GST (Goods and Services Tax) is an indirect tax charged on the supply of goods and services in India. It was introduced on 1 July 2017 and replaced several indirect taxes previously levied by the Central and State Governments.
GST is a destination-based tax, which means tax revenue generally goes to the place where goods or services are consumed.
The main objectives of GST are to create a more unified indirect tax system and simplify the taxation of goods and services.
GST helps to:
GST in India is mainly divided into four components:
CGST is collected by the Central Government on intra-state supplies.
SGST is collected by the State Government on intra-state supplies.
IGST is charged on inter-state supplies and certain other transactions such as imports, as applicable.
UTGST applies to eligible intra-state supplies made within Union Territories where the UTGST framework applies.
An intra-state supply takes place when the supplier and the place of supply are within the same state, subject to GST place-of-supply rules.
For example, a business in Delhi sells goods to a customer in Delhi.
Generally, the transaction will involve:
CGST + SGST
An inter-state supply generally occurs when the supplier and place of supply are in different states, subject to the applicable place-of-supply rules.
For example:
A business in Delhi sells goods to a customer in Haryana.
Generally, the transaction will involve:
IGST
The GST rate is the percentage of GST applicable to a particular supply of goods or services.
GST rates vary depending on the product or service. Common rate categories include 0%, 5%, 12%, 18%, and 28%, along with special rates and treatments for certain supplies.
The applicable rate should always be checked according to the current GST classification and government notifications.
Input Tax Credit (ITC) allows an eligible registered business to claim credit for GST paid on eligible business purchases and use that credit against its output GST liability, subject to the conditions and restrictions under GST law.
A business purchases goods and pays:
Input GST = ₹10,000
It sells goods and collects:
Output GST = ₹15,000
If the business is eligible to claim the full ₹10,000 as ITC:
GST Payable = Output GST − Input GST
= ₹15,000 − ₹10,000
= ₹5,000
So, the business may need to pay ₹5,000, subject to applicable GST rules.
Output GST is the GST collected by a registered business from customers on taxable supplies made by the business.
For example, if a business sells goods worth ₹1,00,000 and GST is charged at 18%:
GST = ₹1,00,000 × 18% = ₹18,000
The ₹18,000 is the output GST collected from the customer.
Input GST is the GST paid by a business on eligible purchases of goods or services used for business purposes.
For example, a business purchases office equipment for ₹50,000 and pays GST of ₹9,000.
The ₹9,000 is input GST and may be available as ITC, subject to eligibility conditions.
GST Registration is the process through which a person or business becomes registered under GST law and receives a GSTIN (Goods and Services Tax Identification Number).
GST registration requirements depend on factors such as:
Not every business is required to register under the same circumstances, so the applicable GST rules should be checked.
GSTIN stands for Goods and Services Tax Identification Number.
It is a unique 15-character identification number assigned to a registered taxpayer under GST.
A GSTIN is used for:
A GST Tax Invoice is a document issued by a registered supplier for a taxable supply of goods or services.
It generally contains important information such as:
A proper invoice is important for maintaining accounting records and, where eligible, supporting ITC claims.
A GST Return is a statement containing information about taxable supplies, purchases, tax liability, and other required details that a registered taxpayer must report to the GST authorities according to the applicable return requirements.
GST return filing helps the government track:
The exact return forms and filing requirements depend on the taxpayer’s registration and applicable GST scheme.
Before GST, India had several indirect taxes such as:
GST brought many of these taxes into a more unified indirect tax framework.
This helped reduce the complexity created by multiple indirect tax systems.
The cascading effect occurs when tax is charged on a value that already includes another tax, resulting in a tax on tax effect.
GST’s Input Tax Credit mechanism is designed to reduce this cascading effect by allowing eligible businesses to set off input tax against output tax, subject to GST rules.
Suppose a product has a taxable value of:
₹10,000
GST rate:
18%
GST:
₹10,000 × 18% = ₹1,800
Total invoice value:
₹10,000 + ₹1,800 = ₹11,800
If it is an intra-state supply, the ₹1,800 GST may generally be divided equally:
CGST = ₹900
SGST = ₹900
For an inter-state supply, the applicable GST would generally be:
IGST = ₹1,800
Under the Reverse Charge Mechanism, the recipient, instead of the supplier, becomes liable to pay GST for specified supplies or circumstances as provided under GST law.
RCM does not apply to every transaction. It applies only where the GST law specifically provides for it.
The Composition Scheme is a simplified GST scheme available to eligible small taxpayers subject to specified conditions and limits.
Under this scheme, eligible taxpayers generally pay GST at prescribed rates and follow simplified compliance requirements.
However, there are restrictions under the scheme, including limitations related to certain types of supplies and Input Tax Credit.
GST is an important part of accounting because businesses need to correctly record GST on purchases and sales, maintain tax invoices, calculate GST liability, account for eligible Input Tax Credit, and complete applicable compliance requirements.
A basic understanding of GST helps accounting professionals maintain accurate books and prepare proper tax-related records.
Remember:
Purchase → Input GST → Sale → Output GST → Adjust Eligible ITC → Calculate GST Liability → Pay/Report GST
Leave a Reply