Goods and Services Tax Basics for CMA Intermediate
Basics of Goods and Services Tax (GST) for CMA Intermediate students
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Welcome to the CMA Knowledge Blog
Hi, friends! How are you all? I hope you are well and focused on your studies. Today, in this article, we are going to delve deep into the basics of GST from a revision point of view. So, let's get started!
What is GST?
Goods and Services Tax (GST) is a comprehensive value-added tax levied on the supply of goods and services in India. GST is designed to create a single, unified market by replacing multiple indirect taxes previously levied by the central and state governments. It is a consumption-based tax, meaning the tax is collected at each stage of the supply chain, but the burden of tax ultimately falls on the final consumer. GST is applicable to both goods and services, and it aims to simplify the taxation system and eliminate the cascading effect of taxes.
Why was GST implemented in India?
The implementation of GST in India addressed several issues present in the previous indirect tax regime. These issues can be summarized as follows:
Multiple Taxes on a Single Product: Previously, products were subject to multiple taxes such as Excise Duty, VAT/CST, Octroi, Entry Tax, LBT, and Cess. This created confusion and increased the tax burden on businesses.
Example: A manufacturer producing a product had to pay Excise Duty during production, VAT during sale, and other taxes like Octroi and Entry Tax when transporting goods across states. GST simplifies this by replacing these multiple taxes with a single tax.
Cascading Effect of Taxes: The previous tax system had a cascading effect, where tax was levied on tax, increasing the overall tax burden on consumers.
Example: If a product cost Rs. 100, an Excise Duty of 12% would make it Rs. 112. VAT at 12% on Rs. 112 would further increase the price to Rs. 125.44. GST eliminates this cascading effect by allowing input tax credits.
Complex Administration: The tax administration process was complex and burdensome, with businesses having to comply with multiple tax authorities and regulations.
Example: Businesses had to deal with separate tax compliances for Excise, VAT, CST, and other taxes. GST simplifies this by providing a unified tax system.
Multiple Points of Taxation: Taxes were levied at various stages of the supply chain, adding to the complexity and administrative burden.
Example: A product would be taxed during production, sale, and interstate transport. GST simplifies this by taxing only the final supply.
Lack of Uniformity: Different states had different tax rates and provisions, leading to confusion and inefficiencies for businesses operating in multiple states.
Example: Each state had its own VAT rates, creating a non-uniform tax structure. GST ensures uniform tax rates across the country.
Classification Issues: New businesses faced challenges in determining whether a transaction was classified as goods or services, leading to disputes and litigation.
Example: A restaurant providing food and beverages had to classify transactions as either goods or services for tax purposes. GST eliminates this confusion by treating both under a single tax.
Service Taxation: States that supplied more services did not have the authority to levy taxes on services, leading to revenue imbalances.
Example: States with high service industries couldn't tax services under the previous regime. GST allows both central and state governments to levy taxes, ensuring a balanced distribution of revenue.
Features of the New GST
Applicable on Supply: GST is levied on the supply of goods or services and is a destination-based consumption tax.
Example: A trader in Maharashtra sells goods to a trader in Gujarat. The GST revenue from this sale goes to Gujarat, as the goods are consumed there.
Dual GST Model: India has adopted a dual GST model, where both the central and state governments levy taxes simultaneously on goods or services.
Example: When a store in Delhi sells a product, both CGST (Central GST) and SGST (State GST) are levied.
Nature of Transactions: GST is levied based on the nature of transactions:
Intrastate Supply: GST on intrastate supplies (within the same state) involves both CGST and SGST.
Example: A trader in Karnataka sells goods within Karnataka. Both CGST and SGST are levied.
Interstate Supply: GST on interstate supplies (between different states) involves IGST (Integrated GST).
Example: A trader in Maharashtra sells goods to Gujarat. IGST is levied and collected by the central government, then distributed to the states.
Exclusions: Certain goods and services are exempted from GST, such as alcohol for human consumption, petroleum products, and electricity.
Example: Alcohol for human consumption is excluded from GST and is taxed separately by the states.
Benefits of GST
For Businesses and Industries:
Ease of Compliance: Simplified tax structure and compliance process.
Example: Businesses can file a single GST return instead of multiple returns for various taxes.
Uniform Tax Rates: Consistent tax rates across the country, eliminating confusion and reducing compliance costs.
Example: All states have the same GST rates, making it easier for businesses to operate across state borders.
Elimination of Cascading Effects: No tax on tax, reducing the cumulative tax burden on businesses.
Example: Input tax credits ensure that businesses do not pay tax on tax.
Increased Competitiveness: Improved business efficiency and competitiveness in both domestic and international markets.
Example: Reduced tax burden and simplified compliance make Indian products more competitive globally.
Benefits for Manufacturers and Exporters: Easier tax refunds and reduced production costs.
Example: Manufacturers can claim input tax credits on raw materials, reducing overall production costs.
For Government:
Simplified Administration: Easier tax administration for both central and state governments.
Example: A unified tax system reduces the administrative burden and enhances efficiency.
Better Revenue Control: Improved revenue control through integrated IT infrastructure and better monitoring.
