What is GST? Meaning, Objectives, Types, Advantages

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Introduction to GST and the objectives of implementing this indirect tax.

Key Takeaways

• The Government of India introduced the Goods and Service Tax in July 2017.
• The objective of GST is to eliminate cascading effect of taxes.
• GST allows curbing tax evasions.
• CGST, SGST, IGST, and UGST are the four types of Goods and Service Tax.
• Small businesses can avail of benefits from the GST Composition Scheme.

Taxes form an integral part of a nation’s economy. Without taxes, it would be impossible for a country to function, take up infrastructure development projects, or finance public sector operations. Like Income Tax, taxpayers also pay tax on goods and services that they consume. In India, economists replaced the previous tax-on-tax system with an improved regime known as GST. Keep reading to know more.

What is GST (Goods and Services Tax)?

The full form of GST is Goods and Services Tax. It is a type of indirect tax introduced to create a unified market across India. The GST Act was passed by the Indian Parliament on 29th March 2017 and came into effect on 1st July 2017. It replaces multiple indirect taxes with a single domestic tax on goods and services, from manufacturers to consumers. To manage GST payments efficiently, businesses and individuals can also open bank account online.

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History of GST in India

The Goods and Services Tax (GST) was introduced by the Vijay Kelkar Task Force to simplify India’s indirect tax system and create a unified market. Its journey involved over a decade of discussions, draft bills, and reforms before becoming law.

• GST Meaning: GST stands for Goods and Services Tax, replacing multiple central and state taxes.
• Early Proposal: Suggested in 2000 by the Vijay Kelkar Task Force.
• Draft Bills: Refined through proposals between 2004–2011.
• Constitutional Amendment: Passed by Parliament in 2016.
• GST Act: Approved on 29th March 2017.
• Implementation: Rolled out nationwide on 1st July 2017.
• Banking Integration: A bank account is required for GST payments; you can Open Bank Account online to comply efficiently.

Objectives of GST

GST was introduced to simplify taxation, create a unified market, and improve compliance across India. Its main objectives include:

One Nation, One Tax

GST has replaced numerous indirect taxes of the previous tax regimes. Implementing a single tax model means that every Indian state abides by the same tax rate for products or services. The Central Government decides the GST rates and policies, and taxpayers need not worry about filing multiple return forms. Businesses and individuals can manage payments efficiently, and those with a bank account can track bank savings interest rates alongside their GST liabilities.

Eliminating the Cascading Effect

In the previous tax-on-tax regime, taxpayers were unable to set off tax credits of one tax against another, also known as the cascading effect of taxes. GST eliminates this effect and allows tax credits to flow across goods and services seamlessly.

Minimise Tax Evasion

Taxpayers can claim tax credit only when the supplier uploads their invoices. This way, the number of individuals claiming tax credits against fake invoices reduces significantly.

Increase overall productivity and efficiency

By subsuming indirect taxes like entry taxes, the overall productivity of businesses may increase.

4 Types of GST

1. Central Goods and Service Tax (CGST) which The Central Government collects on intra-state transactions of goods and services.
2. State Goods and Services Tax (SGST) which state governments collect on intra-state transactions of goods and services.
3. Integrated Goods and Services Tax (IGST) which is a shared tax collected by the Centre and the State on the inter-state transactions of goods and services.
4. Union Territory Goods and Services Tax (UGST) which is collected by Tax authorities of the respective Union Territories on transactions of goods and services of that UT

Features of GST

The main features of GST include:

• Single Tax: GST replaces multiple central and state indirect taxes with one tax on goods and services.
• Destination-Based Tax: The tax is collected where the goods or services are consumed.
• Input Tax Credit: Businesses can claim credit for the tax paid on inputs against their output tax liability.
• Uniform Rates: GST ensures consistent tax rates across states, simplifying compliance.
• Digital Compliance: Filing returns and payments is done online through the GST portal.

GST Registration Process

Businesses must register for GST to comply with tax laws. Knowing the GST calculation formula helps businesses estimate their tax liability during registration and set up accounting correctly.

Step-by-Step GST Registration Procedure

The GST registration process can be completed online by following these steps:

Step 1: Visit the official GST portal.

Step 2: Click on “New Registration” and select the type of taxpayer.

Step 3: Fill in business details, including estimated turnover for tax calculations.

