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What is GST with example?

GST is a consumption based tax levied on sale, manufacture and consumption on goods & services at a national level. … State GST (SGST) Which will be levied by State. Integrated GST (IGST) – which will be levied by Central Government on inter-State supply of goods and services.

The Rajya Sabha has cleared a  constitutional amendment to bring about a system of Goods and Services Tax (GST) in India. It is perhaps the most important economic reform item on the Narendra Modi government’s agenda. This is one reform which affects all of us.

It also happens to be a complicated reform as most taxation matters usually are. This blog attempts to present an overview on GST and explain why it is expected to make a difference to all of us.

GST is a consumption based tax/levy. It is based on the “Destination principle.” GST is applied on goods and services at the place where final/actual consumption happens.

GST is collected on value-added goods and services at each stage of sale or purchase in the supply chain. GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services.The manufacturer or wholesaler or retailer will pay the applicable GST rate but will claim back through tax credit mechanism.

But being the last person in the supply chain, the end consumer has to bear this tax and so, in many respects, GST is like a last-point retail tax. GST is going to be collected at point of Sale.

This system will have two components which will be known as

  • Central Goods and Service Tax (CGST) and
  • State Goods and Service Tax (SGST)

The Central Goods and Service Tax(CGST);FULL DETAIL

  • The Central Goods and Services Tax Bill, 2017 was introduced in Lok Sabha on March 27, 2017.  The Bill provides for the levy of the Central Goods and Services Tax (CGST).
  • Levy of CGST:  The centre will levy CGST on the supply of goods and services within the boundary of a state.  Supply include sale, transfer and lease made for a consideration to further a business.
  • Tax rates: The tax rates of CGST will be recommended by the GST Council.  This rate will not exceed 20%.  In addition, the Bill allows certain taxpayers whose turnover is less than Rs 50 lakh to pay GST at a flat rate on turnover (known as composition levy), instead on the value of supply of goods and services.  This rate will be capped at 2.5%.
  • Exemptions from CGST: The centre may exempt certain goods and services from the purview of GST through a notification.  This will be based on the recommendations of the GST Council.
  • Liability to pay CGST: The liability to pay CGST in relation to supply of goods and services will arise on the date of: (i) issue of invoice, (ii) receipt of payment, whichever is the earliest.
  • Taxable amount (value of supply): CGST will be levied on the supply of goods and services, whose value includes: (i) price paid on the supply; (ii) taxes and duties levied under a different tax law; (iii) interest, late fee, penalties for delayed payments, among others.
  • Input tax credit: Every taxpayer while paying taxes on outputs, may take credit equivalent to taxes paid on inputs.  However, this will not be applicable on supplies related to: (i) personal consumption, (ii) supply of food, outdoor catering, health services, etc.
  • Registration: Every person who makes supply of goods and services and whose turnover exceeds Rs 20 lakh will have to register in every state where he conducts business.  The turnover threshold is Rs 10 lakh for special category states.
  • Returns: Every taxpayer would have to self-assess and file tax returns on a monthly basis by submitting: (i) details of supplies provided, (ii) details of supplies received, and (iii) payment of tax.  In addition to the monthly returns, an annual return will have to be filed by each taxpayer.
  • Refunds and welfare fund: Any taxpayer may apply for refund of taxes in cases including: (i) payment of taxes in excess, or (ii) unutilized input tax credit.  Upon such application, the refund may be credited to the taxpayer, or to a Consumer Welfare Fund.  The Fund will be used for the purpose of consumer welfare.
  • Prosecution and appeals: For offences such as mis-reporting of: (i) goods and services supplied, or (ii) details furnished in invoices, a person may be fined, imprisoned, or both by the CGST Commissioner.  Such orders can be appealed before the Goods and Services Tax Appellate Tribunal, and further before the High Court.
  • Transition to the new regime: Taxpayers with unutilised input tax credit obtained under the current laws such as CENVAT may utilise it under GST.  In addition, businesses may also avail input tax credit on stock purchased before the start of implementation of GST.
  • Anti-profiteering measure: The central government may by law set up an authority or designate an existing authority to examine if reduction in tax rate has resulted in commensurate reduction in prices of goods and services.  The powers of the authority will be prescribed by the government.
  • Compliance rating: Every taxpayer shall be assigned a GST compliance rating score based on his record of compliance with the provisions of this Bill.  The compliance rating score will be updated at periodic intervals and be placed in the public domain.

State Goods and Service Tax(SGST);FULL         DETAIL

SGST is a part of Goods and Service Tax (GST).

SGST means State Goods and Service Tax, one of the three categories under Goods and Service Tax (CGST, IGST and SGST) with a concept of one tax one nation. SGST falls under State Goods and Service Tax Act 2016.
For easy understanding, when SGST is being introduced, the present state taxes of State Sales Tax, VAT, Luxury Tax, Entertainment tax (unless it is levied by the local bodies), Taxes on lottery, betting and gambling, Entry tax not in lieu of Octroi, State Cesses and Surcharges in so far as they relate to supply of goods and services etc. are subsumed.
The revenue collected under SGST is for State Government.
The above information is a brief idea about SGST in simple and easy to understand.

