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 20171. 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 and 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 recipient of the supply is liable to pay GST.
- 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, etc2.
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.
- Mismatch of ITC : A strong mechanism is being set for matching ITC availed by the recipient vis-a-vis GST disclosed by the supplier. Furthermore, to facilitate the transparent flow of ITC, mismatch reports would be generated based on the differences in disclosure by the supplier and the recipient of goods or services to align the flow of credit.
- 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 : The e-invoicing system, which will allow generating invoices on the online GST portal, has been approved by the GST Council. The e-invoice will also act as the e-way bill and furthermore, would be auto-populated as outward supplies of the business in the GST returns. The trial phase of e-invoicing of B2B invoices has been rolled out on a voluntary basis from 1 January 2020. However, the mandatory implementation of e-invoicing (and QR code in case of B2C invoices) has been postponed to 1 October 2020. E-invoicing is currently prevalent in Brazil, China, South Korea, etc.
- Compliances : Compliance is made simpler through the harmonization of tax rates, procedures, and aligned laws. The erstwhile tax regime consisted of Central Excise, Service Tax, and VAT/CST, along with the respective compliances and returns. However, under GST, the various compliances under different laws stand merged, and this has lowered the number of returns as well as the time spent on tax compliances. Under GST, the compliance mechanism is undergoing a transition in a phased manner wherein the ITC of recipients will be intrinsically linked with the declaration made by the suppliers. As a precursor to this, the government implemented a new Rule in October 2019, whereby the ITC available to a business is restricted to 110% of the total ITC available to it as per the invoices uploaded by its vendors. This is intended to encourage companies to source their inputs only from GST-compliant businesses and also prepare companies to adapt to a scenario where the ITC will be directly linked at invoice-level, with the details uploaded by the suppliers. This is in line with one of the stated objectives of GST to detect and minimize tax frauds.
- Anti-profiteering : An anti-profiteering measure is 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 also constituted the ‘National Anti-Profiteering Authority’ to examine whether this provision has been adhered to by businesses. The tenure of this authority was recently extended by two years till 30 November 2021.
The GST regime has largely stabilized since its implementation approximately three years back. Businesses did face certain issues while transitioning to GST, which was expected from a change of this magnitude. The GST Council has been responsive to representations made by the industry and has constantly announced amendments and measures to simplify the GST regime and minimize any adverse impact on trade and industry. As the GST regime completely stabilizes, India should move closer towards the ‘One Nation, One Market’ goal.
- 1.GST Implementation – Notifications issued by CBEC, Nexdigm, https://www.skpgroup.com/
CBEC.html, accessed 20 September 2020
- 2.The extensive list of GST rates for products and services can be found at the Central Board of
Indirect Taxes and Customs, https://cbic-gst.gov.in/gst-goods-services-rates.html, accessed
on 20 September 2020