The GST is an indirect tax applicable to the production of good and services and collected by central and state governments from the consumer.
The GST is a modern act of tax compliance for Indian businesses. It is a bold reform that was introduced in 2017 to abolish the adverse effects of erstwhile tax administration. India is now making efforts to remain on par with the rest of the world where GST is already in existence.
Why Was GST Introduced?
The purpose of implementing GST was to simplify and modernise the tax administration network. In the pre-GST era, there were a total of seventeen slabs and various tax rates that were collected across different states. It was a bottleneck in the tax reporting and accounting system at different nodal points of interstate trade.
The characteristics of the pre-GST era are as follows:
- Unequal tax rates were different amongst state governments and union territories, which led to a concentration of manufacturing activity in states where the applicable rates were low.
- Multiple taxes were levied under the old regime viz., Excise Duty, VAT, Octroi, CST, Luxury Tax, Entertainment Tax, etc.
- The tax was levied at the place where goods were manufactured or sold, or at a place where services were deployed.
- The registration was decentralised under state and central authorities.
- The returns were partially validated, and complete verification was subject to assessments by state or central authorities.
- Although service tax and central excise rates were uniform, VAT (Value Added Tax) guidelines varied from state to state.
However, things have become less complex under the new GST regime. Elimination of complicated tax collection and accounting practices has paved the path for progressive tax reforms under one umbrella- one nation, one tax!
Some characteristics of GST are:
- There is only one tax for the entire nation, and the tax rates will be the same across the country.
- Clubbing together all taxes as one reduces the complexity of adherence to compliance laws.
- Taxes are levied in the geographical area of purchase or sale of goods and services.
- There is a prevailing uniform e-registration for across the nation, depending upon the location of the PAN entity.
- The returns are validated by a computerised reconciling system, and checks of consistency are carried out on the basis of input credit availed tax payments and utilisation.
- The process is followed uniformly across the nation, and, also, the dates for collection, deposit, and filing annual return gst are standard.
Overview Of The GST Structure
GST is a dual levy with two components for the intra-state supply of goods or services: CGST and SGST. The central government will levy and collect tax in the form of Central Goods and Services Tax (CGST Act 2017). The state government will levy and collect tax in the form of State Goods and Services Tax (SGST Act 2017).
In the case of inter-state supplies of goods and services, IGST will be applicable. This tax component comes under the purview of the IGST Act, 2017. This tax will also be levied on Indian imports and exports.
Having seen the above differences, let us go through the meaning of the terms CGST, SGST, IGST.
CGST (Central Goods And Services Tax)
The CGST Act mandates the provision for levy and collection of tax on intra-state supply of goods or services by the central government. It also deals with all issues connected with the compliance and administration of CGST.
The variety and scale of Value Added Tax laws in the country with unequal tax rates and practices divide the country into haphazard economic zones. With the new GST model, no more adjustments in place of taxes will be levied by either the centre or state.
Features Of CGST
- To levy and collect tax on all intra-state supply of goods or services
- To expand the input tax credit base by making it available instead of taxes paid on the supply or manufacture of goods or services or both used or with the intention to further the course of business
- E-commerce entities are obligated to collect tax at source- not exceeding one per cent of the value of net taxable supply
- Self-assessment of tax payable by the registered person
- Provision to conduct an audit of registered persons to verify compliance with the Act of 2017
- Recovery of tax arrears by the use of various modes which include detention and sale of goods, seize movable and immovable properties of defaulting taxable person
- To empower officials to inspect, search, seize, and arrest
- To give consumers the benefit of reduced tax on goods or services or both
SGST (State Goods And Services Tax)
SGST is a layer of tax component within the Goods and Services Tax of India. All the erstwhile taxes collected by the state viz., Sales Tax, VAT, Entertainment Tax, Luxury Tax, Lottery Tax, Betting and Gambling Tax, Entry Tax, Octroi, State Cess, Surcharges, etc. are absorbed into one tax in GST called State GST.
Tax proceeds collected under the purview of SGST provide the revenue for state government.
IGST (Integrated Goods And Services Tax)
The IGST Act stipulates that the central government would levy IGST which is a total of CGST plus SGST on all inter-state transaction value of taxable goods and services with appropriate provision for stock transfer of goods and services.
A few points to note: if the seller delivers a supply outside the state, then he would have to pay IGST only on the amount of value addition after adjusting available credit of IGST, CGST, and SGST of his initial purchase.
Further, the exporting state will transfer the credit of SGST received to the central government, and used in the payment of IGST (on the amount of value addition).
On the other hand, an importing dealer will claim a credit under IGST while discharging his share of output tax in his own state. Further, the central government would then transfer to the importing state government, i.e., credit of IGST used in the payment of SGST.
Additionally, the relevant information would be communicated to the central government, which would act as a clearinghouse to verify the claims and informs respective governments to proceed with the transfer of funds.
Conclusion
Tariff and non-tariff related barriers hindered the flow of free trade across the nation viz., octroi, entry tax, check posts, etc. Besides that, an increasing volume of tax transactions results in increased cost and burden of compliance for taxpayers, i.e., number of returns, payments, penalties, etc.
Given the above roadblocks, all taxes were merged to form the GST. The GST is split into two taxes: cgst, which is administered by the central government and SGST, which is administered by the state government. These taxes will be imposed on the exchange of goods and services within a state.
On the other hand, IGST is administered by the central government and will be used for transactions between states. The IGST amount is equal to the addition of both CGST and SGST.
