Goods and Service Tax, India - An Introduction

GST_India

The Goods and Service Tax (“GST”) is the new indirect tax regime of India. The GST came into effect on July 01, 2017, through the implementation of the 101st Amendment to the Constitution of India and it replaced the multiple indirect taxes levied on the goods and services by the Central and State Governments of India.

GST is a uniform, indirect, destination-based tax, which is levied on every value addition that is made at each stage, on good and services, from the manufacturer to the consumer. GST is based on an input tax credit model, wherein all input taxes paid at each stage of value addition made on the products and services is refunded by the Government upon submission of relevant documents. Therefore, the final consumer is the only person in this supply chain that pays the GST levied by the last dealer.

As per the Ministry of Finance, Government of India, “GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.”

One of the greatest advantages of GST is that it completely mitigates cascading effect of the multiple indirect taxes on the goods sold in India. In the pre-GST era, taxes were levied on taxes (in addition to the value of goods) and as a result the price of goods kept increasing at every stage. However, under GST, dealers at every stage of the supply chain can claim input tax credit for the taxes it had paid to the dealer preceding him in the supply chain. Therefore, the burden of indirect tax on the final consumer is reduced and price of goods under GST is lesser when compared to earlier indirect tax regime.

Under the GST Regime, there are two types of GST, Central Goods and Service Tax (“CGST”) and State Goods and Service Tax (“SGST”), which are levied simultaneously on every transaction of supply of goods and services (except on certain exempted goods and services, which are outside the purview of GST).

In case of inter-state transactions, the Central Government levies and collects the Integrated Goods and Services Tax (“IGST”) on all inter-State supplies of goods and services.

Let us examine the flow of taxes by reviewing an IGST-based transaction:

In these inter-state transactions, the exporting dealer charges IGST to the importing dealer (which will be a combined rate of CGST and SGST).

The exporting dealer thereafter deposits the IGST received from the importing dealer to the exporting State (and claims input tax credit of CGST and SGST paid by it when it had purchased the goods within the exporting State).

The exporting State thereafter transfers the IGST deposited by the exporting dealer to the Central Government (clearly specifying the SGST component).

The importing dealer then claims input tax credit from the importing State for the IGST paid to the exporting dealer (again clearly specifying the SGST and CGST component). The importing State pays the input tax credit for the SGST component of the IGST to the importing dealer.

Finally, the Central Government thereafter transfers the SGST component of the IGST deposited by the exporting State to the importing State.