Fundamentals of GST
- Concept of GST
- Definition & Meaning: A comprehensive, destination-based, multi-stage indirect tax on the supply of goods and services.
- One Nation, One Tax Principle: Unified tax replacing multiple central/state levies to create a common market.
- Destination-Based Taxation: Tax accrues to the state where goods/services are finally consumed.
Historical Background
- Evolution of Indirect Taxes in India:
- Pre-GST: Central Excise, Service Tax, VAT, CST, Entry/Luxury/Entertainment taxes.
- Issue: Cascading due to tax-on-tax and fragmented compliance.
- Need for GST Reform:
- Broaden base and remove cascading for efficiency and growth.
- Improve compliance via technology and uniform processes.
- Implementation Timeline:
- GST Council formation: Inter-governmental body for rate/structure decisions.
- Go-Live: July 1, 2017 (GST implementation date).
Tax Structure Comparison
Indirect Tax Structure – Pre-GST Period
- Key Levies: Central Excise, Service Tax, VAT, CST, Entry/Luxury/Entertainment Taxes.
- Problems: Cascading effect, multiple registrations/returns, classification conflicts.
Indirect Tax Structure – After GST
- Unified system: CGST + SGST/UTGST for intra-state; IGST for inter-state.
- Seamless ITC: Credit across the value chain, reducing embedded taxes.
- Simplified compliance: Common portal, standardized processes.
| Aspect | Pre-GST | Post-GST |
|---|---|---|
| Number of Taxes | Multiple indirect taxes | Single framework (CGST/SGST/IGST/UTGST) |
| Cascading | High (tax on tax) | Minimized via ITC |
| Compliance | Fragmented | Unified portal (GSTN) |
| Credit Flow | Restricted across taxes | Seamless across value chain |
| Market | State-wise barriers | Common national market |
Problem → Solution (Click to Toggle)
Problem: Cascading due to multiple taxes (Excise → VAT → CST) inflated final prices.
Solution: GST’s ITC mechanism allows set-off of input taxes across stages, reducing tax-on-tax and overall costs.
GST Framework
- Objectives of GST
- Remove cascading; broaden tax base; increase compliance; reduce evasion; enable common market.
- Structure of GST (Dual Model)
- Central Component: CGST/IGST administration & policy at Union level.
- State Component: SGST/UTGST administration & policy at State/UT level.
- GST Council: Recommends rates, exemptions, thresholds, returns, and law changes.
- Types of GST
- CGST: Intra-state; collected by Centre.
- SGST: Intra-state; collected by State.
- IGST: Inter-state & imports; collected by Centre (apportioned as per formula).
- UTGST: Intra-UT (without legislature); collected by UT.
Problem → Solution (Click to Toggle)
Problem: Multiple state-specific practices led to rate/classification disputes.
Solution: GST Council harmonizes decisions; standardized HSN/SAC usage and compliance formats.
Salient Features & Benefits
- Salient Features
- Destination-based; multi-stage; robust ITC; technology-driven; threshold exemptions.
- Benefits for Business & Industry
- Elimination of cascading; improved cash flow via ITC; lower transaction costs; simpler compliance; ease of doing business.
- Benefits for Governments
- Broader base; better compliance; reduced evasion; improved revenue; simpler administration.
- Benefits for Consumers
- Lower overall tax burden; single transparent levy; competitive pricing; quality improvements.
Problem → Solution (Click to Toggle)
Problem: SMEs faced complex filings and working-capital stress.
Solution: Threshold exemptions, composition scheme (where eligible), and improved refund/ITC workflows help ease burden.
GST Rules & Registration
- Goods
- Supply of Goods: Transfer of title/possession for consideration in business course.
- Classification: HSN-based coding (worldwide nomenclature).
- Typical Rates: 5%, 12%, 18%, 28% (as notified for schedules).
- Exempted Goods: Notified essentials (e.g., select food/health items) per exemption lists.
- Services
- Supply of Services: Anything other than goods (incl. tolerating an act), for consideration.
- Classification: SAC-based coding.
- Rates: Typically 5%/12%/18%/28% as notified.
- Exempted Services: Notified (e.g., specified education/health), per exemptions.
