What is GST in India and Cascading Effect?

GST benefits for youth

Have you ever come to observe that something is very important to know but you were never able to give it time to understand. GST is one of them. Its been 4 years now since it launched but still many of us know only this GST means Goods and Services Tax and thats it. So today you and I will have a brief look on GST. You will learn What is GST in India, Advantages of GST,etc.

So without further ado lets get started with a basic introduction to GST and then we will explore some deep concepts like History of GST, Components of GST, Advantages of GST, etc.

Introduction to GST (Goods and Services Tax)

Goods and Services Tax (GST) is levied at the prescribed rate of every supply i.e., sale of goods and/or services except alcohol for human consumption and petroleum.

Supply of goods means sale of goods where as supply of services means rendering of services.

It is possible that supply is both of goods and services.

GST is a Value Added Tax (VAT) because GST is paid ( is termed as input GST) is set off against. Whereas GST is collected (is termed as output GST). As a result, GST is on the incremental value of goods and services supplied.

History of GST and What is GST in India?

A commitee was set up to draft a law in year 2000 and that when jopurney of GST is began.

From 2000, it took 17 years for the law to evolve. In 2017, the GST bill was passed in the Lok Sabha and Rajya Sabha. And on 1st July 2017, the GST (Goods and Services Tax) law came into play.

For better understanding, please refer to following infographic to know in details about history of GST.

What is GST in India and History of GST
HISTORY OF Goods and Services Tax

What is like before GST in India?

Before GST came in India, the entire tax system was divided into Direct and Indirect Taxes. Direct Tax refers to tax which is imposed and beared by same person only. On the other hand, Indirect Tax is imposed on one person however, its burden was on another person like Sales Tax, Excise Duty, Custom Duty, and Services Tax.

Before GST

Before GST, the statutory tax rate for most goods was about 26.5%. On the contrary, post GST, most goods are expected to be in 18% tax range.

In the earlier Indirect Tax routine, there were many Indirect Taxes levied by both the State and Central government.

States mainly collected Value Added Tax (VAT). Every state has differentset of rules and obligated.

Inter-State sales of goods was taxed by Center. CST (Central Sales Tax) was applicable in case of inter-state sale of goods.

The Indirect-taxes such as octroi, entertainment tax, and local tax were levied together by both State and Center. In conclusion, these led to lot of overlapping of taxes.

Below is the list of some taxes that used to levied before GST :-

  • Central Excise Duty
  • Duties of Excise
  • Additional Duties of Excise
  • Additional Duties of Customs
  • Special Additional Duty of Customs
  • Cess
  • State VAT
  • Central Sales Tax
  • Purchase Tax
  • Luxury Tax
  • Entertainment Tax
  • Entry Tax
  • Taxes on advertisements
  • Taxes on lotteries, betting, and gambling

Advantages of GST in India

To a greater extent, GST removed the cascading effect on sale of goods and services. Removal of this effect led to reduction in cost of goods.

Since, the GST regime eliminates the tax on tax, the cost of goods decreases.

Also a big thanks to technology, now everything needed to be done can be done through the GST portal like registration, return filing, application for a refund, and saves consumers time.

Adavantages of GST
Advantages of GST

Who introduced GST in India?

Prime Minister Narendra Modi, launched GST into action on midnight of 1 July 2017.

GST was in its early days of induction for almost 18 years and first proposed under Atal Bihari Bajpayee government.

The development of GST took many consultations and back and forth of meetings before it was finally launched in July 2017.

New Compliances and structure under GST

Apart from online filing of the GST returns, the GST regime has introduced several new systems along with it.

e-Way Bills

GST introduced a centralised system of waybills by the introduction of “E-way bills”. This system was launched on 1st April 2018 for inter-state movement of goods and on 15th April 2018 for intra-state movement of goods in a staggered manner.

Under the e-way bill system, manufacturers, traders and transporters can generate e-way bills for the goods transported from the place of its origin to its destination on a common portal with ease. Tax authorities are also benefited as this system has reduced time at check -posts and helps reduce tax evasion.

E-invoicing

Recently, the e-invoicing system has been launched on a trial basis starting from January 2020 and applicable from October 2020. This system requires large businesses with an annual aggregate turnover of more than Rs.100 crore to comply with some requirements.

They must obtain a unique invoice reference number for every business-to-business invoice by uploading on the GSTN’s portal known as the invoice registration portal. The portal verifies the correctness and genuineness of the invoice. Thereafter, it authorises using the digital signature along with a QR code.

E-invoicing allows interoperability of invoices and helps reduce data entry errors. It will, therefore, eliminate the requireent for manual data entry while filing ANX-1/GST returns and for the generation of part-A of the e-way bills.

Components of GST in India

Following are the three component of GST :-

1. CGST ( Central Goods and Service Tax )

2. SGST ( State Goods & Services Tax )

3. IGST (  Integrated Goods and Service Tax )

CGST or Central Goods and Service Tax is the tax collected by the Central government on the intra-state supply ( i.e., supply within the state) of goods and services.

