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Contributed on March 6, 2020

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Demystifying the working of Goods and Service Tax in India

Blog: NASSCOM Official Blog

The new tax regime Goods and service tax rolled out from 1^st-July-2017 while subsuming multiple indirect taxes into uniting tax and paved the way for a common national market for the Indian taxation system. Although the tax official tried all efforts to make it simple but still laymen and small businesses find it difficult to comprehend. Since its implementation, GST has benefitted the Indian economy in many ways whether by keeping a free flow of goods and services or eliminating the cascading effects of taxes.

Experts and professionals have estimated that GST can boost up GDP rates in the long term. Our ex-Finance Minister Arun Jaitley also claimed several benefits of GST such as it would create a national market, improve tax compliance and, enhance the ease of doing business. And for consumers, it would lower the overall tax burden.

The working principle of GST

GST works on a principle of destination-based tax which is opposite of the earlier principle of the origin-based taxation system. Under this tax regime, a multi-stage collection mechanism work where tax is collected at every single stage. After that, the credit of the tax is paid at the previous stage and gets input tax credit available for the next stage of the transaction. This helps to eliminate “tax on tax” or the cascading effect on taxes. GST benefits manufacturing and enterprises with better cash flows and enhanced working capital. From the consumer point of view, GST helps to bring down the overall tax rate.

How the GST mechanism works

Input tax credit

What makes GST different from all the indirect taxes? Now businesses claim the paid amount of GST by offsetting against the output tax. In this system, credits of input taxes are paid at every stage of products and services or delivery can be easily achieved in the succeeding stages of value addition. It simply means that the last consumer will only bear the GST charged at the last point of the supply chain while setting-off benefits at all of the previous stages.

Classification of GST rates

As per the GST standard, the tax categories have been kept under 5 slabs which are 0 percent, 5 percent, 12 percent, 18 percent, and 28 percent. Some of the goods and services of daily necessities and consumption have been kept exempted too.  A cess is also levied at the peak rate of 28 percent on pre-specified luxury goods. Precious metals like gold will attract a separate tax rate of 3 percent.  Under GST, businesses are required to file their monthly as well as annual returns. But the government has made liberal policies to file late returns for the first two months so that businesses can easily adapt to a new online returns filing system.

Types of GST levied on goods

There are four kinds of GST which are currently being used in our country and that are CGST, IGST, SGST, and UTGST. CGST is the Central tax that is levied by the central government of India. SGST is one of the taxes that is levied on every state or (within the state) for the transaction of goods and services. IGST is charged on the interstate or between two-states on the transactions of goods and services. And the last one UGST is levied as the Union territory goods and services.

Registration for GST

According to the new tax regime businesses exceeding turnover above then ₹40 lakhs and ₹, 10 lakhs for NE and hill states are required to register under GST as a normal taxable person. There are some businesses whose registration under goods and services is mandatory and the process of registration is called GST registration.

Claiming GST refund

If you are eligible to file a claim for a GST refund, you have to claim your refund from GST form RFD-01. Any registered person can claim the balance by filing the return as per the dates mentioned.

Payment under GST

Every registered person has to pay his tax liability every month by setting up the ITC. Every payment under GST is made by either using the electronic cash ledger or by through the input tax credit available in the electronic credit ledger. There are two types of payments under GST one is regular taxes and the other is interest as well as penalties. Regular taxes can be made by utilizing the amount available in the ITC or making payment in cash. To make any payment for interest and penalties taxpayers have to use only cash mode.

Offenses and penalties

Taxpayers have to bear penalties if the following offenses are committed:

• If there is any sort of deficiency over the net tax payable amount.
• If no GST return has been made.
• If taxpayers pay returns without any payment or with less amount.
• Failures in GST registration.

The goods and service tax is largely technology-driven as well as reducing the human interface up to a great extent. GST can also lead to speedy decisions for tax payments along with bringing transparency in the taxation system. As the IGST is charged which is equivalent to CGST and SGST, bringing more equality and helping out the local products.  GDP can be considered as a win-win scenario that benefits the entire value chain and is convenient for businesses and consumers too.

But we have to see that, whether it will boost Indian exports and products in the international markets or not. Would it improve GDP rates or revenue collections?  As the GDP is dropping down rapidly we can only hope for best and can expect to see better growth rates, improvements in the balance of payments and developed economy.

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