The Indian Government collects taxes that can be classified into Direct and Indirect Taxes. Direct Taxes refer to taxes imposed directly on the income, earnings, or profits of an individual or entity. These taxes are regulated and administered by the Central Board of Direct Taxes (CBDT) whereas indirect tax is a tax that is transferred to another person or organization. Typically, indirect taxes are imposed on manufacturers or suppliers, who then pass on the cost of that tax to the end consumer.
GST is also known as Goods and Services Tax. GST represents a significant reform in India’s indirect taxation system, marking a transformation that the country since Independence. It is an indirect tax which has replaced several former taxes which includes excise duty, VAT, services tax, etc. The GST Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017 to simply the indirect taxation in India. Goods and Services Tax (GST) is levied on the supply of goods or services or both (composite supply) and beneficial for all stakeholders viz. citizens, Taxpayers, industry and Government. Goods and Services Tax law in India is a comprehensive, multi-stage, destination-based tax levied at each point of value addition. After subsuming a majority of previous indirect taxes, GST has established a single, unified tax structure for the entire nation which streamline the tax collection, minimizing tax evasion, and simplifying the process for businesses and consumers alike.
The GST framework ensures consistent tax rates across all states for both inter-state and intra-state transactions. This will promote compliance and enhances the ease of doing business. The uniform GST rates reduce the incentives for evasion by eliminating rate arbitrage between neighbouring states and that between intra-state and inter-state sales.
In 2024, GST continues to play a pivotal role in the Indian economy, influencing everything from business operations to consumer spending patterns. Here, through this blog we will explore the current state of GST in India along with its features, benefits, challenges.
Key Features of GST
- Comprehensive Taxation: GST is an all-encompassing tax that replaces multiple indirect taxes such as VAT, excise, and service tax. It is a destination-based tax, meaning that the tax is paid where the goods are consumed rather than where they are produced.
- Input Tax Credit (ITC): One of the most crucial features of GST is the Input Tax Credit mechanism, where businesses can claim credit for the tax paid on their purchases, which can be used to offset the GST they charge on their sales. This ensures that taxes are levied only on the value added at each stage of the supply chain.
- Technology-Driven Compliance: GST is managed through an online portal i.e., common portal making the process more transparent and reducing the scope for tax evasion. GSTN (Goods and Services Tax Network) is the backbone that facilitates filing, payments, and audits.
- Uniformity Across States: GST has simplified the complex tax structure of India by standardizing tax rates and compliance procedures across all states. This uniformity has greatly benefited businesses that operate in multiple states.
- Broadening the Tax Base: With the ease of compliance and implementation, GST has expanded the tax base in India. By bringing more businesses under the tax net, the government has been able to increase its tax revenues significantly.
Benefits of GST
- Simplification of Taxation: Before GST, businesses had to comply with multiple tax laws at both the state and central levels, which was bulky and led to inefficiencies. With a unified tax structure, businesses now only need to comply with a single tax regime.
- Boost to Economy: GST has streamlined tax collection, leading to a more efficient and formalized economy. This has led to increased government revenues, which can be used for public welfare and infrastructure development.
- Increased Transparency: The online filing and real-time tax payment system have brought greater transparency to the tax process. The tax paid by businesses at each stage is recorded, making it easier to track and audit.
- Boost to Exports: GST has made Indian exports more competitive by removing the cascading effect of taxes that existed under the previous indirect tax regime. This has made Indian products cheaper in international markets.
- Ease of Doing Business: GST has made it easier for businesses to expand across state borders, eliminating the need to deal with multiple state-level tax laws. The introduction of a single tax structure has helped streamline operations, leading to cost savings for businesses.
One of the biggest benefits of the GST was transforming India into ‘One Nation, One Tax, One Market’. GST will unshackle Indian trade and industry and help realize our full economic potential.
GST Structure in India
In India GST is structured broadly into three tax components which are as under: -.
- Central Goods and Services Tax (CGST):
This tax is levied by the Central Government on intra-state supply of goods and services. - State Goods and Services Tax (SGST):
This tax is levied by the State Government on intra-state supply of goods and services. - Integrated Goods and Services Tax (IGST):
This is applicable for inter-state supply of goods and services and is collected by the Central Government only. Further, the collected tax is apportioned between the Central government and the concerned State government equally.
Each of these taxes is applicable at various stages of the production and supply chain, and businesses must register for GST based on their turnover threshold. The tax rate varies depending on the type of goods and services, with rates ranging from 0% to 28%.
