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How GST Works: A Step-By-Step Guide to Goods and Services Tax

What is GST?

GST, which stands for Goods and Services Tax, is a form of indirect taxation levied on the exchange of goods and services. This tax is designed to be applied at various stages of production and distribution, and it is oriented towards the destination of the goods and services. GST serves as a comprehensive replacement for several previous indirect taxes like VAT, excise duty, and service taxes in India, bringing all goods and services under a single domestic taxation law. Under this system, taxation occurs at each sale point in the supply chain.

Meaning and Objectives of GST:

GST, as defined, is a tax system that has replaced a multitude of indirect taxes, including VAT, service taxes, and excise duties in India. An understanding of the essence of GST is enhanced by delving into its core objectives.

  • Elimination of Cascading Tax Effects: The GST legislation ensures that taxes are imposed exclusively on the net value added, thus eliminating the tax-on-tax structure and consequently reducing the cost of goods.
  • Integration of All Indirect Taxes: Most indirect taxes at both the state and central government levels have been consolidated into the Goods and Services Tax, with only a few exceptions.
  • Boosting the Tax-to-GDP Ratio and Generating Revenue Surplus: A high tax-to-GDP ratio signifies increased tax collections, indicating a robust economic system. A broader tax base and enhanced tax compliance are anticipated to result in higher government revenue through GST services.
  • Reducing Corruption and Tax Evasion: The GST framework aims to enhance transparency in the tax system, leading to fewer instances of false input tax credit.
  • Enhancing Tax Compliance: The online GST system aims to increase tax compliance, particularly among small and unorganized businesses, by simplifying the registration and return filing process on the GST platform.
  • Augmenting Overall Productivity and Efficiency: The implementation of Goods and Services Tax in India seeks to alleviate logistical constraints and streamline the lengthy process of claiming input tax credits. Additionally, the subsuming of entry taxes is expected to enhance the overall productivity of enterprises.

Advantages of GST in Simple Terms:

The GST, which is a new tax system in India, comes with some great benefits:

  • No More Tax Piling Up: With GST, various taxes like service tax and VAT are combined into one. This means less paperwork and easier tax filing. You only need to file one tax return.
  • One Tax for All: GST makes the tax rules the same across the entire country. It's like having the same rules and tax rates for everyone, no matter where you are in India.
  • Easy Online Process: You can do all your GST-related stuff online, like registering and filing tax returns. This makes it super simple, especially for small businesses and startups.
  • Helping Small Businesses: Small businesses with annual earnings between Rs. 20 lakh and Rs. 75 lakh get a break with GST. They can pay less in taxes.
  • Less Confusing Taxes: Instead of dealing with 17 different taxes, GST simplifies things with just one tax. This means lower prices for goods and more money for the government.

So, in a nutshell, GST is like a one-stop shop for taxes, making things easier, fairer, and more efficient for businesses and the government.

Types of GST:

  • State Goods and Services Tax (SGST):

    • Applicability: Charged by state governments for transactions within the same state.
    • Revenue Collection: Collected by the state where the transaction occurs.
  • Central Goods and Services Tax (CGST):

    • Applicability: Imposed by the central government for intra-state transactions.
    • Revenue Collection: Responsibility of the central government.
  • Integrated Goods and Services Tax (IGST):

    • Applicability: Applies to inter-state transactions, including imports and exports.
    • Revenue Collection: Both central and state governments share revenue based on the GST law. The state portion is collected where the goods or services are consumed.
  • Union Territory Goods and Services Tax (UGST):

    • Applicability: Levied by Union Territories for all transactions within their territories.
    • Payment Rules and Distribution: Similar to state GST, following the GST platform's guidelines.

Comparison of Taxation in Old and New Regimes:

Transaction

Old Regime

New Regime

Revenue Distribution

Sale within a particular state

VAT + Excise/Service Tax + Central Excise

Central GST & State GST

Shared between state and center

(e.g., sale within Maharashtra)

Sale between states or more

Excise/Service Tax + Central Sales

Integrated GST

Center shares revenue based on

(e.g., Sales from Delhi to Maharashtra)

goods' destination


GST Registration:

Under the GST system, all businesses previously liable for service tax, VAT, or central excise must register for GST. The GST registration process can be initiated on the GST portal. Upon submitting the application, the online portal generates an Application Reference Number (ARN) instantly.

  • ARN (Application Reference Number): Used to track the status of the GST registration application.
  • GSTIN (Goods and Services Tax Identification Number): A 15-digit code assigned to GST-registered taxpayers, mandatory for businesses with an annual turnover exceeding Rs. 20 lakh.

Typically, taxpayers receive their GST registration certificate and GSTIN within one week of ARN generation.

