The GST tax structure in India uses a well-organised framework to delineate tax rates for various goods and services. This tax structure implements four different tax rates fixed for different types of goods and services consumed in the country. This article discusses the four-tier GST tax structure in detail, while exploring the various other components of the GST regime.
What is the Goods and Services Tax (GST)?
GST or the Goods and Services Tax is a value-added tax that’s imposed on the supply of various goods and services which are intended for domestic consumption. GST was implemented to replace a wide range of indirect taxes like VAT, excise duty, service tax, etc. The chief objectives of the GST system are listed below:
- By eliminating multiple indirect taxes, the single unified GST system aimed to reduce compliance burdens for businesses and individual taxpayers.
- Introduction of GST was aimed at ensuring greater transparency in the indirect taxation system with regard to tax collection.
- Another chief objective of GST was to eliminate the cascading impact of taxes that created a higher tax burden for the end-customer.
- Implementation of GST was aimed at increasing the revenue of the government by broadening the tax base with varied tax rates.
As such, GST is applicable on the final price of goods and services, payable by the customer. The seller collects this GST amount and remits it to the government. This GST tax collection and remitting occurs according to a preset GST structure as determined by the GST Council.
What is the Four-Tier Structure of GST in India?
Let’s have a look at the four-tier GST tax structure in India in detail:
- Exempted Slab (Zero Rate)
The first tier is called the zero rate tier because it comprises all goods and services that are exempt from GST taxation. This bracket mainly includes basic necessities needed for everyday living like food grains, vegetables, fruits, bread, milk, and curd. Additionally, this bracket also includes supplies made to SEZ (special economic zones) developers. It is important to note that the Indian government decides which goods and services are eligible for zero rate GST and updates the list from time-to-time.
- Lower Rate Slab (5%)
Goods and services falling under the lower rate slab are taxed at 5% GST. This bracket includes items like packaged food, cream, skimmed milk powder, and branded paneer. Clothing items under Rs. 1,000 and footwear priced under Rs. 500 also fall under the 5% tax slab.
- Standard Rate Slab (12%-18%)
Most goods and services fall under the standard rate slab of the four-tier GST structure in India. Under the standard rate slab, applicable GST rates from 12%-18%. For instance, 12% GST is applicable on butter, cheese, ghee, packaged dry fruits, ketchup, fruit juices, sauces, and frozen meat products. The GST rate is set at 18% for pasta, cakes, pastries, telecom services, and IT services.
- Higher Rate Slab (28%)
This the highest tax slab in the Indian GST tax structure. The last 28% GST tax slab includes high-value items like cars and motorcycles. This tax rate is also applicable on paints, electronics, and aerated drinks. The government also finalises an additional cess on certain items included in the highest GST tax slab.
Types of GST
There are different taxes levied under the GST tax system in India based on the source and destination of the goods and services supplied. We have summed them up below:
- Central GST: The central government is entrusted with the duty of collecting CGST on the supply of various goods and services within the state.
- State GST: SGST is imposed and remitted to the state government where the goods and services are sold and consumed.
- Integrated GST: For the interstate supply of goods and services, the GST tax structure prescribes the IGST tax. The central government collects IGST on transactions of goods and services happening between two or more states.
- Union Territory GST: UGST is essentially SGST for union territories. According to the GST system in India, the central government is allowed to collect UGST on the supply of goods and services in an union territory.
Reviewing Other Components of the GST Structure of GST
Apart from the 4-tier structure and different types of GST, this taxation system has other essential components which are discussed below:
- Dual GST Model: India uses a dual GST model, meaning both the central and state governments can impose and collect GST.
- Composition Scheme: The Composition Scheme is an easy and simple scheme under the GST structure in India, tailored for small business owners. Small taxpayers with an aggregate turnover of less than Rs. 75 Lakhs in the previous year can opt for this Scheme. Those opting for the Composition Scheme have to pay GST at a fixed rate based on their annual turnover, instead of paying according to the 4-tier GST rate structure.
- Input Tax Credit: As per the tax structure in India after the implementation of GST, businesses registered under GST can claim input tax credits. Claiming input credits allows businesses to offset the GST paid on inputs, helping prevent the cascading impact of indirect taxes.
- Compliance Regulations: Another key component of the GST structure is compliance. Compliance with GST norms requires GST registration, returns filing, payment of taxes, and maintenance of records. GST-registered businesses have to adhere to the various compliance regulations to avoid penalties.
- Exports and Imports: According to the GST tax structure in India, exports are categorised under the zero tax slab. However, imports qualify for IGST at their point of entry into India. The tax rate depends on the type of imported goods in question.
Importance of Understanding GST Structure
Understanding the GST tax structure in India is essential for businesses to effectively navigate taxation and ensure compliance. Reviewing the four-tier GST structure allows businesses to understand the specific tax rate applicable on their goods and services. Knowledge of the appropriate tax slabs and state GST codes can help businesses fine-tune pricing policies, collect the right amount of tax, and avoid fines and penalties when filing returns. Moreover, understanding various aspects of the GST structure in India, including components like the Composition Scheme and Input Tax Credit benefits can help businesses optimise their tax liabilities and leverage benefits applicable under the GST framework.