Benefits of GST

  • The tax structure will be made lean and simple
  • The entire Indian market will be a unified market which may translate into lower business costs. It can facilitate seamless movement of goods across states and reduce the transaction costs of businesses.
  • Number of departments (tax departments) will reduce which in turn may lead to less corruption
  • More business entities will come under the tax system thus widening the tax base. This may lead to better and more tax revenue collections.
  • Companies which are under unorganized sector will come under tax regime
  • It is good for export oriented businesses. Because it is not applied for goods/services which are exported out of India.
  • In the long run, the lower tax burden could translate into lower prices on goods for consumers.
  • The Suppliers, manufacturers, wholesalers and retailers are able to recover GST incurred on input costs as tax credits. This reduces the cost of doing business, thus enabling fairer prices for consumers.
  • It can bring more transparency and better compliance.

    Tax Calculation under GST

    The table below shows the difference in the amount of payment of tax and the advantage of input credit available to manufacturer/dealer:

    PARTICULARS VALUE AND TAX AMOUNT UNDER CURRENT LAWS VALUE AND TAX AMOUNT UNDERGST LAW.
    Value to manufacturer
    Production cost 100000 100000
    Add Profit Margin @10% 10000 10000
    Add excise duty @12% 13200
    Total cost of production 123200 110000
    Add VAT @12.5% 15400
    Add SGST @6% 6600
    Add CGST @6% 6600
    Invoice value for manufacturer 138600 123200
    Value to wholesaler
    Cost of goods 138600 123200
    Add profit margin @10% 13860 12320
    Total Value 152460 135520
    Add VAT @12.5% 19058
    Add SGST @6% 8131
    Add CGST @6% 8131
    Invoice value to wholesaler 171518 151782
    Value to Retailer
    Cost of goods 171518 151782
    Add Profit margin @10% 17152 15178
    Total Value 188670 166960
    Add VAT @12.5% 23584
    Add SGST @6% 10018
    Add CGST @6% 10018
    Invoice value to retailer 212254 18699

 How Indian GST model compares with GST in    other countries

Particulars India (proposed) Canada UK
Name of GST in the country Goods and Service tax Federal Goods and Service Tax & Harmonized Sales Tax Value Added Tax
Standard Rate 0% (for food staples), 5%, 12%, 18% and 28%(+cess for luxury items) GST 5% and HST varies from 0% to 15% 20 %
Reduced rates- 5 %, exempt, zero rated
Threshold exemption
Limit
20 lakhs (10 lakhs for NE states) Canadian $ 30,000 (Approx Rs. 15.6 lakhs in INR) £ 73,000
(Approx Rs. 61.32 lakhs)
Liability arises on Accrual basis: Issue of invoice OR
Receipt of payment
-earlier
Accrual basis: The date of issue of invoice OR the date of receipt
of payment- earlier.
Accrual Basis: Invoice OR Payment
OR Supply
-earliest
Cash basis (T/O upto 1.35mn): Payment
Returns and
payments
Monthly and 1 annual return Monthly, quarterly or annually based on turnover Usually quarterly. Small business option- annual
Reverse charge
Mechanism
Apply on goods (new) as well as services (currently under Service tax) Reverse charge applies to importation of services and
intangible properties.
Applicable
Exempt services Manufacture of
exempted goods or Provision of exempted services (to be notified)
Real estate, Financial Services,
Rent (Residence), Charities, Health, Education
Medical, Education, Finance, Insurance, Postal services

 

Particulars India (proposed) Singapore Malaysia
Name of GST in the country Goods and Service tax Goods and Service Tax Goods And Services Tax
Standard Rate 0% (for food staples), 5%, 12%, 18% and 28%(+cess for luxury items) 7% Reduced rates- Zero rated, exempt 6%
Threshold exemption
Limit
20 lakhs (10 lakhs for NE states) Singapore $ 1 million
(Approx Rs. 4.8 crore)
MYR 500,000
(Approx Rs. 75 lakhs)
Liability arises on Accrual basis: Issue of invoice OR
Receipt of payment
-earlier
Accrual Basis: Issue of invoice OR Receipt of payment OR Supply – earliest
Cash basis:(T/O upto SGD$1mn): Payment
Accrual Basis: Delivery of goods OR Issue of invoice OR Receipt of payment
Returns and
payments
Monthly and 1 annual return Usually quarterly Business option- Monthly
returns.
Large organsations- Monthly
Reverse charge
Mechanism
Apply on goods (new) as well as services (currently under Service tax) Reverse charge applies to supply of services Reverse charge applies to imported services
Exempt services Manufacture of
exempted goods or Provision of exempted services (to be notified)
Real estate, Financial services, Residential rental Basic food,Health Transportation, Residential property, Agricultural land

FIRST COUNTRY WHICH IMPLEMENT GST AND WHY?

Presently,there are around 160 countries that have implemented GST/VAT in some form or other. In some countries,VAT is the substitute for GST,but conceptually it is a destination based tax levied on consumption of goods and services.

  • France was the first to introduce GST.
  • Only Canada has dual GST model(Just like India is going to implement Dual GST Model).
  • Rate of GST ranges between 15–20% generally(may differ to higher/lower side in few countries).

Here,rate of GST is the most crucial part yet to be decided.Various countries have been struggling to rationalize the rate structure.India is all set to introduce GST,lets hope it is introduced at a nominal rate that proves beneficial not only for the common man but for the country as a whole.