tax to the government, either in cash or by claiming Input Tax Credit (ITC).

Registration and threshold

The registration in GST is Permanent Account Number (PAN) based and State specific. Suppliers have to register themselves in each State or Union territory from where they are conducting business.

In GST registration, the supplier is allotted a 15-digit GST identification number called “GSTIN” and a certificate of registration. The first two digits of the GSTIN is the State code, the next 10 digits is the PAN of the legal entity, the next two digits is for the entity code, and the last digit is the check sum number.
Registration under GST is not tax specific, meaning there is a single registration for all the taxes i.e. CGST, SGST/UTGST, IGST and Cess.

Generally, the liability to register under GST arises when you are a “supplier” within the meaning of the term, and if your aggregate turnover in the financial year is above the specified exemption threshold. A business whose aggregate turnover in a financial year exceeds Rs.20 lakhs (or Rs.40 lakh for a supplier of goods) has to mandatorily register under Goods and Services Tax. This limit is set at Rs.10 lakhs for North Eastern and hilly states flagged as special category states.

Small businesses, having turnover below the threshold limit can voluntarily opt to register.

However, the GST law enlists certain categories of suppliers who are required to get compulsory registration irrespective of their turnover which means that the specified threshold exemption limit is not available to them.

Some of these suppliers need to register compulsorily irrespectively of their turnover which includes:

1. Inter-state suppliers
2. A person receiving supplies on which tax is payable by the recipient on a reverse charge basis
3. Casual Taxable person who does not have a fixed place of business in the State or Union Territory from where they want to supply
4. Non-resident taxable persons who does not have a fixed place of business or residence in India
5. A person who supplies on behalf of another taxable person (i.e. an Agent of Principal)
6. An e-commerce operator, who is required to collect taxes at the source under section 52 of the CGST Act, 2017, who provides a platform to the suppliers to supply through it
7. E-commerce operators who are notified as liable for GST payment under Section 9(5) of the CGST Act, 2017
8. An Input service distributor needs to register separately as input Service Distributor (ISD) regardless of their turnover
9. Those supplying online information and data base access or retrieval (OIDAR) services from outside India to a non-registered person in India

The concept of Reverse charge

• Unregistered dealer selling to a registered dealer: In such a case, the registered dealer has to pay GST on the supply
• Services through an e-commerce operator: If an e-commerce operator supplies services, then the reverse charge will apply on the e-commerce operator. They will be liable to pay GST
• Supply of certain goods and services specified by Central Board of Indirect Taxes and Customs (CBIC): CBIC has specified a list of certain goods and services on which reverse charge is applicable
• Input tax credit on reverse charge: Tax paid on reverse charge basis will be available for ITC if such goods and/or services are used, or will be used, for business. The service recipient, that is, the one who pays reverse tax, can make use of the Input Tax Credit.

Invoice matching system in GST

GST allows for a seamless flow of ITC across the supply chain. One of the essential features of the GST is to check the ITC claimed by the taxpayer, to prevent any leakages. For this purpose, an invoice matching system has been developed under GSTN to match the purchase and sale invoices of a taxpayers. Accordingly, every registered taxable person under the GST is required to issue a tax invoice, which will be uploaded on the invoice matching system. After the sale and purchase invoices of a taxpayer have been matched, the ITC is conferred.