The goods and services tax (GST) is a tax that is levied primarily on the supply of goods. It is a tax on the value addition and the supplier can claim a discount through an input tax credit mechanism. This means that the tax paid on the purchase of goods and services is eligible for a discount against the tax paid on further supply of goods and services. The act, tax rates, and rules are uniform across all Indian states and Union Territories.
How does a state charge Central GST and State GST for its transaction of the supply of goods and services?
The Indian GST system follows a dual GST model, which means both the central and the state charge taxes on all transactions within a state involving the supply of goods and services ruled by the CGST Act and the SGST Act, respectively. The taxes are paid electronically and is transferred to the individual CGST/SGST accounts.
Note that previously, only the services and manufacturing transactions are taxed by the central government whereas the sale transactions are taxed by the state government.
The interstate supply of goods and services is taxed under IGST Act or Integrated GST Act. For IGST, the rate of GST is the sum of the total CGST and SGST rates added together. The IGST amount is deposited in the IGST account controlled by the central government and is shared between the central government and the respective state on an agreement.
However, the interstate seller can exercise the input tax credit of IGST, CGST, and SGST to pay the IGST liability.
The taxes consolidated under CGST:
- Central Excise duty
- Additional Excise duties
- Excise Duty levied under the Medicinal and Toiletries Preparation Act
- Service Tax levied under Chapter V of the Finance Act, 1994
- Additional Customs Duty, also known as Countervailing Duty (CVD)
- Special Additional Duty of Customs (SAD)
- Central Sales Tax
- Central cesses.
The taxes consolidated under SGST:
- VAT/Sales tax
- Entertainment tax (unless it is charged by the local community)
- Luxury tax
- Taxes on betting, lotteries, and gambling
- State cess and surcharges as they relate to the supply of goods and services
- Entry tax
- Octroi/Local body tax
The goods that are exempted from paying GST are alcohol, and specific petroleum products like crude oil, high-speed diesel, motor spirit, natural gas, and aviation turbine fuel. However, petroleum products are expected to be included in GST later. Alcohol continues to pay excise duty and VAT. Tobacco and tobacco-based items pay both excise duty and GST. Note, that taxes like stamp duty, road tax, toll tax, electricity duty, etc. do not fall under GST.
The latest tax rate structure consists of seven slabs, 0.25%, 1.5%, 3%, 5, 12, 18, and 28 percent GST compensation cess on certain goods except for the goods that are completely exempted from paying taxes.
The threshold limit starts at INR 20 lakhs of aggregate turnover in one financial year. Nevertheless, some states have a threshold limit of INR 1 million. Composition schemes, it is for businesses with a turnover of over INR 15 million, and the tax rate is mentioned under Section 10 of the CGST Act.
For import services, the IGST is charged on a reverse charge basis and the credit can the recipient in the conformation of the law.
CGST and SGST are parallel taxes under the dual GST system, charged on goods and services. So, it is not permissible to use the CGST input tax credit for the payment of SGST output tax liability and vice versa. However, the IGST credit pool is used for the payment of CGST, IGST, and SGST as the IGST credit pool can be used as a substitute for the central and state GST system.
The IGST credit is utilized in a specified order that starts with IGST, then CGST, and the remaining balance for SGST liability.
Similarly, for SGST credit, it can be utilized first for SGST liability, and then IGST.
Finally, the CGST credit is first used for CGST liability and then for IGST.
Previously the law was such that, the central government will not charge taxes on the sale of goods and the state government cannot charge taxes on the supply of services. The Indian Government had no say in the taxation system of the country. Now, after the arrival of the dual GST system, goods and services are simultaneously taxed by the state as well as the central government. Thus, it is necessary for a constitutional amendment to let the state and the central levy taxes on goods and services simultaneously.
The registered supplier must issue a tax invoice at the time of supplying taxable goods/services. The tax invoice must have the complete information of the transaction like name, address, and GSTIN of the supplier, name, address, and GSTIN of the service recipient, date of invoice, value of goods or service, description of goods or service, HSN classification, rate of CGST, rate of SGST or IGST, tax amount, the signature of the taxpayer, etc.
The payment of taxes can be done both traditionally and electronically through a common challan (a document needed during paying of taxes). The electronic mode is further categorized into three separate modes of payment:
- Using credit card or debit cards
- Through RTGS/NEFT
- By issuing cheques or cash (cannot exceed Rs.10,000/- for both cash and cheque) per tax period or demand draft.
Exports are exempted from GST which means that they will not be taxed and the input taxes will be refunded.
When is a taxpayer eligible to claim a refund? What is the procedure for a refund under the GST law?
The taxpayer is eligible to claim a refund in the following scenarios:
- Refund during exports
- Refunds for an accumulated input tax credit for inverted duty structure.
The refunds can be claimed online.
It is the time when the goods or services are designed to be supplied. So, when the seller got an idea of the time of supply, he can calculate the due date time for the payment of the taxes.
The place of supply is needed to determine the point where the supply has been made. This would help in understanding the type of GST that will be charged, CGST, SGST, or IGST.