Introduction to GST – Understanding Basics & Compliance
Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. Introduced in India on July 1, 2017, GST has revolutionized the taxation system by unifying indirect taxes such as VAT, excise duty, and service tax into a single tax regime. This tax is applicable on the supply of goods and services, making the process of tax collection and payment seamless across India.
GST aims to eliminate the cascading effect of taxes, streamline the taxation process, and improve the ease of doing business. It simplifies tax compliance, reduces tax evasion, and ensures that taxes are paid at each point of sale while providing credit for taxes paid at earlier stages.
In this guide, we will delve into the various aspects of GST, including the types of GST (CGST, SGST, IGST), the need for GST registration, and how GST works.
1. What is CGST, SGST, IGST?
Under GST, there are three types of taxes:
- a) CGST (Central Goods and Services Tax)
CGST is the tax collected by the Central Government on intra-state (within the same state) supply of goods and services. Both the buyer and the seller in the same state will be liable to pay CGST. - b) SGST (State Goods and Services Tax)
SGST is the tax collected by the State Government on the same intra-state supply. This is applicable when both the buyer and the seller are in the same state. - c) IGST (Integrated Goods and Services Tax)
IGST is applicable on inter-state (between different states) supply of goods and services. This is levied by the Central Government, and the amount collected is shared between the state and the central governments.
For example: Let’s assume a manufacturer, “ABC Industries,” is based in Maharashtra and sells a product to two different customers under different scenarios:
1. Intra-State Sale (Same State) – Maharashtra to Maharashtra:
Scenario: ABC Industries manufactures furniture and sells it to a customer in Mumbai (same city as the manufacturer). Since both the manufacturer and the customer are in Maharashtra, this is an intra-state sale. The applicable taxes are CGST and SGST.
- Selling Price of the Product: Rs. 10,000
- CGST (Central Goods and Services Tax): 9% of Rs. 10,000 = Rs. 900
- SGST (State Goods and Services Tax): 9% of Rs. 10,000 = Rs. 900
- Total Tax Collected: Rs. 900 (CGST) + Rs. 900 (SGST) = Rs. 1,800
Here, the total tax liability for the business (ABC Industries) is Rs. 1,800, which will be collected from the customer and paid to the government. The tax is split equally between the central government and the Maharashtra state government.
2. Inter-State Sale (Different States) – Maharashtra to Tamil Nadu:
Scenario: Now, if ABC Industries sells the same furniture to a customer in Chennai, Tamil Nadu (a different state), this will be an inter-state sale. In this case, IGST (Integrated Goods and Services Tax) will be applicable instead of CGST and SGST.
- Selling Price of the Product: Rs. 10,000
- IGST (Integrated Goods and Services Tax): 18% of Rs. 10,000 = Rs. 1,800
- Total Tax Collected: Rs. 1,800 (IGST)
Since it’s an inter-state sale, only IGST is applicable, and it is collected by the central government, which is then shared between the central and state governments.
Comparison of Intra-State and Inter-State Taxation:
| Type of Sale | Selling Price | Applicable Tax | Tax Collected | Amount of Tax |
| Intra-State Sale (Maharashtra to Maharashtra) | Rs. 10,000 | CGST & SGST (9% each) | CGST: Rs. 900, SGST: Rs. 900 | Rs. 1,800 |
| Inter-State Sale (Maharashtra to Tamil Nadu) | Rs. 10,000 | IGST (18%) | IGST: Rs. 1,800 | Rs. 1,800 |
In this example, the major difference is the tax type: CGST and SGST are applicable when the buyer and seller are in the same state, whereas IGST applies when the sale is between two different states.
GST Types and Applicability
| Tax Type | Applicability | Collected By | Example |
| CGST | Intra-state supply | Central Government | 9% of the sale price if both parties are in the same state |
| SGST | Intra-state supply | State Government | 9% of the sale price if both parties are in the same state |
| IGST | Inter-state supply | Central Government | 18% if the sale happens between two different states |
This differentiation ensures that both the state and central governments share the revenue from goods and services taxation.
