Aarti and her friends had booked tickets to see the latest movie in a new theater. They arrived half an hour before time as they were aware of Mumbai traffic. They reached the entry check-in point, the security checked their belongings and told them to go to the next floor for the movie.
They went to the next floor, but the security over there told them that they needed to go to the 3rd floor for checking as their movie was being premiered there.
When they went to the 3rd floor, the security over there told them that mid-level checking happens at the first floor for everyone irrespective of the movie people are here to watch.
Aarti and her friends started getting frustrated with the entire process and left the place. They decided to watch the movie when it came out on any OTT platform. They promised to themselves that they will never visit that theater ever again.
In the Indian Tax System, a situation similar to Aarti and her friends was in play before 2017. We know that Indian taxes are of two types: Direct and Indirect Taxes.
Direct Taxes are charged or imposed directly on the individual, whereas Indirect Taxes are charged for the consumption of goods and services. Indirect taxes are called indirect because the customer does not pay the government directly.
The tax is charged on the seller of goods and services, who then passes it on to the consumer by adding the tax on the product and service.
Before 2017, we had many types of indirect taxes. Some of them were Customs, Value Added Tax, Excise Tax, Service Tax, Octroi Tax, etc. We had a complete clutter or what we Indians call ‘khichdi’ of indirect taxes.
All these indirect taxes created confusion and frustration among people or businesses who had to deal with it on a regular basis. This was in contrast to what the government advocated about making India a business-friendly place.
All this changed on 1st July 2017 with the introduction of the Goods and Services Tax or what we know it as, GST.
Goods and Services Tax tried to bring all the above-mentioned indirect taxes under one umbrella and made tax administration easier. Prime Minister Narendra Modi, while launching this tax, called GST a ‘Good and Simple Tax.’ The motto of GST is ‘one nation, one tax.’
Goods and Services Tax Meaning and Types
Let us first understand the meaning of Goods and Services Tax before discussing its various types.
The “goods” part of GST means all the goods that you could buy like food, clothes, online products, electronics, etc. and the “services” part of GST means all the services that you avail like transportation, etc.
Goods and Services Tax is considered an indirect tax as the government does not directly collect it from people, but it is imposed on the seller of the good or service.
Goods and Services Tax is called a value-added, destination-based tax. By value-added, we mean that when a product is being manufactured, it goes through several stages that add money value to it.
A potato chip that is manufactured goes through several stages where potatoes are peeled, washed, sliced, fried, and then packed. All these steps add value to the potato chips to make them saleable or fit to be sold in the market. GST is imposed for every value added to the product and hence, it is called a value-added tax.
GST is also a destination-based tax, as the tax revenue is collected by that state or place where the goods are consumed. If the potato chips made in Kerala are sold in Maharashtra, GST will be collected by the Maharashtra Government.
Types of Goods and Services Tax
In India, There are four types of Goods and Services Tax (GST). They are Central GST, State GST, Union GST and Integrated GST. Let us discuss each type in further detail.
- Central Goods and Services Tax: When transaction of goods and services takes place within a state, a tax is charged. The part of tax that goes to the Central Government is called the Central Goods and Services Tax, or the CGST.
- State Goods and Services Tax: When transactions of goods and services take place within a state, a tax is charged. The part of tax that goes to the State Government is called the State Goods and Services Tax, or the SGST.
- Integrated Goods and Services Tax: When transaction of goods and services takes place between different states of India or between India and any foreign territory, a tax is charged. This tax is shared by the Central Government and by the State Government where the goods or service was consumed. This is called the Integrated Goods and Services Tax, or the IGST.
- Union Goods and Services Tax: When transaction of goods and services takes place within a union territory, a tax is charged. The part of tax that goes to the Union Territory Government is called the Union Goods and Services Tax or the UGST.
Example of Goods and Services Tax:
Ankita is in the education field and lives in Maharashtra. She teaches students preparing for IIT-JEE. She conducts paid online lectures and sells written notes of those online lectures.
If a student residing within Maharashtra places an order for getting her notes, State GST and Central GST both are charged on the product. However, the student does not have to pay them separately, the total amount is collected from the student and the concerned tax authority divides the amount between the Central and the State Government.
Let us say the price of the notes is INR 5,600 which is the amount including GST. The tax rate applicable to the student in Maharashtra is 12%. This is the combined rate of State GST and Central GST. This is split into 6% for State GST and 6% for Central GST by the tax authority.
The total tax paid by the student is INR 600 where INR 300 goes to the State GST and INR 300 goes to the Central GST.
Similarly, if there is a student who wants Ankita’s notes but lives in Tamil Nadu, then Integrated GST is charged for interstate transfer of goods. Again, the total amount is collected from the student and the tax authority divides the amount between the Central and State governments where the goods were delivered.
Here again, we use the same example. However, the student from Tamil Nadu orders Ankita’s lecture series DVD along with the notes.
The price of the notes and lecture series is INR 5,900 which is the amount including GST. The tax rate applicable to the student in Tamil Nadu is 18%. This is the Integrated GST charged for interstate transfer. This is split into 9% for State GST where the goods are consumed and 9% for Central GST by the tax authority.