GST Slabs in India
GST is designed with multiple tax slabs to ensure fairness and equity in taxation. The primary GST slabs in India are as follows:
- 0%: Rate applied on goods and services in India that are considered essential and have some social importance, therefore these goods are exempt from paying GST but are still part of the tax structure. 0% basically applied on export of goods and services, supply of certain goods and services to SEZs (Special Economic Zone), essential goods, Health care and educational services. These are few categories of supply on which zero rate of GST apply. It is vital to understand here that zero-rated means no GST is charged, but businesses can still claim input tax credits on the purchases made for the production of such goods or services.
- 5%: This rate is considered as one of the lower tax slab rates and is applied to a variety of goods and services which are essential and regular use for consumers. These rate does not include luxury and sin goods, covers only essential products and services. Examples are essential food items like unbranded food grains, medicines and medical equipment, footwear with value upto Rs.1000 per pair, Books and printed material, transport of goods by road (excluding luxury and premium services), Hotel accommodation with a room tariff of upto Rs1000 per night, public transport services like bus fares.The exact items and services that are taxed at a 5% GST rate can vary, and the GST Council may make changes to these classifications based on the prevailing economic needs and policy decisions.
- 12%: This rate is applicable to certain goods and services. Example are processed food items, electronics and electrical goods, Paints and Varnishes, Clothing and textiles, restaurant services, tourism and travel-related services, financial services.
- 18%: This rate is applied to wide range of goods and services. This rate is one of the standard rates under GST and is commonly applied to several categories which includes goods like furniture, electrical appliances, construction materials, Automobiles, etc. and services like professional services, banking services, telecommunication services, tourism-related services (hotels, travel agencies etc.)
- 28%: This rate is applied to certain luxury goods, high-end services, some non-essential items. This rate is the highest under the Indian GST system, which has a multi-tier structure with rates of 0%, 5%, 12%, 18%, 28%. Examples of such goods are luxury items, tobacco and tobacco products, cigars and cigarettes, high-end consumer goods and other certain services.
The government periodically reviews the GST structure, and some items or services might be shifted to lower or higher tax brackets based on changes in economic conditions or policy objectives.
GST Not Applicable
Supply of alcoholic liquor for human consumption is outside the scope of GST till now. Accordingly, alcoholic liquor for human consumption is specifically exempted from the scope of GST through its constitutional definition. Additionally, five petroleum products—have been temporarily excluded from GST as under: -.
- Petroleum crude
- Motor spirit (petrol)
- High-speed diesel
- Natural gas
- Aviation turbine fuel
The GST Council is entrusted with the authority to decide the date from which these alcoholic liquor and petroleum products will be brought under the purview of GST.
Registration
All Businesses are required to register under GST if they meet certain thresholds or are engaged in specific activities. Here is the list showing mandatory registration.
- Aggregate Turnover Threshold: If the aggregate turnover exceeds the prescribed limit in a financial year, GST registration is mandatory.
- For Supply of Goods: The threshold limit for businesses to register in GST is Rs. 40 lakhs whereas Rs. 20 lakhs for special category states.
- For Services: 20 lakhs (Rs. 10 lakhs for special category states).
- For E-Commerce Operators: If making taxable supplies, the turnover threshold may differ.
- Interstate Supply: Any person or business engaged in the supply of goods or services across state borders (interstate supply) is required to register, regardless of turnover.
- Casual Taxable Person: Individuals or businesses who occasionally supply goods or services in a state where they do not have a fixed place of business must register as a casual taxable person before starting the business activities.
- Non-Resident Taxable Person: Individuals or businesses who are not residents of India but are supplying goods or services in India must register as a non-resident taxable person.
- TDS/TCS Applicability: Any person liable to deduct tax at source (TDS) or collect tax at source (TCS) must obtain GST registration, regardless of turnover.
- E-Commerce Operators: If an e-commerce operator is facilitating the supply of goods or services through its platform, it must register under GST.
A business who wants to claim ITC on their purchases and expenses, GST registration is mandatory for them. Additionally, exporters are mandatory to register in GST even if the exporter’s turnover does not exceed the threshold as GST registration is necessary to claim refunds on export duties or taxes. Further, the taxpayer can also avail voluntary registration under GST even if it does not meet the mandatory threshold limits as mentioned above.
Types of GST Registrations
There are different types of GST registration, depending on the nature of the business: -.
