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Knowledge 2021-09-06

Basic Concepts of GST

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 comprehensivemulti-stagedestination-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.

Five Basic Points about GST 

When is GST levied?

The most important thing about GST then is its point of levy. Under GST, point of tax levy is ‘supply’. What constitutes a supply has been defined in the GST Act. Supply means sale of goods and services. A supply of goods and services can take place even without an actual sale. Supply will also include, transfer, exchange, and barter, rental, lease and also a supply made to an agent or to a branch. So if you are a business, engaged in any of the above, GST will replace all taxes paid by you on purchases, and mandate you to levy GST on your supply. In this context the government may notify some services & goods, which will not be considered a supply and hence will not attract GST. So the first step would be to identify if your business has made a supply.

Types of GST

Once it has been established that your business has made a supply, the next step is to find out whether it is an intra-state or an inter-state supply. If the origin state is different from the destination State, it is considered an inter-state supply. This is the reason why GST is also called a destination-based tax. Those who make inter-state supplies have to mandatorily register for GST. Most supplies are likely to be taxed at the rate of the destination state. Supplies made outside India would not attract any GST, however GST registration may still be required for these supplies. Intra-state sales will attract Central and State levy, called SGST and CGST. And inter-state sales will attract IGST, which is likely to be a sum total of CGST and SGST. IGST will also be levied on imports.

Who should prepare for GST?

If you are an existing registrant under VAT or service tax or excise duty, you should roll over your registration to GST. Those with turnover less than Rs 20 lakh (Rs 10 lakh for North East states) do not have to mandatorily register for GST. This limit, though, is not to be considered if the business is involved in making inter-state transactions. GST registration is mandatory for them. If you have a website from where supply of goods or services takes place, GST registration will be mandatory for you. GST also applies to an ‘input service distributor’. Input service distributor means a head office that receives billing for services received at branches and later on it sends apportions to branches. Such ISDs also have to mandatorily register for GST.

GST applicability for various businesses

As a trader, you may be already registered under VAT, so you must register for GST. GST will allow you to set off tax paid at earlier stages for payment of GST on supplies you make. Manufactures also stand to benefit by registering, as they can now adjust tax paid on inputs against GST on outputs. So far as service providers are concerned, many of the existing rules will flow to GST. However, GST on services would now be levied by both State and centre. Taxes would flow to the place of consumption and will be received by the consuming state. Service providers will be able to claim set-off of tax paid on input goods, which was earlier restricted to only input services. Some services, such as doctors, para-medical services, and education services earlier exempt from service tax are likely to be exempt under GST as well.

Should you voluntarily opt for GST registration?

Many small businesses that are below the turnover threshold and do not make inter-state supplies have the option to register voluntarily. If your buyers are GST compliant it helps you are too. This way, your buyer will be able to take credit of taxes you pay for your inputs. The GST act has laid down that if registered buyers make purchases from unregistered sellers, they will have to do full GST compliance towards tax payment and return filing on behalf of the unregistered seller. With every buyer and seller on board, GST will create a sort of a club of its own with benefits, but at the same time come with the cost of being compliant as well adapting technology as means to do business. Both bets worth the investment.

Applicability of GST

  • To every person who supplies goods and/or services of value exceeding Rs 20 lakh in a financial year. (Limit is Rs 10 lakh for some special category states).
  • Compulsory registration for these. And GST must be paid when turnover exceeds Rs 20 lakh (Rs 10 lakh for some special category states).
  • To any person making inter-state taxable supply of goods and/or services
  • Every e-commerce operator
  • Supplier of goods and/or services, other than branded services, through e-commerce operator
  • Aggregators who supply services under their own brand name
  • Casual Taxable Person
  • Non-Resident Taxable Person
  • Person required to deduct/collect tax (TDS/TCS)
  • Input Service Distributor
  • Supplier of online information and database access or retrieval services from a place outside India to a person in India, other than a registered taxable person.
  • Person required to pay tax under Reverse Charge
  • Person supplying the goods on behalf of other taxable person (eg. Agent)

Non-Applicability

  • GST does NOT apply to Agriculturists.
  • It does not apply to any person engaged exclusively in the business of supplying goods and/or services that are not liable to tax or are wholly exempt from tax under this Act.

Exemptions Under GST-Goods

Understanding the taxability also involves knowing whether item is exempt or not under GST. Due to the scope of taxable supplies being widened under GST, GST Exemptions have clearly been defined. Not just knowing the Exemption list, but also understanding the implication of item being exempt is important as certain conditions are attached to it like reversing the ITC.

Also, what can be Nil rated today may become charged to a higher tax rate in the future. Hence, clearly demarking the various terms such as Nil Rated, Exempt, Zero-rated and Non-GST supplies under GST is important.

ZERO-RATED and EXEMPTED GOODS

Almost untries apply preferential rates to some goods and services, making them either “zero rated” or “exempt.” For a “zero-rated good,” the government doesn’t tax its retail sale but allows credits for the value-added tax (VAT) paid on inputs. This reduces the price of a good. Governments commonly lower the tax burden on low-income households by zero rating essential goods, such as food and utilities or prescription drugs.

Ifby contrast, a good or business is “exempt,” the government doesn’t tax the sale of the good, but producers cannot claim a credit for the VAT they pay on inputs to produce it. Because exempting breaks the VAT’s chain of credits on input purchases, it can sometimes raise prices and revenues. Hence, governments generally only use exemptions when value added is hard to define, such as with financial and insurance services.

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Hope you can find this article helpful. If you did like this Blog then Share it with your friends who are doing CA Final studies or who will be giving their CA Final exams in the near future. 

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Comments (03)

Aaron Nunez

21 July 2021

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