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Fundamentals of GST : Goods and Services Tax


Fundamentals of GST : Goods & Services Tax

What is GST?

GST stands for Goods and Services Tax. It has been implemented from 1st July, 2017.
To understand GST we need to understand what are direct and indirect taxes.

Direct Tax : The tax imposed by the government on an individual’s profit or income is known as direct tax. It is the tax paid by an individual or a person directly to the government. For example, Income Tax.

Indirect Tax : The tax imposed on the goods and services is known as indirect tax. This tax is collected by an organisation or a person from customers and then deposit it to the government. For example, GST.

Why GST has been introduced in India?

Before the introduction of GST in India, the rules and taxes were different in each state of India. From 1 July 2017, Goods and Services Tax (GST) has been introduced to make the tax uniform across states. GST will make the tax rates same in each state.

GST has replaced the taxes like Value Added Tax (VAT), Central Sales Tax (CST), Service Tax, Excise Tax, Luxury Tax, Entertainment Tax etc.

However, few taxes has remain unchanged such as Income Tax, Tax Deducted at Source (TDS), Customs, Payroll etc.

What are various terms related to GST?

Dealer : Any person who buys goods or services for resale is known as a dealer (or a trader). A dealer can be a firm or a company.

Intra-state sales : Sales of goods and services within the same state or Union Territory are called intra-state sales.

Inter-state sales : Sales of goods and services outside the state or Union Territory are called inter-state sales.

Input GST : When dealers pay GST on purchase of goods and services, it is called Input GST.

Output GST : When dealers collect GST from end user customers, it is called Output GST.

What are the different types of GST?

GST has been introduced to have a single tax for all types of sales. However, the concept of One GST has not been implemented. Instead, it has been divided into THREE types:-

\blacktriangleright CGST – It stands for Central GST
\blacktriangleright SGST – It stands for State GST
\blacktriangleright IGST – It stands for Integrated GST

When a sale happens within a State, means the buyer and the seller belongs to the same state, then CGST and SGST comes into the picture.

And when a sale happens from one state to another, means buyer and seller are residing in different states, then IGST is applicable.

Who paid what taxes before the introduction of GST?

Indirect taxes are levied on Goods sold and Services provided.

Goods are manufactured by a Manufacturer and sold by a Dealer. Earlier, the tax scheme was a little bit complex.

For Manufacturers

(i) If a Manufacturer does his production in a particular state and sales the goods to the dealers in the same state, then he had to pay Excise Tax to the Central Government and VAT to the State Government.

(ii) If a Manufacturer does his production in a state and sales the good to a dealer in other state, then he had to pay Excise Tax and Central Sales Tax (CST) which was distributed amongst the Central Government and the State Government.

For Dealers

(i) If a Dealer makes a sales within the state where he has got the license to trade, then he had to pay the VAT to the State Government.

(ii) If a Dealer makes a sales outside of the state, then he had to pay CST which was distributed amongst the Central Government and the State Government.

For Service Providers

If a Service Provider provides his services anywhere (within State or Outside State), then he had to pay Service Tax which was distributed amongst the Central Government and the State Government.

Who will pay what tax after the implementation of GST?

With the implementation of GST, India has moved closer to the concept of “One Nation, One Tax“. Now the Manufacturers and the Dealers have to pay the taxes in a different way.

For Manufacturers

(i) If a Manufacturer does his production in a particular state and sales the goods to the dealers in the same state, then he will have to pay CGST to the Central Government and SGST to the State Government.

(ii) If a Manufacturer does his production in a state and sales the good to a dealer in other state, then he will have to pay IGST which will go to the Central Government.

For Dealers

(i) If a Dealer makes a sale within the state where he has got the license to trade, then he will have to pay CGST to the Central Government and SGST to the State Government.

(ii) If a Dealer makes a sale outside of the state, then he will have to pay IGST which will go to the Central Government.

For Service Providers

(i) If a Service Provider provides his services anywhere within State, then he will have to pay CGST to the Central Government and SGST to the State Government.

(ii) If a Service Provider provides his services anywhere outside State, then he will have to pay IGST which will go to the Central Government.

Illustration to understand CGST and SGST

Suppose Dealer A sells goods worth ₹ 3000 to a Customer B in the state of West Bengal.

Let the standard rate of GST is applicable at 12% on these goods.

Then GST will be divided into two parts – CGST and SGST as the sale is intra-state.

Therefore, out of 12% GST, CGST will be 6% and SGST will be 6%.

[Special Note : CGST and SGST on intra state sells is shared by State and Central Government equally]

Now Dealer A will collect the GST in two parts :
(i) 6% of ₹ 3000 = ₹ 180 as CGST and deposit it to the Central Government.
(ii) 6% of ₹ 3000 = ₹ 180 as SGST and deposit it to the State Government (West Bengal in the current example).

Therefore, Dealer A will collect a GST of ₹ 180 + ₹ 180 = ₹ 360 in total.

Illustration to understand IGST

Suppose Dealer X of Maharashtra sells goods worth ₹ 50,000 to a Customer Y in the state of West Bengal.

Let the rate of GST is applicable at 18% on these goods.

Now Dealer X will collect an IGST of 18% of ₹ 50,000 = ₹ 9000 from Customer Y and deposit it to the Central Government.

State Governments will not get any amount from it.

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Published on October 2nd, 2019 | by Abhishek Mandal


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