- Normal Taxpayer: Regular businesses required to pay GST as per the law.
- Composition Scheme: Small businesses with a turnover below the threshold limit can opt for a composition scheme with reduced compliance requirements. This is available only for certain type of businesses which are as manufacturers, traders.
- Input Service Distributor (ISD): This registration is for businesses distributing the input tax credit to various branches or units.
- GST Practitioner: A professional authorized to handle GST compliance on behalf of others.
(OIDAR) Services under GST
Online Information and Database Access or Retrieval (OIDAR) services are digital services delivered over the internet with minimal human intervention. OIDAR Services includes digital services such as e-books, online gaming, streaming, and software applications offered to customers in India, whether the service provider is located inside or outside the country. These service providers are required to obtain GST registration in India, irrespective of whether the threshold limit for obtaining GST registration is exceeded or not, in accordance with the Goods and Services Tax (GST) regulations. Therefore, OIDAR service providers, even those outside India, providing services to residents in India are required to obtain GST registration. The IGST rate for sale of digital services in India is 18%, which applies to both OIDAR service providers located in India or outside India.
Challenges of GST
- Implementation Challenges: The initial implementation of GST in India was not smooth, with many businesses facing difficulties in adapting to the new tax system. The government had to make several changes and simplifications in the early years to ensure smoother compliance.
- Complex Filing Process: Despite technological advancements, the filing process can still be complicated for small businesses. Frequent changes in tax rates and procedures, along with the need for accurate documentation, have sometimes overwhelmed small and medium enterprises (SMEs).
- Impact on Small Traders: Although GST is beneficial for large businesses, small traders and retailers often struggle to meet the compliance requirements. The tax rates and registration thresholds have been a point of contention for many small-scale traders.
- Revenue Shortfall: While GST has increased tax compliance, the expected revenue boost has not been as significant as projected. Some states have reported a shortfall in the expected GST collections, which has led to tensions between the central and state governments.
- High Compliance Costs: The process of regular filing and reconciling returns can be expensive for businesses, especially small ones that lack resources or expertise to manage the complexities of GST.
Recent Reforms and Updates in 2024
As of 2024, the Indian government has continued to refine the GST regime by introducing several reforms to enhance ease of doing business and improve tax compliance:
- Simplification for Small Businesses: The threshold for GST registration for small businesses has been raised to help ease the burden on smaller traders and service providers.
- GST Amnesty Scheme: To encourage businesses to file pending returns, the government introduced a GST Amnesty Scheme, which waives penalties and late fees for non-compliance.
- GST Rates: – The GST council had made some adjustments to tax rates across various sectors. These rate changes aim to provide relief to specific industries and make the tax structure more equitable. Certain goods and services have seen rate reductions to boost consumption, while some luxury or non-essential items have had their rates revised.
- Introduction of E-invoicing: The government has made the scope of e-invoicing expanded. It now applies to businesses with a turnover of 5 crore or more (down from Rs. 10 crores in previous years). This is aimed at further increasing transparency and reducing tax evasion. With this expansion, more businesses are required to generate e-invoices for their B2B transactions, ensuring a more streamlined and digital approach to compliance in the invoicing process and reducing tax evasion.
- GST on Online Retailers: GST on e-commerce transactions has been refined to ensure that online retailers comply with tax rules. This has ensured that both traditional businesses and online vendors are treated equitably.
- GST on Electric Vehicles (EVs) and Green Technologies: – There are certain expectations that GST rates on the aforesaid will reduce to promote sustainability and accelerate adoption. Similarly, solar equipment and other green technologies are likely to continue receiving favorable GST treatment to boost the renewable energy sector. These measures are part of the government’s push to encourage environmentally friendly alternatives and reduce carbon footprints.
- GST on Online Gaming and Casino: – During this year, there was a significant development regarding the taxation of online gaming. This GST on online gaming and casino, horse racing has been revised. The council decided to impose a uniform 28% GST on the online gaming platforms, ensuring better regulation and revenue collection from this sector.
Conclusion
GST has proven to be a game-changer in India’s tax landscape, encourage greater transparency, reducing tax evasion, and streamlining compliance for businesses. While challenges remain, especially for smaller enterprises, ongoing reforms and technological advancements are gradually addressing these issues. The tax system has significantly boosted India’s economy by promoting ease of doing business and encouraging interstate trade. As the system matures, GST is poised to play a vital role in India’s long-term economic growth, making it a crucial part of the nation’s fiscal future.