The total tax paid by the student is INR 900 where INR 450 goes to the State GST and INR 450 goes to the Central GST.
Advantages vs Disadvantages of Goods and Service Tax
There are some advantages and disadvantages of the Goods and Service Tax. Let us discuss some points below
Advantages Of Goods and Services Tax:
- Goods and Services Tax makes it difficult to evade taxes as the surveillance system is centralized, which makes it easier to crack down on defaulters.
- Goods and Services Tax has brought all indirect taxes under one umbrella, thereby simplifying the tax system for businesses.
- Goods and Services Tax procedure is done completely online. Filing returns, registration, e-way bill generation, everything can be done easily without any hassle.
- Goods and Services Tax has eliminated the problem of cascading effect of taxes. Before GST, people had to pay tax on tax at every stage of the sale.
Disadvantages of Goods and Services Tax:
- There are many small businesses that are not used to modern technologies. GST is an online tax system, and small enterprises find it difficult to adapt to the digital world.
- To comply with all GST rules businesses might need the help of tax professionals thereby increasing the operational costs of businesses
- Those businesses that do not comply with GST have to pay heavy penalties. Small and medium-sized enterprises will have to constantly maintain their online digital records, invoices and file regular returns. For these enterprises, the GST tax regime becomes a headache.
- Companies have to employ accounting software that is compliant with GST. This requires constant upgrading of the software and training of employees to learn how to operate the new system.
Goods and Services Tax Slabs
There is a five-tier tax structure in Goods and Services Tax. There are 1300 goods and 500 services included in these four slabs. Tax Slab means a group of income on which tax is charged and falls within a range with upper and lower limits.
These five tax slabs are 0.25% , 5%,12%,18% and 28%.
Since the list of products and services mentioned in GST covers many things, we will mention a few commodities and items that are covered under each tax slab.
In the 0.25% tax slab jewellery items are covered; 5% tax slab household items are covered; 12% tax slab covers processed food, computer accessories; 18% tax slab covers industrial goods; 28% tax slab mostly covers luxury items and services.
|Tax Slab||Commodities/Items covered|
|0.25%||Jewelry items like diamonds and semi-precious stones-cut & polished|
|5%||Household items, life-saving drugs, and services like air transport, newspaper printing,etc.|
|12%||Processed Food, Computer Products, and services like rail transportation, etc.|
|18%||Industrial and Capital goods and services like restaurants, catering business, entertainment, hotel accommodation,etc.|
|28%||Luxury Items and services like 5-star hotels, gambling, sporting events,etc.|
Goods and Services Tax implemented on 1st July 2017 is nothing short of revolutionary tax reform in India. It is an indirect tax that has replaced many other types of indirect tax that made the system complicated and confusing. GST has created a unified market with its single central tax regime.
Though there are many hiccups in GST like the long list of exemptions of goods and services from it, there are positives as well. GST has been helpful in reducing the cascading effect of tax, increased taxpayers’ base, reduced tax evasion, and is making the ease of doing business in India a reality.
Frequently Asked Questions Related to Goods and Services Tax
- What was the need for Goods and Services Tax when there were so many other indirect taxes?
The provision of so many indirect taxes made the tax system complicated and confusing. Goods and services replaced most of the indirect taxes in India. The introduction of GST has made tax administration easier, increased transparency, and reduced tax evasion.
- The idea of Goods and Services Tax is taken from which country?
France was the first country to introduce the Goods and Service Tax in 1954
- Why did the recent news mention that GST revenue collection was rising?
GST collection for July was Rs 1,16,393 crore. The rise in the collection is because the economic activity in India is said to be normalizing with the easing of covid related restrictions.
- What is the GST council?
The GST council was introduced by the Central Government of India to make recommendations related to various issues in GST like goods that can be taxed, goods exempted from taxation, GST laws, etc. It includes the Union Finance Minister of India and all the State/ Union Territory Finance Ministers.
- Why is it difficult to include petrol and diesel under GST?
It is difficult to include petrol and diesel under GST because Value Added Tax is imposed by every state on them. This Value Added Tax is determined by every state government and is different for every stage.
VAT on petrol and diesel gives state governments ample revenue and if it is brought under GST states’ will lose that revenue as the tax rate will be decided by the central government.
- What are the four types of Goods and Services Tax?
The four types of Goods and Services Tax are Central GST, State GST, Union GST, and Integrated GST.
- Does the Central Government get a part of the GST tax in every transaction of the country?
Yes. In every transaction that takes place within India, GST is bifurcated into two parts. One part goes to the state or the union territory concerned, and the other part goes to the central government. The consumer does not have to pay both of them separately, this division is done by the tax authority of India.
- Why is GST called a value added tax?
Every good or service goes through various stages. From manufacturing to consumption, every act to make it into a product adds value to it and makes it saleable. So, GST is charged for every value added to the product to make it saleable. Hence, it is called a Value Added Tax
- Why is GST called a destination based tax?
GST is called a destination-based tax because the good or service is taxed at the destination where it is consumed and not at its origin.
10. When was the concept of Goods and Services Tax first discussed?
The concept of Goods and Services Tax was first discussed by the Atal Bihari Vajpayee Government in 2000. It took 17 years for GST to be implemented.
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