Complete Guide to GST in India – All you need to Know

GST in India

GST in India– The GST is an indirect tax launched in India on the 1st of July 2017. For understanding GST, let’s get a basic idea about taxes. The taxes are broadly divided into two categories viz. Direct taxes and Indirect taxes. The direct taxes are those which we pay directly to the government, eg: Income tax, property tax, etc. Indirect taxes are those which we pay indirectly to the government while buying goods or availing services. Remember the hotel bills we pay or MRP of a commodity indicating the tax %. This comes under the indirect tax.

So how GST works?

Indirect taxes are levied by both Central and State governments. The major taxes levied by Central includes Excise duty (for goods produced in India), Central Sales Tax (CST) (for inter-state sales of goods), Custom duty (on imported and exported goods), Service tax (on various services). The State government levied taxes includes Value Added Tax (VAT) (on goods sold in the State), Luxury tax (on luxury items and services), Entertainment tax (on various entertainments eg: movies), Entry/Octroi tax (for goods entering the state).

Now, all these indirect taxes levied by Central and State governments are combining to one as GST. GST is divided into two as CGST (Central GST) and SGST (State GST). All the Central indirect taxes other than customs duty are combined to form CGST and the entire state govt. ones are combined to form SGST. We’ll explain the working of GST based on an example.

Consider a shoe manufactured at the rate of Rs. 100. As per the old tax system, the manufacturer imposes excised duty (for ex. 10%) for this shoe and sells it to the distributor (wholesaler or retailer) for Rs. 110 (Rs. 100 + Rs. 10 Ex. Duty). The manufacturer who has to bear the VAT (for eg. 12%) sells this item for Rs. 123.2 (Rs.110 + Rs. 13.2 VAT). Now, this VAT of Rs. 13.2 includes Rs. 12 which is on the original cost of the shoe which is Rs. 100 and Rs. 1.2 which is on the Excise duty already paid by the manufacturer. This is called a cascading effect of tax on tax. So the buyer pays this extra amount unknowingly.

Now, this is where the GST helps. The tax which has already been paid is exempted from the next tax. ie; in the above example, the consumer will get the product for Rs. 122, where he saves Rs. 1.2 which is actually the VAT imposed on Excise duty. This benefit can be availed by the distributor only if he has PAN/Aadhar, with which he can claim the deduction. Hence, all the transactions which are intentionally hidden will not get this tax benefit, as he cannot claim for the same. Thus GST helps in controlling the black money flow. Also, GST helps in replacing CST and Octroi, thus ensuring a smooth inter-state flow of goods.

Slabs of GST

There are mainly four slabs of GST:

5%, 12%, 18%, and 28%

All the essential items including food grains are exempted from GST. Ie; 0% tax.

  • 5% rates are for commonly used items.
  • 12% and 18% are standard rates of GST.
  • 28% is applicable for luxury items and services.

Value Added Tax (VAT):

As we already discussed, VAT comes under indirect tax levied by the state. The VAT is a concept that is actually being implemented in a Sales tax deduction. Here, as the name suggests, the tax is paid only for the value addition. So what is value addition? Let’s understand that through a simple example.

Assume that a factory produces iron blocks at the rate of Rs. 1000. Let the sales tax by 10%. So he sells the iron for Rs. 1100 to a machinist. The machinist converts this iron into a table at a total expense and profit of Rs. 900. The total cost for this item becomes Rs. 2000 (Rs. 1100 raw material price + machining cost of Rs. 900). With a 10% sales tax, machinist sells at the rate of Rs. 2200 to the shop. The shop decides to take profit from Rs. 800. He then puts the price tag of Rs. 3300 including sales tax (Rs. 2200 initial buying cost from machinist + Rs. 800 profit + Rs. 300 sales tax) to the buyer. Now the buyer pays a total sales tax of Rs. 600 (Rs. 100 incurred by factory + Rs. 200 incurred by machinist + Rs. 300 incurred by shop).

So to avoid this, VAT is introduced. With the VAT, the machinist has to pay a sales tax of Rs. 90 only as his value addition is Rs. 900 and 10% of its sales tax make it Rs. 90. So the total cost will be Rs. 2090. The shop adds a value of Rs. 800 for which he pays Rs. 80 as sales tax at the rate of 10%. Now the total buying price becomes Rs. 2970 (Rs. 2090 machinist selling price + Rs. 800 profit of shop + Rs. 80 sales tax). So the buyer’s profit with VAT is Rs. 330.

Now, you might think that the government will be losing this tax amount. Well, actually no. For availing these tax deductions, the machinist and shop have to show their buying receipts, after which they’ll get this tax deduction. So, the government will be able to track these transactions and earn more, similarly as in the case with GST.

VAT Slabs

0% for basic needs. Unfortunately in Kerala, tobacco falls under this category. Eg: salt, khadi, rice, wheat.
1% for relatively expensive items. More VAT for these will further increase the price tag. Eg: gold, diamonds, precious stones.  4-5% for basic daily items. Eg: cooking oil, medicines, tea, etc.
12-15% or more for luxury items. Eg: cigarettes, alcohol, etc.