Being an updated and enlightened consumer is paramount in today’s age, with the competition and complexities rising in the business and commercial world. Not just that, if you’re a young mind with some ingenious business ideas, you need to be aware of the taxes you might have to pay.

Now, income tax is just one of the revenue sources for the Government. Most of its revenue comes from the GST we pay—when we go out to dine, buy a property, invest in gold, or even purchase groceries. To know where our money is going, and how it is being used, we should know what exactly we are paying for.

Even if you don’t work in the world of finance, taxation, or anything related to GST, you should know it. So let’s see what it entails.

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What is GST?

Goods and Services Tax (GST) is an indirect tax applicable at each stage of the supply of goods and services. The Goods and Services Tax Act was passed on 29th March 2017 and came into effect on 1st July 2017.

This is an extensive, multi-stage tax, brought into the picture to replace the multiple taxes formerly in place like VAT, service tax, excise duty, etc. Since it is applied to the supply of goods and services, it is a destination-based tax, which is levied on every stage of value addition/sale.

Now, what does this mean?

For example, the process of manufacturing and selling a biscuit is

Flour, sugar, and other raw materials —> Biscuit —> Labelling —> packaging.

GST will be imposed at each of these levels.

Furthermore, if the goods are manufactured in Maharashtra and sold to the ultimate consumer in Gujarat, the tax revenue will go to Gujarat and not Maharashtra.

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What are the benefits of Goods and Services Tax?

One of the major shortcomings of the previous Indirect Tax Regime was taxation at several points, at several rates. This turned out to be too cumbersome for the taxpayer’s compliance and payment.

GST solves this issue under a comprehensive tax regime. This was to improve tax compliance, aid revenue receipts for the government, and enhance transparency on the taxes levied.

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So what exactly does the current regime comprise?

GST applies to pretty much all goods and services in the country. The rate of taxation is determined based on the value. For this purpose, various rates have been formulated to accommodate the said goods and services.

However, fruits and vegetables, i.e. agricultural produce, petrol is not included in the ambit of GST. While the agricultural produce is tax free, petrol, diesel, and other fuels are taxed at a higher rate than the maximum GST rate of 28%. This is because India still imports over 80% of its oil requirements and there are no plans to bring petrol under GST in the near future—probably until the country develops its own resources.

The whole of Goods and Services Tax is classified and levied as:

Central Goods and Services Tax (CGST): the tax collected by the Central Government on an intra-state sale

State Goods and Services Tax (SGST): the tax collected by the state government on an intra-state sale

And Integrated Goods and Services Tax (IGST): tax collected by the Central Government for an inter-state sale

There are various tax slabs formulated to accommodate different goods and services, based on the value offered. 

One thing worth remarking here is that there’s a flat rate applied to the said goods and services, which is shared equally between the above classifications. So this is not double taxation, but one tax distributed equally between the Centre and the State.

How does this impact you?

If you have been wondering if the change of rates affects your cost of living, then no. Most of the items are charged at less than 18% GST, so it is not really expected to be inflationary. The major efft is the reduction of the overall burden of taxpayers on goods and services.

This is because it wipes out points of double taxation or the cascading effect of taxes. It also reduces exemptions and makes ways for input credit facilities—which can be useful for supply chains. This will reduce the evasion of indirect taxes.

GST requires e-filing of returns—which produces transparency in records and better compliance. If someone doesn’t file the records fairly and properly, their GST registration is at risk. This is a measure taken to ensure trust among businesses to show commitment to one’s own business.

The last word:

Although the studies and ideas of GST were pitched more than a decade ago, it has only been 5 years since its actual implementation. The GST regime is still in the budding stage and prone to quite a few deviations, confusion, conflicts, and more. The idea is to have a broad understanding of what it is, how it works and how it affects you.

Stay tuned to this space to continue learning more about taxation, finance, and other aspects new to adulthood!