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GST –

THE GOODS AND SERVICES TAX ACT, 2017 (CENTRAL & STATE)

THE INTEGRATED GOODS AND SERVICES TAX ACT 2017

THE UNION TERRITORY GOODS AND SERVICES TAX ACT 2017

THE INCOME TAX ACT 1961

THE CENTRAL SALES TAX ACT 1956

THE WEALTH TAX ACT 1957

THE VALUE ADDED TAX ACT 2006

THE CUSTOMS ACT 1962

Goods & Services Tax GST (India) What is GST? Indirect Tax Law Explained

1. What is GST?
GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods
and Service Tax Act was passed in the Parliament on 29th March 2017. The Act
came into effect on 1st July 2017; Goods & Services Tax Law in India is
a comprehensive, multi-stage, destination-based tax that is levied on
every value addition.
In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply
of goods and services. This law has replaced many indirect tax laws that previously
existed in India.
GST is one indirect tax for the entire country.
So, before Goods and Service Tax, the pattern of tax levy was as follows:
Under the GST regime, the tax is levied at every point of sale. In the case of intra-
state sales, Central GST and State GST are charged. Inter-state sales are
chargeable to Integrated GST.
Now let us try to understand the definition of Goods and Service Tax – “GST is
a comprehensive, multi-stage, destination-based tax that is levied on every value
addition.”

Multi-stage
There are multiple change-of-hands an item goes through along its supply chain:
from manufacture to final sale to the consumer.
Let us consider the following case:
 Purchase of raw materials
 Production or manufacture
 Warehousing of finished goods
 Sale to wholesaler
 Sale of the product to the retailer
 Sale to the end consumer

Goods and Services Tax is levied on each of these stages which makes it a multi-
stage tax.

Value Addition
The manufacturer who makes biscuits buys flour, sugar and other material. The
value of the inputs increases when the sugar and flour are mixed and baked into
biscuits.
The manufacturer then sells the biscuits to the warehousing agent who packs large
quantities of biscuits and labels it. That is another addition of value after which the
warehouse sells it to the retailer.
The retailer packages the biscuits in smaller quantities and invests in the marketing
of the biscuits thus increasing its value.
GST is levied on these value additions i.e. the monetary value added at each stage
to achieve the final sale to the end customer.

Destination-Based
Consider goods manufactured in Maharashtra and are sold to the final consumer in
Karnataka. Since Goods & Service Tax is levied at the point of consumption. So, the
entire tax revenue will go to Karnataka and not Maharashtra.

2. Journey of GST in India


The GST journey began in the year 2000 when a committee was set up to draft law.
It took 17 years from then for the Law to evolve. In 2017 the GST Bill was passed in
the Lok Sabha and Rajya Sabha. On 1st July 2017 the GST Law came into force.

3. Advantages Of GST
GST has mainly removed the Cascading effect on the sale of goods and services.
Removal of cascading effect has impacted the cost of goods. Since the GST regime
eliminates the tax on tax, the cost of goods decreases.
GST is also mainly technologically driven. All activities like registration, return filing,
application for refund and response to notice needs to be done online on the GST
Portal; this accelerates the processes.

4. What are the components of GST?


There are 3 taxes applicable under this system: CGST, SGST & IGST.
 CGST: Collected by the Central Government on an intra-state sale (Eg:
transaction happening within Maharashtra)
 SGST: Collected by the State Government on an intra-state sale (Eg:
transaction happening within Maharashtra)
 IGST: Collected by the Central Government for inter-state sale (Eg:
Maharashtra to Tamil Nadu)

In most cases, the tax structure under the new regime will be as follows:

Transaction New Old Regime


Regime

Sale within CGST + VAT + Central Revenue will be shared equally between the
the State SGST Excise/Service tax Centre and the State

Sale to IGST Central Sales Tax + There will only be one type of tax (central)
another State Excise/Service Tax in case of inter-state sales. The Centre will
then share the IGST revenue based on the
destination of goods.

Illustration:
 Let us assume that a dealer in Gujarat had sold the goods to a dealer
in Punjab worth Rs. 50,000. The tax rate is 18% comprising of only IGST.

In such case, the dealer has to charge Rs. 9,000 as IGST. This revenue will go to
the Central Government.
 The same dealer sells goods to a consumer in Gujarat worth Rs. 50,000. The
GST rate on the good is 12%. This rate comprises of  CGST at 6% and SGST
at 6%.

