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What is GST Applicability?

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  • Post published:November 4, 2023
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Last Updated on November 4, 2023 by Iram

GST Applicability

If you’re not registered under the GST system, you won’t be able to charge tax to your customers or claim tax credits on what you’ve paid. GST, which stands for Goods and Services Tax, has replaced various older taxes in India, like Central Excise Duty, Service Tax, and Value Added Tax (VAT). It applies to businesses supplying goods or services in India, provided they meet specific turnover criteria.

GST has been in place in India since July 1, 2017, simplifying the tax system. It’s a comprehensive tax applied to the supply of goods and services nationwide. While GST is designed to be straightforward and helpful to taxpayers, it might still be confusing for those unfamiliar with the tax system. In this article, we’ll break down the basics of GST applicability in a more user-friendly way.

Who Should Register for GST?

When it comes to GST registration, it’s important to know the rules. In India, if your business provides goods or services and your annual turnover is Rs. 20 lakhs or more, you’ve got to get yourself registered under the Goods and Services Tax (GST) regime. However, there’s a little twist in the tale for businesses operating in the North Eastern states and hill states – their registration threshold is Rs. 10 lakhs.

But that’s not all. There are certain types of businesses that have no choice but to jump on the GST registration bandwagon, regardless of their turnover. These include:

  1. Businesses that deal in inter-state transactions.
  2. E-commerce operators.
  3. Casual taxable individuals.
  4. Non-resident taxable individuals.
  5. People responsible for tax deduction or collection (TDS/TCS).

So, if your business falls into any of these categories, GST registration is not an option, even if your turnover is below the specified threshold. Remember, the key to navigating the GST world is understanding these rules so you stay compliant and avoid any unwanted surprises down the road.

GST Rates

In India, the Goods and Services Tax (GST) rates come in four main categories – 5%, 12%, 18%, and 28%. These percentages determine how much GST you pay on various goods and services. But wait, there’s more to the story.

Some items don’t quite fit into these categories. Some goods and services get a free pass, meaning they are either exempt from GST or taxed at a lower rate. So, if you’re wondering why a chocolate bar might have a different GST rate than, say, a smartphone, it’s all thanks to these categories.

Who decides which category each item falls into? Well, that’s the job of the GST Council. This council is like the referee of the GST game, ensuring that the rules are fair and the playing field is level. It’s made up of Finance Ministers from various states and the Union Finance Minister, and they all come together to make important decisions about how different things are taxed under the GST system. So, if you ever find yourself scratching your head over the GST rate on a particular product, know that the GST Council is behind the scenes, making sure everything is balanced and fair.

GST Composition Scheme

In the GST system, if you’re a small business with a turnover of up to Rs. 1.5 crore, you have the option to choose the Composition Scheme. This special scheme lets you pay taxes at a lower rate and makes it easier to handle your tax-related tasks. But here’s the trade-off: if you go for the Composition Scheme, you can’t take advantage of the Input Tax Credit (ITC) for the taxes you pay on your purchases. So, while it simplifies things, you won’t be able to claim back the tax you’ve paid on your business expenses.

Input Tax Credit (ITC)

One of the standout features of the Goods and Services Tax (GST) system in India is the Input Tax Credit (ITC) mechanism. It might sound a bit technical, but it’s actually a very important concept that makes the whole tax system work more smoothly and fairly. In simple terms, ITC allows businesses to get a credit for the taxes they’ve already paid on their purchases, and they can use this credit to offset the GST they owe. This has several benefits, such as preventing double taxation and making sure that the final consumers don’t end up shouldering an excessive tax burden.

Now, let’s break this down further. In India, the GST system brought about a significant change in the way taxes are collected and shared between the central government and the state governments. This transition was essential to simplify and streamline the tax process, reduce tax evasion, and ultimately benefit both businesses and consumers.

Under the GST system, it’s the suppliers who technically pay the tax when they sell their goods or services. However, in reality, this tax burden is often passed on to the end-users. And that’s where ITC comes in. It’s a mechanism that helps ensure a fair and efficient tax system for everyone involved.

To fully appreciate the importance of ITC, it’s crucial to understand that India is a quasi-federal country. This means that both the central government and state governments have the authority to levy and collect taxes through their own legislation. This used to result in a complex web of different taxes and rules, which often led to confusion and compliance issues for businesses.

Shift in Focus

GST aimed to simplify this. It replaced a slew of state and central taxes, including value-added tax (VAT) or sales tax, octroi, entertainment tax, taxes on lottery, betting, or gambling, purchase tax, luxury tax, service tax, additional excise duty, central excise duty, and many others. Instead of dealing with multiple taxes and their unique rules, businesses now have one unified tax system to follow.

This shift to GST wasn’t just about simplification; it also brought transparency and efficiency to the taxation process. This is where GST registration in India plays a pivotal role. When a business registers under the GST Law, it essentially obtains a unique identification number from the relevant tax authorities. This number is a fundamental tool for collecting taxes on behalf of the government and claiming Input Tax Credits for the taxes paid on their purchases.