2. How GST Works & Who Needs to Register?
How GST Works
GST is a destination-based tax, meaning that it is charged where the goods or services are consumed, rather than where they are produced. Businesses collect GST on behalf of the government from their customers at the point of sale and remit it to the government. The GST paid on purchases (input tax) can be claimed as a credit against the GST collected on sales (output tax), ensuring that businesses pay taxes only on the value added to the goods and services.
GST Registration
GST registration is required for businesses whose turnover exceeds the prescribed threshold limit. It is mandatory for:
- Businesses with an aggregate turnover of more than Rs. 40 lakhs (Rs. 20 lakhs for special category states).
- Businesses involved in inter-state supply of goods or services.
- Businesses involved in e-commerce.
- Professionals providing services (with a turnover exceeding Rs. 20 lakhs).
If a company’s turnover in a year exceeds the limit of Rs. 40 lakhs (Rs. 20 lakhs in some states), it must register under GST. Once registered, the business can claim input tax credit on its purchases and remit the collected GST to the government.
GST Registration Criteria
| Business Type | Threshold Limit | Requirement for Registration |
| Goods-based business (in normal states) | Rs. 40 lakhs | Mandatory GST registration |
| Goods-based business (special states) | Rs. 20 lakhs | Mandatory GST registration |
| Service-based business | Rs. 20 lakhs | Mandatory GST registration |
| E-commerce business | No threshold limit | Mandatory GST registration |
| Inter-state supply of goods/services | No threshold limit | Mandatory GST registration |
Businesses below these thresholds may voluntarily register for GST, allowing them to benefit from input tax credit and avoid paying GST on their own purchases.
GST Rates & Classification of Goods and Services
Under GST, goods and services are classified into different categories based on their tax rates. The rates are categorized into five tax slabs: 0%, 5%, 12%, 18%, and 28%. Some goods and services are exempt from tax, while others attract special rates. Below is a detailed table outlining the classification of goods and services along with their applicable GST rates.
Comprehensive Table of Goods and Services and Their GST Rates
| Product/Service Category | Tax Rate | Description |
| Essential Goods (e.g., food grains, vegetables, fruits) | 0% | Goods like cereals, vegetables, fruits, etc., are exempt from GST to ensure basic essentials are affordable. |
| Textiles and Apparel (e.g., cotton, wool, garments) | 5% | Basic textiles and apparel, excluding luxury or branded items, fall under the 5% slab. |
| Health & Education Services | 0% | Healthcare services and education services are exempt from GST. |
| Electric Vehicles | 5% | Tax rate for electric vehicles to encourage green mobility. |
| Books & Printed Material | 0% | Books and printed educational material are exempt from GST. |
| Daily Use Items (e.g., soap, toothpaste) | 18% | Most daily-use consumables like soaps, shampoos, and toothpaste attract this rate. |
| Luxury Cars | 28% | High-end luxury vehicles fall under this tax rate, with higher taxes to curb excessive consumption. |
| Hotel Accommodation (Room rates above ₹7,500) | 18% | Hotels charging more than ₹7,500 per night attract this rate. |
| Hotel Accommodation (Room rates below ₹7,500) | 12% | Hotel rooms with a rate below ₹7,500 are taxed at a lower rate. |
| Gold and Precious Metals | 3% | Gold and precious metals like diamonds are taxed at a relatively low rate to maintain their demand. |
| Services Provided by Restaurants (Non-AC) | 5% | Restaurants with no air-conditioning or heating facilities are taxed at a lower rate. |
| Alcoholic Beverages (Alcohol for human consumption) | 28% | Alcoholic beverages are placed under the highest tax slab of 28%. |
| Cigarettes, Tobacco, and Other Tobacco Products | 28% | These products are taxed at the highest rate to discourage usage. |
Exemptions & Special Provisions under GST
Under GST, certain goods and services are exempt from tax to make essential items more affordable. Additionally, some special provisions apply to specific sectors or types of transactions to encourage growth or provide relief.
