Goods and Services Tax (GST)
India witnessed a transformation in the indirect taxation system in 2017 with the introduction of the Goods and Services Tax (GST) from 1 July 2017. GST replaced multiple taxes/duties like VAT, CST, Service Tax, Central Excise Duty, Entry Tax, Entertainment Tax, Luxury Tax, Purchase Tax, etc. prevalent before. It was mainly introduced to bring transparency into the administration, reduce the cascading effect of taxes on the cost of goods and services, and thereby create a common national market.
Furthermore, unlike the erstwhile indirect tax regime, the decisions in the GST regime are taken by a centralized body, i.e., the GST Council, which consists of Union and State Finance Ministers.
The key concepts under the GST legislation have been outlined below:
- Supply : GST is levied on the ‘supply’ of goods or services. The scope of supply is wide and includes sale, transfer, barter, exchange, license, rental, lease, etc. and certain activities are undertaken even without consideration.
- Administration :The GST Law is administered by the Center and the respective States/Union Territories. Accordingly, there are three types of taxes under GST:
- Central Goods and Service Tax (CGST)
- State Goods and Service Tax (SGST)/Union Territory Goods and Service Tax (UTGST)
- Integrated Goods and Service Tax (IGST)
- Inter-state versus intra-state supply : CGST and SGST/UTGST are levied on all intra-state supply of goods or services, and IGST is levied on inter-state supply of goods or services. The location of the supplier and POS for the goods/services determines whether the transaction is an inter-state or intra-state supply.
- Place of Supply (POS) : As GST is a destination-based tax, POS provisions have been formed in a manner to determine the territory of a supply transaction where the goods/services will be consumed and accordingly, determine its taxability.
- Time of supply : The time of supply provisions have been introduced to determine when GST must be paid for the supply of goods and services so that a certain alignment is achieved for the collection of taxes.
- Threshold : The threshold limit under GST is INR 4 million (INR 2 million for a taxable person conducting business in north-eastern states, including Sikkim) of aggregate turnover of goods and/or services during the financial year.
- Registration : A person exceeding the prescribed threshold limit of INR 4 million is required to undertake registration under GST, including specified individuals irrespective of their turnover. Registration can also be obtained voluntarily under the facility provided.
- Composition levy : Composition levy is an alternative method for levying tax designed for small taxpayers. It is a subsidized rate of GST eligible to taxpayers with an aggregate turnover in a financial year of up to INR 15 million (INR 5 million for service providers).
- Reverse Charge Mechanism (RCM): Typically, a supplier of goods/services is liable to pay GST on the supply. However, for the import of services and other notified goods/services, a mechanism has been prescribed wherein the liability to pay GST falls upon the recipient of supply.
- Rate of tax : The GST legislation provides for the classification of goods and services and applicable tax rates are determined based on the said classification
- Services Accounting Code (SAC) is used for the classification of services. Each kind of service offered has a unified code for measurement, recognition, and taxation.
- Harmonized System Nomenclature (HSN) code is used for the classification of goods. (HSN is a globally-adopted product description and coding system)
The commodities and services subject to GST are categorized under four tax slabs, viz. 5%, 12%, 18%, and 28%. However, GST is not applicable to certain commodities such as jute, fish, eggs, fresh meat, milk, curd, fresh fruits, buttermilk, vegetables, etc. Most of the goods are covered under the 12% and 18% tax slabs, while services are generally taxable at 18%. The number of products covered in the highest tax slab of 28% has substantially reduced since the inception of GST. Presently the 28% tax slab mostly covers luxury commodities, including motor vehicles, cement, personal aircrafts, yachts, etc1.
In order to avoid an issue for classification of a supply involving both goods and services, a Schedule has been prescribed under the GST legislation to determine if transactions shall be treated as a supply of goods or services.
- Input Tax Credit (ITC) : The recipient of goods or services would be eligible to claim ITC subject to certain restrictions. The ITC availed is eligible to be utilized as a set-off against the payment of taxes, subject to prescribed restrictions2.
- Mismatch of ITC : A stringent mechanism3 has been put in place to ensure that ITC availed by the recipient matches with the corresponding GST disclosed and paid by the supplier(s). This is intended to encourage companies to source their inputs only from GST-compliant businesses, which in turn would help detect and minimize tax frauds.
Furthermore, ITC of supplies by newly registered vendors may be restricted for a specific time period.
- Digitization : Procedures for different processes such as registration, tax payments, refunds, returns, etc. have been automated and simplified under a unified platform - GSTN (Goods and Services Tax Network). This has facilitated the creation of a platform for swift processing since the interface between the taxpayer and the tax authorities has reduced.
- E-invoicing : Businesses having turnover above INR 50 million4 in a financial year are required to comply with e-invoicing provisions. Accordingly, they are required to incorporate a unique Invoice Reference Number (IRN) and QR Code generated online on their B2B and export invoices. While e-invoicing is not applicable to B2C supplies, taxpayers having turnover more than INR 5 billion are required to generate a dynamic QR Code for enabling digital payments. E-invoicing is currently prevalent in Brazil, China, South Korea, etc.
- Compliances : Compliance have been simplified through the harmonization of tax rates, procedures, and allied laws. A taxpayer is required to file monthly/quarterly GST returns disclosing their outward supplies, availment of ITC, and discharge of applicable tax liability. Furthermore, companies having an aggregate turnover of more than INR 20 million are required to comply with annual filings, while those with turnover more than INR 50 million should additionally reconcile their books of accounts with GST returns.
- Valuation : Valuation plays a paramount role in GST. The GST Law accepts the transaction value where price is the sole consideration, and the supplier and recipient are unrelated. However, in case of related party transactions, or where price is not the sole consideration, certain methods have been prescribed to derive the value of supplies. Certain additions (such as delayed payment interest) and deductions (such as discounts) have been prescribed under the GST Law.
- Refunds : Companies engaged in zero-rated supplies (exports out of India and supplies to SEZs) are eligible to claim a refund of GST paid thereon, or unutilized accumulated ITC, subject to certain conditions and restrictions.
- Anti-profiteering : An anti-profiteering measure has been incorporated under the GST Law to ensure that any benefits due to the fungibility of ITC between goods and services or the reduction of the tax rate on supply of goods or services would result in a commensurate reduction in the prices of such goods/services. The government has empowered the Competition Commission of India to decide the anti-profiteering cases5 as the term of the National Anti-profiteering Committee ended 30 November 2022.
The GST regime has largely stabilized since its implementation six years back. The GST regime has completed 6 years since it was introduced. Businesses did face certain issues while transitioning to GST, which was expected given the change of this magnitude. The GST Council has been receptive to representations made by the industry and has constantly announced amendments and trade facilitation measures to mitigate any adverse impact to businesses. However, the administration is now focusing on plugging the revenue leakages through special drives to weed out fake/suspicious GSTINs from the GST eco-system.
- 1.The extensive list of GST rates for products and services can be found at the website of Central Board of Indirect Taxes and Customs, https://cbic-gst.gov.in/gst-goods-services-rates.html, as on 1 April 2023
- 2. W.e.f. 1 January 2021
- 3. Vide Finance Act, 2022 w.e.f. 1 October 2022
- 4. Applicable w.e.f. 1 August 2023
- 5. With effect from 1 December 2022