The Goods and Services Tax or GST is a destination-based tax levied on every value addition in the supply chain. With effect from 1st July 2017, GST has replaced the multitude of indirect taxes levied earlier by the central and state governments. Under the GST regime, a single tax is charged on the goods and services. There are three types of GSTs, namely, State Goods and Services Tax, Central Goods and Services Tax, and Integrated Goods and Services Tax. CGST and SGST are collected by the central and state governments respectively, while IGST is imposed on interstate supplies and imports and divided between the centre and state. This article outlines GST and its features in detail.
What Are The Salient Features of GST?
As a taxpayer, you should be aware of the main features of the GST regime. We explain the salient features of GST below:
- Single Indirect Tax
The Indian Government introduced the GST regime as a single unified tax system. Before the implementation of GST, taxpayers had to pay a myriad of indirect taxes which led to a cascading tax burden. However, the Goods and Services Tax (GST) helped eradicate and subsume various indirect taxes like VAT, service tax, and excise duty under a unified tax and simplify compliance for businesses. GST works by implementing a single tax rate to various goods and services based on their classification under the Harmonised System Nomenclature. As such, GST rates can range from 0%-28% depending on the nature of the goods and services in question.
- Registration Exemption for Small Businesses
According to the salient features of the GST Act of 2017, businesses with a total turnover exceeding Rs. 40 Lakhs in a financial year need a GST registration. For special category states, the registration threshold is set at Rs. 20 Lakhs. Additionally, service providers with a turnover of Rs. 20 Lakhs (normal states) and Rs. 10 Lakhs (special category states) need to register for GST. These minimum threshold requirements exempt small businesses from GST registration and helps simplify their taxation burden further.
- Input Tax Credit System
One of the main features of the GST regime is the applicability of input tax credit. Input tax credit or ITC is a tax refund that a GST-registered taxpayer can claim on the Goods and Services Tax paid on inputs used during the production/supply of goods and services. In the GST system, tax is imposed at each stage of the supply chain and it is paid by the final consumer of the good/service. Businesses can claim the tax paid on every stage as ITC in the subsequent stage (if they have not opted for the composition scheme). For instance, if a manufacturer pays Rs. 6,000 as GST on procuring tires for a car, he can claim this as an ITC at the time of paying GST on the sale of the final product (car). If his GST liability is Rs. 40,000, he can use this input credit to off-set his liabilities and lower them to Rs. 34,000.
- Multiple Tax Slabs
The tax structure under GST is classified into four tax slabs. Goods and services are classified according to their nature and taxed at different slab rates. Let’s have a look at the tax rates under GST:
5% GST is applicable on essential goods like food items and lifesaving drugs.
12% GST is applicable on certain items like apparel, packaged foods, medicines, nuts, etc.
18% GST is applicable on various consumer durables, electronic items, and most services.
28% GST is applicable on luxury goods and harmful goods like tobacco and aerated drinks.
Additionally, there is no GST on some essential goods and services like milk, eggs, health services, and education services. Special GST tax rates of 0.25% and 3% are applicable on cut and semi-polished stones and pearls, diamonds, and gold respectively.
- Invoice Matching
Another prominent GST feature and benefit to note is that the GST system matches the details of the invoices filed by the supplier with those filed by the recipient. If the information provided by the supplier and recipient matches, then the system considers the data to be correct. However, if there is a mismatch, the GST portal sends automated notifications to the concerned taxpayer to help them correct these discrepancies at the earliest and claim ITCs seamlessly.
- GST Composition Scheme
When talking about the importance of GST, you must also understand the GST Composition Scheme. By opting for this Scheme, eligible businesses can enjoy lower GST rates on goods and services. According to the provisions of the Composition Scheme. manufacturers with an annual turnover of up to Rs. 1.5 Crores can opt for this Scheme. For the Northeastern states and Himachal Pradesh, this turnover limit is set at Rs. 75 Lakhs. Service providers can also avail of a special Composition Scheme where the threshold is set at Rs. 50 Lakhs. However, you should note that opting for the Composition Scheme disqualifies you from claiming any input tax credit.
- Consumption-Based Tax
To understand how GST works you need to understand that GST is a destination-based consumption tax. In simple words, tax is received by the state where the goods and services are consumed rather than manufactured. While GST is levied on each stage of the supply chain, the supplier deducts the same by claiming ITC on the GST that’s already paid. Subsequently, GST is transferred to the final consumer of the goods and services.
- Competitive Advantage
The introduction of the GST system has helped eliminate the cascading impact of indirect taxes in India. The single integrated GST system has lowered compliance hurdles for Indian businesses making them more appealing to foreign investors in the international market and enhancing their competitive edge.
- Anti-Profiteering Measures
This salient feature of the GST system ensures that businesses pass down the lower tax rate benefits to customers by reducing prices of various goods and services. To this end, the GST law incorporates certain anti-profiteering measures to offer a framework to ensure that these benefits are passed down to consumers.
- Digital Compliance and Payments
The digital ecosystem of GST registration and payments makes compliance easy. The all-in-one GST portal allows taxpayers to complete various actions like GST registration, return filling, payments online. Businesses can seamlessly pay GST online using a digital payment mode of convenience like NEFT, internet banking, credit/debit cards, or RTGS. In fact, taxpayers can correct mistakes or appeal against errors using the digitised ecosystem as well.
Conclusion
In a nutshell, the GST system in India has helped streamline tax compliance with a simplified tax structure. The various salient features of GST have brought about greater transparency and more accountability in the taxation system, while simultaneously boosting economic growth and business development in the nation by eliminating cascading taxes and complicated compliance requirements. Understanding the salient features of GST and the various types of GSTs can help business owners better manage their tax liabilities and claim ITC wherever applicable.