For Example. A transaction happening within Delhi.

Also CGST and SGST is levied at the half of prescribed rate of tax.

SGST or State Goods & Services Tax is collected by the State government on intra-state supply. SGST is levied at same rate like CGST at half of the prescribed rate of tax.

IGST or  Integrated Goods and Service Tax is levied on inter-state upply (i.e., supply outside the state) of goods and services.

For Example. Supply of goods from Delhi to Kerela will come under IGST.

ILLUSTRATION

Let us assume that a dealer in Delhi had sold the goods to a dealer in Punjab worth Rs. 50,000. The tax rate is 10% comprising of only IGST.

In such a case, the dealer has to charge IGST of Rs.5,000. This revenue will go to Central Government.

The same dealer sells goods to a consumer in Gujarat worth Rs. 50,000. The GST rate on goods is 12%. This rate comprises CGST at 6% and SGST at 6%.

The dealer has to collect Rs.6,000 as Goods and Service Tax, Rs.3,000 will go to the Central Government and Rs.3,000 will go to the Gujarat government since the sale is within the state.

How GST helped trinity

GST in India helped not only government but also consumers and manufacturers and traders. Hence, GST helped trinity.

See below table for more understanding and how advantages of GST brings life to all three categories.

How GST helped Consumers, Traders and manufacturers, and government
GST helped Government, consumers and Traders and manufacturers

How GST led to price reduction

Before GST, every purchaser including the final consumer paid tax on tax. This condition or phenomenon also known as Cascading Effect of Taxes.

GST introduced the country with a uniform tax rate. It will improve the collection of taxes as well as build the Indian Economy by removing this cascading effect.

concept of Value Addition
concept of Value Addition

Now in GST scenario. there is a way to claim the credit for tax paid in attaining input. The individual who has already paid a tax can claim credit for this tax when he submit his GST return.

The indirect tax system under GST will integrate the country with a uniform tax rate. It will improve the collection of taxes as well as boost the development of the Indian economy by removing the indirect tax barriers between states.

Based on the above example of the fries manufacturer, let’s take some actual figures to see what happens to the cost of goods and the taxes, by comparing the earlier GST regimes and GST in India.

Table showing before GST
Table showing before GST

The tax liability was passed on at every stage of the transaction, and the final liability comes to a rest with the customer. This condition is known as the cascading effect of taxes, and the value of the item keeps increasing every time this happens.

table showing after GST
table showing after GST

In the case of Goods and Services Tax, there is a way to claim the credit for tax paid in acquiring input. The individual who has already paid a tax can claim credit for this tax when he submits his GST returns.

In the end, every time an individual is able to claims the input tax credit, the sale price is reduced and the cost price for the buyer is reduced because of lower tax liability. The final value of the fries is therefore reduced from Rs.2,244 to Rs.1,980, thus reducing the tax burden on the final customer.

The final value of fries is therefore reduced from , hence. reducing the burden on final consumer.

A helping hand for youth as GST in India

First of all, the cascading tax effect refers to a tax on tax. Most noteworthy, The GST eliminates the cascading effects of Tax. This is because GST is a comprehensive indirect tax. It certainly brings almost all indirect taxation under one umbrella.

Another notable advantage of GST is the increase in the threshold for registration. Earlier, a VAT  was applied if the turnover was more than Rs 5 lakh. This VAT’s application was upon a business. Furthermore, there was no service tax when turnover was less than Rs 10 lakh. In contrast, under GST this threshold is Rs 20 lakh. Hence, this means an exemption for many small traders and service providers and provides young people with advantages of GST.

GST brought benefits to youth and Small Business

Small businesses can certainly benefit significantly under GST. Furthermore, these small businesses have a turnover of Rs 20 to 75 lakh. The benefit of these small businesses takes place due to the composition scheme. Under GST, there is an option for small businesses to lower taxes. They can do so by utilizing the composition scheme.

The entire process of GST is available online. Most noteworthy, it is an easy and simple online process. Therefore, it is really beneficial for start-up businesses. This is because they don’t have to struggle to get different registrations.
In conclusion, GST has been a revolutionary tax system for India. Most noteworthy, many experts hail it as one of the biggest tax reforms. GST certainly is beneficial for the entire population of India.

Conclusion

Goods and Services Tax (GST) is levied at the prescribed rate of every supply i.e., sale of goods and/or services except alcohol for human consumption and petroleum. From 2000, it took 17 years for the law to evolve. In 2017, the GST bill was passed in the Lok Sabha and Rajya Sabha. And on 1st July 2017, the GST (Goods and Services Tax) law came into play.

The entire process of GST is available online. GST in India helped not only government but also consumers and manufacturers and traders.

So thats it for todays post readers. I hope you enjoyed this post as much as I enjoyed creating it. At the end of the day the purpose is to make financial knowledge more understandable to people so that people and especially young people dont run away from finance, instead they should learn about it and take full advantage of it.

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4 thoughts on “What is GST in India and Cascading Effect?”

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