- GSTIN (15-Digit ID)
- Format: State code (2) + PAN (10) + Entity (1) + Blank (1) + Check digit (1).
- Use: Mandatory for registration, returns, e-invoicing/e-way bill, and ITC claims.
- GSTN (GST Network)
- National IT backbone: registration, returns, payments, interoperability with stakeholders.
- Online portal for compliance and analytics.
Problem → Solution (Click to Toggle)
Problem: Mismatch in GSTR-2B vs purchase register blocks ITC.
Solution: Vendor follow-ups, timely invoice uploads, and reconciliation discipline ensure ITC eligibility.
Illustrative Examples (Bullet Form)
- Intra-State Supply (CGST + SGST):
- Example: A sells goods in Delhi to B (also in Delhi) worth ₹1,00,000 at 18% GST ⇒ CGST 9% (₹9,000) + SGST 9% (₹9,000).
- Inter-State Supply (IGST):
- Example: A (Gujarat) sells to B (Maharashtra) worth ₹2,00,000 at 18% ⇒ IGST 18% (₹36,000).
- ITC Flow (Eliminating Cascading):
- Example: Manufacturer purchases inputs (₹50,000 + 18% = ₹9,000 GST). On sale of finished goods (₹1,00,000 + 18% = ₹18,000 GST), output tax ₹18,000 − input tax credit ₹9,000 = net cash outflow ₹9,000.
- Exempt Supply Impact:
- Example: If final output is exempt, related input ITC may be ineligible/reversed as per rules.
Flowchart: Identify Applicable GST Type
Mind Map: GST Unit Overview
Questions & Answers (Click to Reveal)
5-Mark Questions (5)
-
Explain the concept of destination-based taxation under GST with an example.
Answer: Tax accrues to the state of consumption. Example: Supplier in Gujarat sells to Maharashtra. IGST is charged; revenue is apportioned so the consuming state (Maharashtra) ultimately benefits.
-
Discuss how GST eliminates cascading through the ITC mechanism.
Answer: Input taxes paid are credited against output liability across stages. Only value addition is taxed; prior-stage tax is set-off via ITC.
-
Describe the role and functions of the GST Council.
Answer: Recommends rates, exemptions, thresholds, model laws, returns, special provisions, and ensures harmonization across Centre and States.
-
Compare Pre-GST and Post-GST structures focusing on compliance and credit flow.
Answer: Pre-GST had multiple returns & limited cross-credit; Post-GST uses a unified portal with broader, seamless ITC across the chain, minimizing tax-on-tax.
-
Evaluate benefits of GST for SMEs and identify practical challenges.
Answer: Benefits: simplified taxes, ITC, threshold relief. Challenges: reconciliation, timely uploads, working-capital lock-in; addressed via discipline, automation, and appropriate schemes.
3-Mark Questions (5)
-
Define CGST, SGST, IGST, and UTGST.
Answer: CGST/SGST (or UTGST) for intra-state; IGST for inter-state/imports; CGST & IGST collected by Centre, SGST/UTGST by State/UT.
-
What is GSTIN and why is it important?
Answer: 15-digit identifier used for registration, returns, e-invoicing/e-way bills, and ITC claims; ensures traceability and compliance.
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State two benefits of GST for consumers.
Answer: Lower overall tax burden and transparent pricing; competitive markets lead to better quality/value.
-
How does GST broaden the tax base?
Answer: Uniform law, registration thresholds, and technology tracking widen coverage of businesses and transactions.
-
Give two examples of exempt supplies.
Answer: Selected education/health services; specified essential goods (as notified from time to time).
2-Mark Questions (5)
-
State the GST implementation date.
Answer: July 1, 2017.
-
What is HSN/SAC?
Answer: HSN = goods classification; SAC = services classification for coding & rate linkage.
-
Name the typical GST rate slabs.
Answer: 5%, 12%, 18%, 28% (as notified).
-
Who collects IGST?
Answer: Central Government (with apportionment between Centre and destination State).
-
What does “destination-based” mean?
Answer: Tax accrues where the supply is consumed.
Disclaimer
This resource is for educational purposes only and does not constitute legal advice.