Example: The GSTN portal helps the government track transactions and ensure compliance.
Reduced Collection Costs: Streamlined processes reduce the cost of tax collection, enhancing revenue efficiency.
Example: The cost of collecting taxes is lower under GST compared to the previous regime.
For Consumers:
Lower Prices: Reduced tax burden on consumers, making goods and services cheaper.
Example: Consumers no longer pay multiple taxes on a single product, leading to lower prices.
Single Tax Return: Businesses need to file only one GST return, simplifying the compliance process.
Example: A single tax return reduces the administrative burden on businesses, ultimately benefiting consumers.
Taxes Eliminated by GST
After the implementation of GST, several central and state taxes were eliminated:
Central Government Taxes:
Excise Duty
Example: Previously, manufacturers paid Excise Duty on the production of goods. This tax is now subsumed under GST.
Additional Excise Duty
Example: Additional Excise Duty, which was levied on specific goods, is now part of GST.
Service Tax
Example: Service providers, such as restaurants and hotels, previously paid Service Tax. This tax is now included in GST.
Additional Customs Duty (CVD)
Example: Countervailing Duty (CVD) on imports is now replaced by IGST.
Special Additional Duty (SAD)
Example: Special Additional Duty (SAD) on imports is also replaced by IGST.
State Government Taxes:
State VAT/Sales Tax
Example: State-level VAT on goods is now subsumed under GST.
Entertainment Tax (except when levied by local bodies)
Example: Entertainment Tax levied by states on movie tickets and other entertainment activities is now part of GST.
Central Sales Tax (CST)
Example: Central Sales Tax on interstate sales is replaced by IGST.
Octroi and Entry Tax
Example: Octroi and Entry Tax levied on goods entering a state are now part of GST.
Purchase Tax
Example: Purchase Tax on the acquisition of goods is now subsumed under GST.
Luxury Tax
Example: Luxury Tax on luxury goods and services is included in GST.
Taxes on Lottery, Betting, and Gambling
Example: Taxes on lottery, betting, and gambling are now part of GST.
Taxes Not Subsumed under GST
Certain taxes are not included in the GST framework:
Basic Customs Duty (BCD)
Example: BCD is still levied on imported goods to protect domestic industries.
Taxes on Petroleum Products
Example: Taxes on petroleum products, such as petrol and diesel, are not included under GST and are taxed separately.
Electricity and Power Taxes
Example: Electricity and power are not included in GST and are taxed by the respective state governments.
Stamp Duty on Real Estate
Example: Stamp Duty on the transfer of real estate is not part of GST and is levied by state governments.
Taxes on Alcohol for Human Consumption
Example: Alcohol for human consumption is excluded from GST and is taxed separately by the states.
Role of GSTN
The Goods and Services Tax Network (GSTN) provides a common and shared IT infrastructure for GST implementation. GSTN handles several key functions, including:
Online Filing of Registration Applications:
Example: A new business can register for GST online through the GSTN portal, streamlining the registration process and reducing paperwork.
Filing of Returns:
Example: Businesses can file their GST returns online, ensuring timely compliance and reducing the need for physical submissions.
Creation of Challans for Tax Payments:
Example: GSTN enables businesses to generate challans for tax payments, simplifying the payment process and ensuring accuracy.
Settlement of IGST Payments:
Example: GSTN facilitates the settlement of IGST payments, ensuring that the collected tax is accurately distributed to the states.
Generation of Intelligence and Analytics Data for Tax Authorities:
Example: GSTN provides data analytics and intelligence to tax authorities, helping them monitor compliance and detect tax evasion.
Powers and Functions of the GST Council
The GST Council is a powerful body within the GST framework, responsible for making key decisions and recommendations. The Union Finance Minister serves as the Chairman, and state finance ministers are members. The Council's roles and functions include:
Recommendations: Making recommendations to the central and state governments on various matters related to GST.
Example: The GST Council can recommend changes to tax rates, exemptions, and threshold limits to ensure a smooth implementation of GST.
Tax Subsumation: Subsuming various taxes, cesses, and surcharges under the GST regime.
Example: The Council decides which existing taxes should be subsumed under GST to create a unified tax structure.
Exemptions: Listing goods and services subject to GST or exempted from it.
Example: The Council determines which goods and services should be exempt from GST, such as essential items.
Threshold Limits: Defining threshold limits below which goods and services are exempt from GST.
Example: The Council sets the threshold limit for small businesses, below which they are exempt from GST registration.
Floor Rates: Fixing GST floor rates with bands and any special rates for specific purposes.
Example: The Council can set a minimum GST rate for certain goods and services to ensure consistency across states.
Special Provisions: Making special provisions for states with special status.
Example: The Council can recommend special tax rates or exemptions for states with unique economic conditions.
Model Laws: Creating model GST laws for uniform application across states.
Example: The Council drafts model GST laws to ensure consistency in implementation and compliance.
Other Matters: Addressing any other GST-related matters as decided by the Council.
Example: The Council can address emerging issues and challenges related to GST implementation and compliance.
Thanks for reading,
CMA Knowledge Blog Team
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