How does GST Work? Explained in 10 Points

Destination-Based Tax: GST is a destination-based tax as against the earlier principle of origin-based taxation. The new tax regime follows a multi-stage collection mechanism wherein tax is collected at every stage and the credit of tax paid (input tax credit) at the previous stage is available as a set-off at the next stage of transaction. This helps to eliminate ‘tax on tax’ or the cascading impact of tax. GST benefits the industry through better cash flows and better working capital management. From consumer point of view, GST helps to bring down overall tax.

Input Tax Credit: The biggest game changer in GST is input tax credit, where credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition. This means that the end consumer will thus only bear the GST charged by the last point in supply chain, with set-off benefits at all the earlier stages. For example, a manufacturer's total tax on output comes to Rs. 5,000 while tax paid on input (purchases) is Rs. 3,000. In this case, the manufacturer needs to deposit only Rs. 2,000 (Rs. 5,000 - Rs. 3,000) as tax, after claiming input tax credit of Rs. 3,000, thus reducing the overall incidence of tax on final product

GST Rates: GST rates on goods and services have been classified into broadly four tax rates: 5 per cent, 12 per cent, 18 per cent and 28 per cent. Some goods and services have been exempted. While rates for a few services are specified, the general rate for services not specified is 18 per cent. Precious metals like gold will attract a separate tax rate of 3 per cent. Cess will be levied over the peak rate of 28 per cent on specified luxury and sin goods. Under GST, businesses are required to file returns each month. However the government has let companies file late returns for the first two months so that they can adapt to a new online filing system.

CGST, IGST, SGST: The GST to be levied by the Centre would be called Central GST (CGST) and that to be levied by the States (including Union territories with legislature) would be called State GST (SGST). CGST & SGST are levied in case of intra-state supply. An Integrated GST (IGST) would be levied on inter-state supply (including stock transfers) of goods or services. This would be collected by the Centre. Import of goods would be treated as inter-state supplies and would be subject to IGST in addition to the applicable customs duties. Exports will be treated as zero-rated supplies which means no tax will be payable on exports of goods or services. However, exporters can claim input tax credit subject to certain conditions.

Who are liable to pay GST? Businesses with an annual turnover of Rs. 20 lakh (Rs.10 lakh for special category states) would be exempt from GST and also is not required to get himself registered under the GST law. A composition scheme (to pay tax at a flat rate without input credits) is available to some businesses having an annual turnover of up to Rs. 75 lakh during the preceding financial year. The composition scheme is optional.

Stocks in transition: On stocks unsold before GST rollout, manufacturers and retailers have been allowed to carry forward input tax credit subject to conditions. On such goods they can claim as much as 60 per cent of the input tax credit on stocks lying unsold up to June 30. (For further information refer our blog- http://taxwardo.blogspot.in/2017/07/impact-of-gst-on-closing-stock.html)

Anti – Profiteering mechanism: To ensure that manufacturers and service providers pass on the benefit to the final customer, the government has included an anti-profiteering clause in GST. Under this, it becomes mandatory to pass on the benefit of tax reduction due to input tax credit to the final customer. Anti-profiteering clause in GST is a deterrent which is not intended to be used unless forced to, says Mr. Jaitley. 

GST Council: GST Council will make recommendations on everything related to GST including laws, rules and rates etc. Union Finance Minister Arun Jaitley heads the panel while ministers of finance or taxation of each state are its members. Decisions in the Council are taken by a 75 per cent majority. Centre and a minimum of 20 states are required for majority because Centre would have one-third weightage of the total votes cast and all the States taken together would have two-thirds of weightage.

Products not covered under GST: Petroleum products such as petrol, diesel and aviation turbine fuel have been kept out of GST as of now. The GST Council will take a decision on it at a later date. Alcohol has also been kept out of GST.

Tax Administration: To ensure single interface, all administrative control of 90 per cent of taxpayers having turnover below Rs. 1.5 crore would vest with state tax administration while 10 per cent with the central tax administration. Further, all administrative control over taxpayers having turnover above Rs. 1.5 crore will be divided equally between central and state tax administrations. States will be compensated for any revenue loss from GST implementation for five years.