The Indian government launched the countrywide Goods and Services Tax (GST) on July 1, 2017, to unify indirect taxes for India’s US$2 trillion economy and its 1.3 billion people into a single tax system. But what is it and how does it impact your business?
The GST is a comprehensive indirect tax levy on manufacture, sale, and consumption of goods and services at the national level. The tax has replaced more than a dozen indirect taxes that were previously levied by the federal and state governments such as central excise, service tax, VAT, entry tax, and octroi (a duty levied by a local municipality on goods entering a state).
The GST is a dual levy that is imposed by both the federal government and state governments on a common tax base. The GST tax system has the following three components:
- Central Goods and Services Tax (CGST), which is levied on an intra-state sales and collected by the federal government;
- State and Union territory Goods and Services Tax (SGST), which is levied on an intra-state sale and collected by the state or union territory government;
- Integrated Goods and Services Tax
The GST is a destination-based tax that follows a multi-stage collection mechanism. The tax is collected at every stage in the supply chain and the credit of tax paid at the previous stage is available as a set off at the next stage of the transaction. That means, businesses can avail input tax credit (ITC) at the time of paying tax on output and reduce the tax that they have already paid on inputs. This ensures better cash flow and working capital management for companies. The multi-stage collection mechanism also shifts the tax incidence near to the consumer, mitigating the potential for cascading, or double taxation on goods and services.
GST in India follows a four-tier rate structure for goods and services. The tax slabs fall under 5 percent, 12 percent, 18 percent, and 28 percent bracket. The GST applies the tax rate based on the items economic classification. Essential services and food items are placed in the lower tax brackets, while the luxury services and products are placed at the higher tax bracket.
There are some supplies that are exempt from the GST, including alcohol beverages, petroleum products, and real estate.
Since the inception of the GST, the GST Council has revised tax rates a number of times. The GST Council is a federal forum that makes recommendations on GST rates, exemption lists, threshold limits, and all other matters relating to the GST.
GST calculation GST in India is calculated as the sum of GST payable on reverse charge, inward supplies, output supplies, exempted supplies, inter- state sales along with eligible and non- eligible ITC.
This total is derived individually every month and can help businesses manage the 18 percent interest that is levied in case the payment falls short of the business’s actual obligation.
GST return forms
There are various GST return forms for taxpayers according to the categories for making an easy transaction.These forms are available on the official website of the Central Board of Direct Taxes. The types of GST return forms and their due date for filing are given on page 5.
The anti-profiteering clause of the GST allows businesses to pass on the benefit of a reduced tax rate on goods and services to consumers. This is to prevent any rise in the price of commodities following the GST implementation.
Import and export under GST
All imports and exports of goods and services are deemed as inter-state supplies under the GST. Accordingly, the IGST is applicable on the imports of goods and services into the country. The exports of goods and services, however, are exempt from taxes under the GST law.
For the import of goods, the basic customs duty is levied in addition to IGST.
Manufacturers, service providers, and traders of goods and services are allowed to offset IGST paid on the import of goods and services against their output liability or tax on sales. However, credit for customs duty is not available.
Import and export of services
The supply of any service is treated as an import when:
- The supplier of the service is located outside India;
- The recipient of the service is located in India;
- The place of supply of the service is in India; and
- The supplier and recipient of the service are not establishments of the same person.
The supply of any service is treated as an export when:
- The supplier of the service is located in India;
- The recipient of the service is located outside India;
- The place of supply of the service is outside India; and
- The supplier and recipient are not establishments of the same person.
The supply of goods is treated as an import when it is brought into India from a place outside India, and export when it is taken out of India to a place outside of India.
The e-way bill is an electronic bill that transporters can use to move goods from one state to another. The e-way bill is valid throughout India – transporters no longer need to keep separate transit passes for moving goods across state borders.
An e-way bill is mandatory for interstate movement of goods by motorized vehicle where the value of goods exceeds INR 50,000 (US$718). Motorized vehicles constitute all vehicles that transport people or cargo from one state to another, other than trains, ships, or airplane. The transportation of goods through a non-motor vehicle is exempted from the e-way bill system.
There are also specific goods for which e-way bill is mandatory even if the value of the consignment of goods is less than INR 50,000 (US$718). These include:
- Inter-state transport of handicraft goods by a dealer exempted from GST registration;
- Inter-state movement of goods to the worker by the principal/registered job worker.
Composition scheme for small and medium enterprises
The government has introduced the composition scheme to soften the impact of GST on small and medium businesses, by granting relief to it on GST filings, procedures, and tax rates.
Under the scheme, a composite taxpayer pays tax at a fixed percentage that is usually lower than the regular taxpayers. The scheme, however, is limited to certain eligible entities:
- Small businesses with an annual turnover not more than INR 1.5 crores (US$215,610);
- Service providers with an annual taxable turnover up to INR 50 lakh (US$71,870); and
- Companies doing business in the northeast and north Indian state of Uttarakhand with an annual turnover of not more than INR 75 lakh (US$107,634)
If the turnover of the business exceeds the threshold amount during the financial year, the benefits of the composition scheme cannot be used, and the business needs to file simple GST returns from this point onwards.
One drawback of the scheme is that entities that opt for the composition cannot be involved in inter-state transactions, e-commerce business, imports or exports, or the manufacture of ice cream, pan masala, and tobacco. In addition, the buyer transacting with a seller registered under the composition scheme cannot claim the input tax credit, which can impact the former’s sales.
Taxpayers who fail to meet the criteria for the scheme at any time during the financial year, or wish to opt out of the scheme, must file the form GST CMP – 04.
Form GSTR 4 and GSTR 9A
To opt into the scheme, the business must file form GST CMP – 02 with the government, using the online GSTN portal. To remain in the scheme, a business must post notice before every financial year (FY). The Form GSTR 4 then needs to be filed by the 18th of the month in the following the quarter after the GST is being paid.
GSTR 9A is the form for annual returns for taxpayers under this scheme. Submission of this form is required by December 31 of the next financial year.
For GSTR 4, delayed filing will incur late fees charged at:
- INR 50 (US$0.72) per day; or,
- INR 20 (US$0.29) per day in case of nil returns.
For GSTR 9A, late fees will be charged at:
- INR 200 (US$2.88) per day; or,
- INR 100 (US$1.44) per day for nil returns.
The maximum amount that can be charged for delayed filing is INR 5,000 (US$72). However, an additional 18 percent annual interest on the tax owed is also levied.
The government imposes heavy penalty for tax avoidance, or when businesses register under the scheme without meeting the prerequisites. The penalty includes up to 100 percent of the taxes levied on the company.
The GST system requires taxpayers to self-assess their tax liability and pay their tax without any intervention by the tax authorities. The law provides for a robust audit mechanism to measure and ensure compliance by the taxable person. The GST audit checks the accuracy of information furnished, taxes discharged, refund claimed and input tax credit availed by the individual taxpayer.
There are three types of audits available under the GST regime.
Audit by chartered accountants or cost accountants
Every registered taxable person whose turnover during a financial year exceeds the prescribed limit of INR 2 crore (US $280,131) is required to get their accounts audited by a chartered accountant or a cost accountant.
General GST audit
This is a general audit of the business transaction. Here, the commissioner or any other officer authorized by the commission may undertake the audit of any registered person for a period, at a frequency, and in a manner as prescribed under the GST Law.
Special GST audit.
An officer above the rank of assistant commissioner may call for a special GST audit to examine and audit records of a registered taxpayer, including books of account if the regular audit reveals disparities in the taxpayer’s records.