Goods And Services Tax

Multi-stage – A product has to go through multiple change-of-hands through its supply chain. This starts from the manufacturing until the final stage of sale to the end-user or consumer.

Here are the various stages involved:

• Purchase of raw materials
• Production or manufacture
• Warehousing of finished goods
• Selling to wholesalers
• Sale of the product to the retailers
• Selling to the end-users

The Goods and Services Tax is charged during each of these stages, thus making it a multi-stage tax mechanism.

Value Addition - A manufacturer who is in the business of producing biscuits purchases flour, sugar and other raw material. The net input value increases when the sugar and flour are combined to further be baked into biscuits.

The manufacturer sells the final product, i.e; biscuits to a wholesaler who packs bulk quantities of biscuits in carton boxes and labels them. This stage is also a value addition to the biscuits. Post this, the wholesaler sells it to multiple retailers. The retailer then packages the biscuits in smaller units and invests money for the marketing of these biscuits. This once again increases its value. GST is applicable on such value additions, i.e. the monetary value which gets added at every stage for reaching the final stage of making it available to the end-users.

Destination-Based – Suppose, goods are manufactured in Maharashtra and sold to an end-user in Karnataka. As Goods and Service Tax is charged at the point of consumption, the total tax revenue will be considered in Karnataka and not the original state of Maharashtra.

Advantages of GST - GST has primarily eliminated the cascading effect of taxation on the sale of products and services. This removal has had an impact on the final cost of goods. GST regime has successfully eliminated the tax on tax and therefore the cost of goods has decreased.

GST is also mainly technologically driven. All action points like registration, return filing, application for refund and response to notice are done online on the GST portal. This help in accelerating the processes involved.

Eliminating the cascading tax effect – Since the time of Goods and Services Tax implementation, all the taxes have been combined to be brought under a single tax umbrella. This means that the cascading tax effect has been done away with. For example, before the GST law, if a consultant provided his/her services for a value of Rs. 40,000 and charged a service tax of 14% (Rs. 5,600), purchased office requirements of Rs. 15,000, paid VAT at 5% (Rs. 750), then the total cash outflow would be Rs. 5,600 + Rs. 750 = Rs. 6,350.

After the implementation of GST, the applicable tax rate for the service would be 18%. If the service is offered for Rs. 40,000, the GST applicable would be Rs. 7,200. The Rs. 750 towards office supplies are deductible. This makes the net outflow Rs. 7,200 – Rs. 750 = Rs. 6,450.

Higher threshold - In the previous tax regime when VAT was applicable, businesses which generated turnovers above Rs. 5 lakhs were required to pay VAT. Service providers who had a turnover of maximum Rs. 10 lakhs were exempt from Service Tax. However, the minimum threshold for registration under GST is Rs. 20 lakhs. This means that small service providers and business units do not have to register.

Simple procedure - The entire GST process, right from registration to filing of returns, can be done online. It is an easy procedure which requires minimal technical knowledge and allows any individual to use it. Registering under GST is very simple since there is no requirement to go through multiple registrations such as Service Tax, Excise Duty, VAT, etc.

Composition scheme - Small businesses with turnovers ranging between Rs. 20 lakhs and Rs. 75 lakhs can benefit under the new tax regime since the Composition Scheme helps in lowering the applicable taxes. The tax burden on small businesses has reduced considerably due to the implementation of GST.

Lesser complications - The tax regime that was applicable before GST had Service Tax and Value Added Tax. Each of these taxes came with their compliances and returns. For example, Excise Duty return filing was required to be done every month, while Service Tax return filing was required to be done every month for companies and LLPs. It was required to be done every quarter for partnerships and proprietorships. Value Added Tax was different across states and this resulted in inconsistencies within the country. The implementation of GST has made sure that all businesses end up paying a uniform tax for the products and services.

Same treatment to E-Commerce companies - Before the implementation of the Goods and Services Tax, there was no proper definition for the supply of goods via an e-commerce portal. There were multiple VAT laws. For instance, deliveries through online portals such as Amazon and Flipkart to states like Uttar Pradesh required the filing of a VAT declaration. The registration number of the vehicle that was delivering the product would also have to be mentioned, and tax authorities had the power to seize products in case proper documents were not produced.

GST has effectively done away with such confusing compliances and differential treatments. The e-commerce sector now has clearly defined provisions that make it easier to engage in the supply of products across states.

Regulation of the unorganised sector - Before the implementation of GST, few industries including textile and construction used to be highly unorganised and unregulated. With the implementation of GST, there have been many provisions for online payments and compliances that were introduced. Even to the smallest aspects like availing of input credit are clearly defined, thus allowing complete regulation and accountability across all sectors.

GST Components

There are three key taxes applicable under the GST tax system: CGST, SGST & IGST.

• CGST: This tax is collected by the Central Government on an intra-state sale (e.g., a sale that takes place within Maharashtra)
• SGST: This tax is collected by the state government on intra-state sales (e.g., a sale taking place within Maharashtra)
• IGST: This tax is collected by the Central Government for an inter-state sale (e.g., a sale between Maharashtra and Tamil Nadu)

New Compliances Under GST

GST regime has several new systems introduced as part of a tax revamp, some of these are:

e-Way Bills - GST brought in a centralised system for waybills via the introduction of “E-way bills”. This mechanism was launched on 1st April 2018 for goods movement happening inter-state and on 15th April 2018 for intra-state movement of goods.

As part of the e-way bill system, manufacturers, traders and transporters can make use of the e-way bills for the goods that are transported from the origin place to destination on a common online portal. Tax authorities can also benefit from this since this system has significantly reduced the time required at check -posts and the scope for tax evasion also reduces.

E-invoicing - The e-invoicing system was launched recently on a trial basis since January 2020 and has been applicable since October 2020. This mechanism involves large businesses which have an annual aggregate turnover beyond Rs. 100 crores for complying with few of the requirements.

Businesses are required to obtain a unique invoice reference number to get a business-to-business invoice. This can be done by uploading on the GSTN’s portal, which is also known as the invoice registration portal. The portal helps in verifying the correctness and validity of the invoice. It then authorises the usage of the digital signature combined with a QR code.

E-invoicing helps in interoperability of invoices and minimises data entry errors. It is designed to transfer the invoice related information directly from the IRP to the GST portal and the e-way bill portal. Thus, it eliminates the need for manual data entry at the time of filing ANX-1 /GST returns and for generating part-A of the e-way bills.

Additional Benefits of GST

Here are some of the key benefits offered by GST:

1. GST ensures that all transactions and processes are done through the electronic mode for achieving a non-intrusive administration. This helps in minimising the taxpayer's need to physically interact with tax officials.

2. GST offers the facility of auto-generated monthly and annual returns.

3. It also allows taxpayers to get a tax refund within 60 days, and a provisional release is offered of 90 per cent refund for exporters within 7 days.

4. Additional measures of GST include interest payment in case refund is not granted in time, and refund is directly credited to the recipient’s bank account.

5. Comprehensive transitional provisions for ensuring a smooth transition of existing taxpayers to GST regime, credit for available stocks, etc.

6. Other provisions include the mechanism of GST compliance rating, etc.

7. Anti-profiteering provisions to protect consumer rights: Any benefit due to reduction in the rate of tax or increase in input tax credit because of the introduction of GST are passed on to customers (through a reduction in final sale price).

8. Under the GST regime, exports are zero-rated in entirety. In the earlier system refund of some of the taxes did not happen due to fragmented indirect taxes between the Centre and states.

9. GST is technology-driven and minimises human interface to a large extent

10. GST has helped to improve easy business processes in India.

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