Documents Required for GST Registration:

  • Sole Proprietor or Individual:
    • PAN (Permanent Account Number)
    • Address proof
    • Aadhaar card (owner)
    • Bank account details
    • Photograph of the owner
  • Partnership Firms, Including LLP (Limited Liability Partnership):
    • PAN
    • Address proof (partners and business location)
    • Bank account details
    • Copy of the partnership deed
    • Registration certificate or board resolution (for LLP)
    • Photographs of authorized signatories and partners
    • Proof of the appointment of an authorized signatory
  • Hindu Undivided Family (HUF):
    • PAN (HUF)
    • Address proof
    • Bank account details
    • Photograph of the owner
    • Aadhaar card and PAN card (Karta)
  • Company (Both Indian and Foreign, Public and Private):
    • PAN (company)
    • Bank account details
    • Address proof (principal place of business)
    • PAN and Aadhaar card (authorized signatories)
    • PAN and address proof (directors of the company)
    • Articles of Association or Memorandum of Association
    • Proof of the appointment of an authorized signatory
    • Photographs of directors and the authorized signatory
    • Certificate of incorporation issued by the Ministry of Corporate Affairs

GST registration fees

It's essential to understand that there are no government-imposed GST registration fees when an individual chooses to register through the online GST service portal. However, if someone opts to seek assistance from a certified chartered accountant or GST practitioner for GST services, they will need to pay a fee for the professional assistance.

GST Login for Existing Users:

Step 1: Go to the official Goods and Services Tax portal.

Step 2: Locate the 'Login' button in the top-right corner of the homepage.

Step 3: Click on the 'Login' button.

Step 4: Provide your username, password, and the CAPTCHA code, then click the 'login' button.

Step 5: Upon successful GST login, you will be directed to the dashboard, where you can access information such as the summary of GST credit, the 'pay tax' tab, the 'file returns' tab, Annual Aggregate Turnover (AATO), saved forms, notices received, and more.

If you have forgotten your login credentials, you can easily recover them through the GST services portal by clicking on the 'forgot password' button on the login page and following the subsequent steps.

GST rates slabs

In India, there are four main GST tax slabs. These slabs are designed to ensure that things like food and essential services have lower taxes, while luxurious items and services have higher taxes. More than 1,300 goods and nearly 500 services are divided into these four tax slabs, which are 5%, 12%, 18%, and 28%. It's important to note that gold has its own tax rate of 3%, and certain special items like semi-precious stones have a tax rate of 0.25%.

GST Rates in India:

5% GST Slab:

Goods: Items in this category include clothing up to Rs. 1,000, agarbatti, Braille materials (watches, paper, typewriters), coir mats, cashew nuts, domestic LPG, edible oils, floor coverings, fish fillets, fertilizers, first-day covers, frozen vegetables, footwear up to Rs. 500, hearing aids, insulin, baby food, medicines, matting, packaged paneer, packaged food items, pizza bread, postage stamps, roasted coffee beans, revenue stamps, rusk, sugar, stents, sabudana, stamp postmarks, skimmed milk, and tea.

Services: Services in this slab encompass road transport by motor cabs and radio taxis, tour operators’ services, restaurants with a turnover of up to Rs. 50 lakh, economy class air travel, sale of advertising space, and transportation services like railways and airways.

12% GST Slab:

Goods: Goods in this category include ayurvedic medicines, almonds, clothing above Rs. 1,000, animal fat sausages, butter, bhujia, chutney, board games, cake servers, reagents and diagnostic kits, exercise books, fruits, frozen meat products, fish knives and forks, fruit juice, corrective spectacles, ghee, jam, jelly, mobile phones, namkeen, notebooks, non-AC restaurants, pickles, packaged coconut water, sewing machines, tongs, tooth powder, and work contracts.

Services: Services here include hotels, guest houses, and inns with tariffs between Rs. 1,000 and Rs. 2,500 per night, as well as business class air travel.

18% GST Slab:

Goods: Items in this category consist of aluminum foil, furniture, biscuits, bamboo products, branded clothing, CCTV cameras, cakes, corn, curry paste, envelopes, footwear priced above Rs. 500, hair oil, instant food mixes, ice cream, mineral water, mayonnaise, monitors, paddling pools, pasta, printers, preserved vegetables, soups, soaps, salad dressings, steel products, tissues, tampons, toothpaste, electronic and non-electronic weighing machines, and more.

Services: This slab covers telecom services, AC hotels serving alcohol, IT services, and hotels with room tariffs ranging from Rs. 2,500 to Rs. 5,000 per night.