Step 4: Upload supporting documents.

Step 5: Submit the application.

Step 6: Receive the GSTIN (GST Identification Number) once approved.

Documents Required for GST Registration

The GST registration documents include:

• PAN card of the business or applicant
• Proof of business registration or incorporation certificate
• Identity and address proof of promoters or directors
• Address proof of the business premises
• Bank account details and cancelled cheque
• Digital signature of authorized signatory

GST Registration Fees

Regular Taxpayers: GST registration is free for most businesses in India.

Non-Resident Taxable Person: A nominal fee of INR 100 may apply for registration.

Special Cases: Certain categories, such as Input Service Distributors or casual taxable persons, may have specific fee requirements as per GST rules.

Advantages of GST

Uniform Tax Structure

As a result of GST, the entire nation is under one and only one tax regime allowing uniformity in processes, tax rates, and laws across India.

Online Process of GST

All GST registration and filing processes can be done online, thereby encouraging new businesses to register for the GST process hassle-free.

Composition schemes for small businesses

Businesses with annual turnover in the INR 20 Lakh and INR 75 Lakh range are eligible to become beneficiaries of the GST Composition Scheme which reduces taxes on such respective businesses.

GST Rates in India

GST rates in India is charged at multiple rates depending on the goods or services:

• 0% GST: Essential items like fresh food, education, and healthcare.
• 5% GST: Items of mass consumption such as packaged food and household goods.
• 12% and 18% GST: Standard rates for most goods and services.
• 28% GST: Luxury goods, high-end vehicles, and certain excise goods.
• Special Rates: Some items may have cess applied on top of the 28% rate.

GST Calculation

Calculating GST correctly is essential for businesses to determine their tax liability and comply with the law. The calculation differs for intra-state and inter-state transactions.

How to Calculate GST

Step 1:  Determine the taxable value – This is the price of goods or services before tax.

Step 2: Identify the applicable GST rate – Rates vary by product or service category.

Step 3: Apply the GST rate – Multiply the taxable value by the GST rate.

Step 4: Split for intra-state sales – Divide the GST into CGST (Central GST) and SGST (State GST) equally.

Step 5: Apply IGST for inter-state sales – For sales across states, apply Integrated GST instead of CGST and SGST.

Step 6: Calculate total price – Add the GST amount to the taxable value to get the final price.

GST Calculation Formula

The GST calculation formula is:

• GST Amount = Taxable Value × GST Rate / 100
• Total Price = Taxable Value + GST Amount

Example:

• Taxable value of a product: INR 1,000
• GST rate: 18% (intra-state)
• CGST = 9%, SGST = 9%
• GST Amount = INR 1,000 × 18/100 = INR 180
• Total Price = INR 1,000 + INR 180 = INR 1,180

For inter-state sales, the same 18% is charged as IGST.

GST Return Filing

Filing GST returns is mandatory for all registered taxpayers. Returns report sales, purchases, and the tax collected or paid. Proper filing ensures compliance and helps claim input tax credit.

When to File GST Returns

Taxpayers must file returns according to their category and turnover:

1. Monthly Returns:
• GSTR-1: Details of outward supplies (sales) by the 11th of the next month.
• GSTR-3B: Summary of sales, purchases, and tax liability by the 20th of the next month.
2. Quarterly Returns:
• Applicable to small taxpayers under the Composition Scheme.
• Filed every three months using a simplified form.
3. Annual Returns:
• GSTR-9: Summarizes all transactions for the financial year.
• Filed once a year by 31st December of the next financial year.

New Compliances Under GST

Recent GST rules introduced new compliance requirements:

1. Invoice Matching: Input tax credit can only be claimed if the supplier uploads a matching invoice.
2. E-Invoicing: Mandatory for businesses above a certain turnover threshold to report invoices digitally.
3. Real-Time Reporting: Outward and inward supplies must be submitted online for accurate tracking.
4. Timely Payment: Tax liabilities must be paid on time to avoid interest and penalties.

Conclusion

GST has simplified indirect taxation by replacing multiple cesses and charges with a single tax. Rates vary depending on the type of product or service, distinguishing between essentials and luxury items. With GST making compliance easier, managing finances is simpler. You can download the DBS digibank app to begin and conveniently open savings account online for seamless transactions.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.