An indirect tax is a tax that is collected at some stage in the supply chain and paid to the government, but its value is passed on to the end customer by adding its value to the price of the good. In other words, these are called “indirect” because the tax on one person/entity is paid by another. The goods and services tax (GST) refers to an indirect tax which replaces several other indirect taxes (like excise duty, customs duty, luxury tax and entertainment tax).
India adopted the GST Act in 2017, and in the three years since then, GST and its several amendments have revolutionised the taxation system in the country. This article throws light on the origin of GST and how things have changed from 2017 until now.
GST in India
Characteristics of GST
- GST is a destination-based or consumer-based tax. This means that the tax is collected at the place where a good is sold, not where it is produced.
- One of the main advantages of GST is that it eliminates the cascading effect of taxes. Earlier, the central government would charge excise duty and state governments would charge VAT on top of that. GST removes the levying of “tax on tax”.
- GST has also made the taxation system more transparent by digitising the entire process, including registration, payment, and filing of returns. E-commerce businesses and others with a large enough turnover have to register themselves on the GST portal, apply for a unique GSTIN number, and check their GST status.
Components of GST
Three different taxes are levied under GST in India:
- IGST (full form: Integrated GST): Collected by the central government for inter-state sales
- CGST (Central GST): Collected by the central government for intra-state sales
- SGST (State GST): Collected by the respective state governments on intra-state sales
GST Tax Slabs
One of five tax slabs is applied to almost all goods and services (except petroleum products, alcohol, and electricity) under the GST Act. Here are some examples of the different tax rates:
0% (7% of goods and services) – Essential goods like milk, bread, fruits, vegetables, and agricultural services.
5% (14% of goods and services) – Apparel (below INR 1000) and footwear (below INR 500), packaged foods, kerosene, coal, and economy air tickets.
12% (15% of goods and services) – Indoor games, business-class air tickets, and edible items like frozen meat products.
18% (43% of goods and services) – Biscuits, electronics, smartphones, AC and luxury restaurants.
28% (19% of goods and services) – Luxury items like washing machines, automobiles, and sin goods like tobacco, pan masala etc. Some goods in this slab have an additional tax called compensation cess, collected by the central government. This is given to the states heavy in manufacturing that lose a lot of revenue since GST is destination-based.
These tax rates undergo periodic revisions based on economic requirements. For example, to boost the hospitality sector, the GST council revised the tax slab for hotel rooms charging less than INR 1000 per night to 0%. Similarly, to stimulate the automobile sector and to increase the production of electric vehicles, the tax rate has been reduced to 5%.
Exemptions and Concessions
As mentioned before, goods like petroleum are exempted from GST and are taxed as per the state-wise VAT rates. Similarly, if your business has a turnover of less than INR 40 lakhs (10 lakhs for north-eastern states), you are exempt from the GST and are charged at a nominal rate. Agricultural services, educational services, certain transportation services and government services like those provided by the Reserve Bank (RBI), services provided to diplomats (including the UN) are some of the services which are exempt from GST.
During the recent COVID-19 pandemic, the Finance Minister announced several relaxations in the taxation system. These include extensions for filing returns and linking the Aadhaar and PAN details and not charging a penalty for late payment of GST.
As an Indian taxpayer, you must be aware of all the taxation laws and regulations that impact you directly or indirectly. If you are a small businessman, a lot of GST reforms would have been extremely confusing to grasp. That’s why a lot of companies have taken the initiative to launch software services to businessmen to guide them not only about GST but also about taking their business online.