The dealer has to collect Rs. 6,000 as Goods and Service Tax. Rs. 3,000 will go to
the Central Government and Rs. 3,000 will go to the Gujarat government as the sale
is within the state.

5. Tax Laws before GST


In the earlier indirect tax regime, there were many indirect taxes levied by both state
and centre. States mainly collected taxes in the form of Value Added Tax (VAT).
Every state had a different set of rules and regulations.
Interstate sale of goods was taxed by the Centre. CST (Central State Tax) was
applicable in case of interstate sale of goods.  Other than above there were many
indirect taxes like entertainment tax, octroi and local tax that was levied by state and
centre.
This led to a lot of overlapping of taxes levied by both state and centre.
For example, when goods were manufactured and sold, excise duty was charged by
the centre. Over and above Excise Duty, VAT was also charged by the State. This
lead to a tax on tax also known as the cascading effect of taxes.
The following is the list of indirect taxes in the pre-GST regime:
 Central Excise Duty
 Duties of Excise
 Additional Duties of Excise
 Additional Duties of Customs
 Special Additional Duty of Customs
 Cess
 State VAT
 Central Sales Tax
 Purchase Tax
 Luxury Tax
 Entertainment Tax
 Entry Tax
 Taxes on advertisements
 Taxes on lotteries, betting, and gambling

CGST, SGST, and IGST has replaced all the above taxes.
However, the chargeability of CST for Inter-state purchase at a concessional rate of
2%, by issue and utilisation of c-Form is still prevalent for certain Non-GST goods
such as:
i. Petroleum crude;
ii. High-speed diesel
iii. Motor spirit (commonly known as petrol);
iv. Natural gas;
v. Aviation turbine fuel; and
vi. Alcoholic liquor for human consumption.

in respect of following transactions only:


 Resale
 Use in manufacturing or processing
 Use in the telecommunication network or in mining or in the generation or
distribution of electricity or any other power
6. What changes has GST brought in?
In the pre-GST regime, every purchaser including the final consumer paid tax on
tax. This tax on tax is called Cascading Effect of Taxes.
GST has removed this cascading effect as the tax is calculated only on the value-
addition at each stage of the transfer of ownership. Understand what the cascading
effect is and how GST helps by watching this simple video:
This indirect tax system under GST has improved the collection of taxes as well as
boosted the development of Indian economy by removing the indirect tax barriers
between states and integrating the country through a uniform tax rate.

Illustration:
Based on the above example of biscuit manufacturer along with some numbers, let’s
see what happens to the cost of goods and the taxes in the earlier and GST regimes.
Tax calculations in earlier regime:

Action Cost 10% Tax Total

Manufacturer 1,000 100 1,100

Warehouse adds a label and repacks @ 300 1,400 140 1,540

Retailer advertises @ 500 2,040 204 2,244

Total 1,800 444 2,244

Along the way, the tax liability was passed on at every stage of the transaction and
the final liability comes to rest with the customer. This is called the Cascading Effect
of Taxes where a tax is paid on tax and the value of the item keeps increasing every
time this happens.
Tax calculations in current regime: 

Action Cost 10% Tax Actual Liability Total

Manufacturer 1,000 100 100 1,100

Warehouse adds label and repacks @ 300 1,300 130 30 1,430


Retailer advertises @ 500 1,800 180 50 1,980

Total 1,800 180 1,980

In the case of Goods and Services Tax, there is a way to claim credit for tax paid in
acquiring input. What happens in this case is, the individual who has paid a tax
already can claim credit for this tax when he submits his taxes.
In the end, every time an individual is able to claim the input tax credit, the sale price
is reduced and the cost price for the buyer is reduced because of lower tax liability.
The final value of the biscuits is therefore reduced from Rs. 2,244 to Rs. 1,980, thus
reducing the tax burden on the final customer.
GST regime also brought a centralised system of waybills by the introduction of “E-
way bills”. This system was launched on 1st April 2018 for Inter-state movement of
goods and on 15th April 2018 for intra-state movement of goods in a staggered
manner. Under the e-way bill system, manufacturers, traders & transporters are now
able to generate e-way bills for the goods transported from the place of its origin to
its destination on a common portal with ease. Tax authorities are also benefitted as
this system has reduced time at check -posts and help reduce tax evasion.

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