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GST in India: Everything You Need to Know

GST in India: Everything You Need to Know


Goods and Services Tax (GST) came into effect in India on July 1, 2017, after being approved by the Union Cabinet in 2016, as India’s biggest tax reform since Independence. An indirect tax that replaces all taxes levied by the Indian government and central governments on goods and services, GST has simplified the country’s complex tax structure and reduced the cascading effects of taxation on small businesses and consumers alike. Read on to learn everything you need about GST in India.


What are Indirect Taxes?

Before we get into the details of GST, it’s important to understand what an indirect tax is. In simple terms, taxes like VAT and service tax are indirect taxes. Direct taxes (like income tax) directly impact an individual or a company, while indirect taxes are levied on products and services that we buy. So when you pay 15% on your taxi ride (or any product for that matter), that money goes toward various public projects like infrastructure maintenance and education. The government uses indirect taxes to fund its operations because they tend to be easier to administer than direct taxes. They also have lower evasion rates because they aren’t applied at every stage of production and distribution, as is the case with sales tax. While there are different types of indirect taxes, most governments use some combination of three major ones: value-added tax (VAT), sales tax, and excise duty.


Types of Indirect Taxes In India

CGST (Central Goods and Services Tax) is a state tax, SGST (State Goods and Services Tax) is a state tax, and IGST (Integrated Goods and Services Tax) is an inter-state tax. All these indirect taxes are applicable on every supply of goods or services except exports from one state to another, inter-state transfer of goods or services without consideration, imported goods and entry of goods for home consumption after release from customs duty. In fact, there are two types of Indirect Taxes in India – Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST). Union Government collects the first type of Indirect Tax, whereas State Governments collect the second type of Indirect Taxes. In addition to that, there’s also Integrated Goods and Service Tax which means that all indirect taxes will be integrated into one single tax system across all states.


Difference between Direct Tax and Indirect Tax

Direct taxes are paid directly by the individual on their earnings. Indirect taxes are paid by either the manufacturer or the consumer of a good.
The rate of income tax is usually progressive, which means the higher your income, the higher the tax rate. The rate of an indirect tax is usually fixed . A person or entity can claim tax deductions under certain conditions while there are no such deductions in case of indirect taxes.
A direct tax is not a general tax but based on the individual income. An indirect tax is a general tax that is collected by the manufacturer or seller and paid to the government.
All individuals are equally affected by direct taxes as they are imposed on income. The population is not equally affected by indirect taxes as manufacturers and retailers incur the cost of the tax.


Features of Indirect Tax

The tax is imposed on an event that does not happen directly. The rate of an indirect tax is usually fixed and not progressive. An indirect tax is not based on the ability to pay principle.  The manufacturer of a product pays the excise duty. - Tax can be imposed on different sources of expenditure like goods and services.A person or company can claim tax deductions under certain conditions. - An indirect tax is a general tax that is collected by the manufacturer or seller and paid to the government.


Merit of Indirect Tax

An indirect tax is a general tax that is collected by the manufacturer or seller and paid to the government. This means a person or entity is not affected directly by the tax. An indirect tax improves the economy of a country by promoting trade and investment, increasing the revenue of the government, and reducing the inflation rate. Indirect taxes are imposed on goods and services; for example, customs duty on the import of goods, sales tax on the sale of goods, and service tax on the provision of certain services. Indirect taxes are usually imposed to ensure that the government has a strong financial backing.


Demerits of Indirect Tax

Indirect taxes are generally regressive in nature because the poor are likely to incur a higher percentage of their income on necessities such as food and clothing compared to the rich. The poor are at a disadvantage since they tend to spend a higher percentage of their income on goods and services compared to the rich. The low-income households are more likely to suffer from the inefficiencies caused by an indirect tax system.


Example of Indirect Tax in India

In India, there are many examples of indirect taxes, like the customs duty that is imposed on the import of goods, the sales tax that is levied on the sale of goods, and the service tax that is charged for the provision of certain services. There are multiple places where you pay indirect taxes in India. You might pay excise duty when you purchase a good, or you might pay customs duty when you import goods into the country.


When is Tax Levied?

GST is charged on any transfer of goods or services which are subject to tax. The transactions which will be taxable under GST have been identified by the Central Board of Excise and Customs (CBEC) vide Notification No. 17/2017-Central Tax (Rate). Central GST and State GST are chargeable on such taxable supplies. There can be cascading taxes because CGST, SGST and IGST will be levied on all taxable supplies. It has also been clarified that there shall not be any reverse charge mechanism applicable for inter-state supply of goods and services as per section 9(1)(b) of CGST Act 2017.
The transaction value includes all considerations, whether in cash or otherwise received for a supply made but does not include exempted goods and services as per section 9(1)(e) of CGST Act 2017. Taxable transactions are divided into three categories depending upon turnover thresholds as given below: -

Category I – Transactions with annual turnover upto Rs. 20 lakhs.

Category II – Transactions with annual turnover above Rs. 20 lakhs & upto Rs. 75 lakhs.

Category III – Transactions with annual turnover above Rs. 75 lakhs & upto Rs. 1 crore.


Need For GST In India

The indirect tax regime in India is quite complex. There are different kinds of taxes imposed on goods and services, such as excise duty, service tax, value added tax (VAT), additional customs duty (CVD), central sales tax (levied by states) and entertainment tax. The good news is that a national GST will simplify all of these into one single indirect tax regime. This means no more filing multiple returns or paying multiple taxes. It also means better compliance and easy administration for businesses. For example, with VAT, there were several types of VAT rates applicable depending on whether it was a normal or luxury item and whether it was being sold in its original form or an altered form. With GST, there will be only one uniform rate applicable across all goods and services without distinguishing between standard or luxury items.


Things to know before starting a business under GST.

GST is not a new tax; it is just a reform of an existing tax that was there for many years. GST stands for Goods and Services Tax, meaning now you won’t be paying multiple taxes on different goods and services at different stages. It’s a single tax system where all businesses must register with GST and pay taxes according to their turnover. Every state will get its own GST rate based on its expenditure to take care of its welfare without any worries. The best part about GST is that every business will be getting input credit on every product they buy from someone else. So, if you purchase something from someone else, they can claim input credit (that means no more double taxation), and if you are selling something to someone else, they can claim output credit (that means no more double deduction). The overall effect of GST would be reduced prices for consumers and increased government revenues due to better compliance and efficiency of the collection mechanism.


How will it affect the consumers?

GST is going to affect every Indian citizen and business. Your regular expenses will be impacted even if you don’t own a business. In fact, even your smartphone costs are going up! The government has clarified that smartphones priced over Rs 10,000 will now attract a 12% GST (Goods and Services Tax) instead of 15%. This means, for example, that Apple iPhone 8's retail price in India will go up by roughly Rs 1,200! Here’s how it works: Under GST, most goods and services have been placed under four tax slabs 5%, 12%, 18% and 28%. As mentioned earlier, one of these four rates is applicable on all goods except luxury items such as cars, tobacco products etc.



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