Key Exemptions under GST:
| Goods/Services | Exemption Description |
| Healthcare & Medical Services | Services provided by healthcare professionals, medical clinics, and hospitals are exempt under GST. |
| Educational Services | Education provided by schools, colleges, and other recognized institutions are exempt from GST. |
| Agricultural Products | Basic agricultural produce such as grains, fruits, vegetables, etc., are exempt from GST. |
| Export of Goods and Services | Goods and services exported out of India are zero-rated under GST, meaning no tax is levied. |
| Government Services | Services provided by the government, including municipal services, are generally exempt from GST. |
| Public Transportation | Services like transportation by public buses, trains, and airways are exempt. |
Special Provisions under GST
- Composition Scheme for Small Businesses: Small businesses with an annual turnover of less than ₹1.5 crore can opt for a Composition Scheme, which allows them to pay GST at a lower, fixed rate instead of regular GST rates.
- Reverse Charge Mechanism: Under the Reverse Charge Mechanism (RCM), the liability to pay GST is on the recipient of goods or services, instead of the supplier. This is applicable to certain goods or services as notified by the government.
- Tax Collection at Source (TCS) for E-Commerce: E-commerce operators are required to collect GST on behalf of sellers on their platform and remit the tax to the government. This provision helps ensure tax compliance in the digital economy.
Advantages of GST
- Single Tax for All Goods and Services:
GST replaces multiple indirect taxes (like VAT, Excise Duty, and Service Tax), making the taxation process simpler and more transparent. It reduces the cascading effect of taxes and helps avoid tax-on-tax. - Boost to Ease of Doing Business:
With a unified tax system, businesses no longer need to deal with the complexities of multiple state and central taxes. This makes it easier for businesses to operate across states and regions. - Better Compliance and Transparency:
The GST system requires businesses to maintain digital records and file regular returns, which improves transparency and reduces tax evasion. - Lower Tax Burden on Goods and Services:
GST has resulted in a reduction of tax rates on many goods and services, making them more affordable to the consumer.
Disadvantages of GST
- Complexity of GST Filing:
While GST is intended to simplify taxation, the multiple returns and the requirement for detailed documentation may still be overwhelming for small businesses, especially in the initial stages. - Increased Compliance Cost:
Businesses, especially small ones, may need to hire tax consultants or software for GST filing, which adds to their operating costs. - Impact on Small Businesses:
Small businesses may struggle to comply with the GST requirements, particularly when it comes to maintaining digital records and meeting regular filing deadlines. - Implementation Issues:
The initial rollout of GST was challenging, with many businesses facing difficulties in understanding the new tax system, leading to delays and confusion. While the system has improved over time, some issues persist.
FAQ’s (Frequently Asked Questions)
- What is the GST rate for daily-use products?
Daily-use items like soaps, toothpaste, and cleaning products fall under the 18% GST slab. - Are educational services exempt from GST?
Yes, educational services provided by recognized institutions are exempt from GST. - What is the GST rate for gold?
The GST rate for gold and other precious metals is 3%. - Do exports attract GST?
Exports are zero-rated under GST, meaning no tax is levied on exported goods and services. - What is the Composition Scheme under GST?
The Composition Scheme allows businesses with an annual turnover of less than ₹1.5 crore to pay GST at a reduced rate. - How often do businesses need to file GST returns?
Businesses need to file monthly or quarterly GST returns depending on their turnover. - What is Reverse Charge Mechanism (RCM)?
Under RCM, the recipient of goods or services is liable to pay GST instead of the supplier. - Can GST be claimed back on purchases?
Yes, businesses can claim Input Tax Credit (ITC) on GST paid for purchases used for business purposes. - How is GST paid on services provided by professionals?
Services provided by professionals like doctors, lawyers, and chartered accountants are exempt from GST. - What are the advantages of GST for businesses?
GST simplifies taxation, reduces tax cascading, and makes compliance easier across different states.
Conclusion
GST has revolutionized the taxation system in India by unifying multiple taxes into a single, streamlined process. While it offers several benefits, such as enhanced transparency, reduced tax burden on goods and services, and simplification of interstate trade, businesses also face challenges in terms of compliance, especially small enterprises. However, as the GST system evolves, the ease of doing business in India continues to improve, making it a significant step towards the nation’s economic growth.
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