GST registration serves several important purposes:

  1. Identifying Indirect Taxpayers: It helps the government efficiently identify businesses that need to comply with GST regulations. This, in turn, reduces tax evasion and enhances transparency.
  2. Ensuring Tax Compliance: Registration under GST compels businesses to maintain accurate records and follow tax regulations. This significantly contributes to improving overall tax compliance.
  3. Streamlining the Tax Collection Process: With the businesses registered, the tax collection process becomes more systematic, organized, and trackable.
  4. Promoting ITC: GST registration allows businesses to claim Input Tax Credit. They can set off the taxes they’ve already paid on their inputs against the taxes they need to remit. This encourages businesses to deal with registered suppliers, who are more likely to be compliant with tax regulations.
  5. Reducing the Cascading Effect: In the pre-GST era, businesses couldn’t claim credit for the central sales tax paid on their purchases. This resulted in a cascading effect where taxes were levied on top of already taxed goods and services. With ITC, this cascading effect has been significantly reduced, leading to a fairer tax system.

So, in essence, GST and the Input Tax Credit mechanism have brought about a transformation in the way businesses and consumers experience taxation in India. It’s not just about simplification; it’s about making the tax system fair, efficient, and conducive to economic growth. By ensuring that businesses can claim credit for the taxes they’ve already paid, GST reduces the burden on end consumers and promotes a more transparent and accountable tax system for all.

Types of GST and its Applicability

Goods and Services Tax, or GST, has transformed the taxation landscape in India. It’s a unified tax system that has replaced numerous indirect taxes, making it simpler, more efficient, and taxpayer-friendly. GST is based on a multi-tier tax structure and is categorized into different types, each serving specific purposes. In this comprehensive guide, we’ll explore the various components of GST in India, demystifying the jargon to help you grasp its intricacies.

GST Overview 

GST is a comprehensive indirect tax levied on the supply of goods and services in India. It was introduced on July 1, 2017, and it replaced a plethora of central and state-level taxes, such as Central Excise Duty, Service Tax, Value Added Tax (VAT), and others. The aim was to simplify the taxation system, promote ease of doing business, and reduce tax evasion.

The Tax Categories

  1. Integrated Goods and Services Tax (IGST)

The IGST is a crucial component of the GST system, designed to regulate the taxation of interstate transactions, imports, and exports. It is governed by the IGST Act, and the Central Government is responsible for its collection. Here’s how it works:

  • Interstate Transactions: When goods and services are exchanged between two different states, IGST is applied. The tax collected is initially received by the Central Government.
  • Exports and Imports: In the case of exports, IGST is charged, and exporters can claim a refund. For imports, IGST is levied at customs, and it can be offset against the final GST liability.

The Central Government plays a pivotal role in the IGST mechanism. It collects the taxes and later distributes them among the respective states. This ensures that revenue is distributed fairly, maintaining the financial autonomy of individual states.

  1. State Goods and Services Tax (SGST)

SGST is applicable to intrastate transactions, meaning those that occur within the same state. Both SGST and Central GST (CGST) are applicable to these transactions. The revenue generated from SGST is claimed exclusively by the state government. Here’s how SGST works:

  • Intrastate Supplies: When goods and services are bought or sold within the boundaries of a single state, SGST is levied. It is collected by the state government.

SGST empowers the states with the ability to collect taxes on transactions that occur within their jurisdiction. This revenue contributes to the state’s resources and allows them to fund developmental projects.

  1. Central Goods and Services Tax (CGST)

Much like SGST, CGST is applicable to intrastate transactions. It’s governed by the CGST Act and is collected by the Central Government. Here’s how CGST operates:

  • Intrastate Transactions: When goods and services are bought or sold within the same state, CGST is applied. The tax revenue collected goes to the Central Government.

CGST, along with SGST, facilitates a dual GST structure. It ensures that revenue is generated and allocated efficiently, simplifying the tax collection process for intrastate transactions.

  1. Union Territory Goods and Services Tax (UTGST)

UTGST mirrors SGST but is applicable in Union Territories (UTs) rather than full-fledged states. The UTGST Act governs the taxation in UTs like Andaman and Nicobar Islands, Chandigarh, Daman and Diu, Dadra and Nagar Haveli, and Lakshadweep. The revenue generated from UTGST is collected by the respective Union Territory governments.

This tax structure ensures that even in UTs, the government can efficiently collect and allocate revenue from the sale of goods and services.

GST is a transformative taxation system in India. It simplifies the complex web of taxes that existed before its implementation and brings transparency, accountability, and efficiency to the tax collection process. By categorizing taxes into IGST, SGST, CGST, and UTGST, the government ensures that the taxation process is well-structured, promoting fair distribution of revenue and compliance with tax regulations. Understanding these different components of GST is essential for businesses and consumers alike, as it impacts the tax they pay and the benefits they receive from the government.

Conclusion

To sum it up, GST is like a breath of fresh air for India’s tax system. It’s made paying taxes a lot less complicated for businesses and brought more clarity to the tax rules. For businesses, knowing when and how GST applies is essential to follow the law, stay out of trouble, and prevent any unwanted fines or legal headaches. So, understanding the basics of GST is not just a good idea; it’s a must.

Iram

Greetings, I'm Iram, a taxation expert with a profound passion for helping businesses navigate the complex world of tax compliance and financial strategies. With extensive knowledge in tax law and a commitment to providing businesses with the guidance they need, I'm here to be your trusted partner in achieving financial success. I firmly believe that every business owner, regardless of their background, deserves access to expert taxation advice and strategies. My goal is to support you in optimizing your tax planning and compliance efforts, ensuring that your business thrives in the competitive landscape. I am honored to be part of your journey toward financial success through this blog, where I'll share valuable insights and strategies tailored to your taxation needs. Thank you for entrusting me with the opportunity to contribute to your business's financial prosperity. For more information and resources, please visit www.kanakkupillai.com.