28% GST Slab:

Goods: Items include aerated water, personal aircraft for personal use, aftershave, motor vehicles, ceramic tiles, chocolates without cocoa, dishwashers, deodorants, hair dye, shampoo, paan masala, paints, shaving cream, shavers, vacuum cleaners, water heaters, washing machines, and more.

Services: Services attracting 28% GST include 5-star hotels, race club gambling and betting, hotels with room tariffs of Rs. 5,000 and above per night, and cinema and entertainment.

Additionally, there are zero-rated supplies in GST, which apply to goods that are exempt from GST.

How to Calculate GST:

In India, the calculation of GST (Goods and Services Tax) involves adding up the GST payable on reverse charge, inward supplies, and output supplies. This calculation is done on a monthly basis, and the resulting amount needs to be paid when filing your monthly GST returns.

As a taxpayer, it's crucial to take into account various factors and charges, including reverse charge, exempted supplies, inter-state sales, and both eligible and non-eligible Input Tax Credit (ITC), when determining your GST liability. Accurate GST calculation is essential to avoid incurring an 18% interest penalty for any shortfall in your payment.

You can make use of the GST calculator provided on the Government of India's GST portal. This tool helps you determine your total tax liability by entering the necessary values for different categories, such as the return filing month, current ledger balance, tax liability under reverse charge mechanism (RCM), and more.

GST Calculation Formula:

GST Amount = (Original Price x GST Rate) / 100

Net Price = Original Price + GST Amount

For example: Let's say you're selling a product from Mumbai to Kolkata for Rs. 10,000, and the applicable GST rate is 12%.

The GST amount for this transaction would be (10,000 x 12) / 100 = Rs. 1,200. Therefore, the net price of the product would be Rs. 10,000 + Rs. 1,200, totaling Rs. 11,200.

GST Return Filing:

When to Submit GST Returns?

Essentially, a GST return (GSTR) is a document that taxpayers need to file with the relevant tax authority. It contains details of income/sales and purchases/expenses, aiding in the calculation of a business's tax liability.

Under the GST tax system, registered dealers are required to file GSTRs, which encompass sales, purchases, output GST, bank account information, and input tax credit.

As per the norms of goods and service tax, regular businesses with an annual aggregate turnover exceeding Rs. 5 crore must file one annual return and two monthly returns, totaling 25 returns in a year through the online GST platform.

However, for those under the QRMP scheme, the number of GST returns varies. Quarterly GSTR-1 filers, for instance, must complete a total of nine GST service tax returns in a year, including the annual return and GSTR-3B. The number also varies for special cases like composite dealers, who are required to file GSTR five times a year.

Return Form

Filing Frequency

Due Date

GSTR-1

Monthly

11th of the following month (Effective from October 2018)

GSTR-3B

Monthly

20th of the following month

GSTR-4

Quarterly

18th of the subsequent quarter

GSTR-5

Monthly

20th of the following month

GSTR-6

Monthly

13th of the following month

GSTR-7

Monthly

10th of the following month

GSTR-8

Monthly

10th of the following month

GSTR-9

Annually

31st December of the next financial year

 

New Compliances under GST:

In addition to the online filing of Goods and Services Tax (GST) returns, the GST system has introduced several new compliance measures.

E-way Bills: The centralized E-way Bills system was launched for inter-state goods transportation on April 1, 2018, and for intra-state movement on April 15, 2018. This system allows traders, manufacturers, and transporters to easily generate E-way bills for the goods they transport. It has proven to be beneficial for tax authorities, reducing time spent at check-posts, and effectively curbing tax evasion.

E-invoicing: E-invoicing is applicable to businesses with an annual turnover exceeding Rs. 100 crore in the previous fiscal year. These businesses must obtain a unique invoice reference number for all B2B (business-to-business) invoices by uploading them on the GSTN's online invoice registration portal. This portal verifies invoice accuracy and authenticity, authorizing businesses with a digital signature and QR code.

E-invoicing offers advantages such as reducing data entry errors and enhancing invoice interoperability. It allows for the instant transfer of invoice information from the Invoice Registration Portal (IRP) to the GST platform and E-way bill portal, eliminating the need for manual filing of GSTR-1.

HSN Code Requirements: Businesses are required to include their SAC/HSN code on all invoices for goods and services from April 1, 2021. For instance, B2B supplies to registered entities with an aggregated turnover of up to Rs. 5 crore in the previous year must mention their 4-digit HSN code on the invoice. Similarly, B2B or B2C supplies to registered entities with a turnover exceeding Rs. 5 crore in the preceding year must include their 6-digit HSN code on the invoice. Any changes to the 4/6-digit HSN or SAC code must be detailed under Table 12 of the GSTR-1 form.

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