GST, the acronym for Goods and Services Tax, has been hailed by many as the most far reaching change in India’s indirect tax code since independence. GST has been designed to act as an effective replacement of the previous highly fragmented indirect tax collection methodology. Now that it has been over 6 months since GST implementation, the following are some things everyone must know about GST.
Reasons for GST Implementation
A major reason for GST implementation is to end the problem of multi-level taxation and make indirect tax estimation simpler. Under the previous method, multiple taxes were applied at various levels of supply chain which were difficult to estimate over time. The application of multiple taxes at different levels was prevalent especially in case of interstate buying and selling of goods/services. The new regime of GST is a consumption-based tax applicable to goods and services at their point of consumption irrespective where it was manufactured. Subsequent to the unification of the tax rates under GST, a predetermined portion of the tax revenue would be available to the state where the good/service was consumed and the rest will be available to the centre as revenue.
Different Rates for different Good and Services
Even though GST would feature a single tax rate for each type of good or service, different rates are applicable depending on the type of good or service being considered. There are currently the following applicable rates:
Exempt (0% GST) – Examples in this category include jute, fresh meat, butter, printed books, hotel tariff below Rs. 1000, etc.
0.25% GST – Goods including rough industrial diamonds and various other types of rough precious and semi-precious stones are included in this category.
3% GST – Polished diamonds, silver and gold jewellery will feature this GST rate.
5% GST – All restaurants (both air conditioned and non-air conditioned) are included in this category along with cotton and footwear priced below Rs. 500.
12% GST – Readymade clothes, frozen meat products, namkeen and bhujia are some of the key items in this category.
18% GST – Many of the earlier 28% GST items are now taxed at this lower rate. Some items currently present in the 18% GST category include financial services, furniture, mattresses, plywood, particle fibre, wooden boards, electrical panels, fans, compressors, marble/granite slabs, etc.
28% GST – This is the highest tax rate currently applied to any good or service in India. Main examples are goods such as pan masala and various tobacco products.
Not covered in GST – Some items are still taxed by the state and GST is not currently applicable to these. Examples include alcohol and various petroleum products.
The above list is for illustrative purposes only and not exhaustive. Also these rates are liable to periodic change as per decision of various bodies including the GST council.
Earlier Central and State Taxes replaced by GST
As mentioned earlier, GST has been introduced as a single tax to replace the multitude of taxes that were applied at different levels by central and state governments. Some of the state and central government taxes that have been replaced by GST include state VAT, CENVAT, service tax, excise duty, krishi kalyan cess, swacch Baharat cess, central sales tax, entertainment tax, luxury tax, and education cess to name a few. The removal of these taxes in effect means that various goods and services will be taxed just once at the point of purchase instead of multiple times along its cycle as used to happen earlier.
Who Determines GST Rates
Since before the time GST was officially introduced, the Central and State Governments were negotiating the applicable rates of each product. Currently, a specialized body known as the GST Council proposes and revises applicable GST rates. However, it is not an unilateral decision making body as the council is required to get 75% approval votes before a change in GST rate/item-specific GST is affected. The Central Government representatives account for one-third of the votes while the remaining two-thirds of the votes on the GST council are held by state government representatives.
GSTN is only partially Government Owned
The Good and Services Tax Network (GSTN) provides the technological backbone and know how that powers the GST online network. In practice, GSTN is a non-government organization engaged for the sole purpose of ensuring that availability of IT infrastructure and support to key GST stakeholders such as service providers, taxpayers and the government. At present the government of India owns a 24.5% stake in GSTN, while the rest is privately owned.
GST Impact on Economic Growth is still unclear
In India, cash-only businesses in the unorganized sector have been a major driver of economic growth by providing employment to millions; however, these businesses were notorious for evading taxes. The implementation of GST as well as the need for GST registration by smaller and larger businesses alike, a larger portion of the unorganized sector is expected to enter into the organized sector. This might very well manifest itself through higher GDP numbers without actual increase in economic activity as the organized sector expands at the expense of the unorganized sector, but, as of yet, such data is still awaited.
Businesses may need Multiple GST Registrations
In case your business is operating in multiple states across India, you will have to apply for separate GST registration in each and every state where you operate. Such separate registration is required as GST and is applied at the time of consumption/acceptance of the goods or services being offered. Hence each state where your product or service is consumed will derive its own revenue from the applicable GST. The GST registration process mandatorily requires input of PAN number and generates a unique identifier termed the GSTIN (Goods and Services Tax Identification Number). GST registration is currently optional for businesses with sales of less than Rs. 20 lakhs annually.
Since the implementation of GST about 6 months back, the GST tax rates as well as the items in each slab have undergone multiple changes. Going forward too, further tweaks in the rates and lists are expected to be implemented by the GST council. However the implementation of GST is definitely a step in the right direction for promoting ease of doing business across the country.