By now, the entire country has settled down to the idea of GST. Yes, the new taxation regime has kicked in. The age-old confusion regarding various taxes like the VAT, service tax, excise duty, purchase tax, and many others have been eliminated. The government has introduced the One Nation – One Tax ideology.
Goods and Services Tax
This is an indirect tax which has replaced many indirect taxes from the old regime. The GST regime came into effect from 1st July 2017. It covers the supply of goods and services. It is one tax for the entire nation, irrespective of state. You need to first understand the supply chain format. Then only, you can have a fair idea of how the taxation structure works.
The Supply Chain Process
- In the first step, raw materials are purchased for the production of goods.
- Then, the production process starts.
- The completed products are then stored in warehouses.
- The products are then sold to the wholesaler.
- The wholesaler sells it to the retailer.
- The retailer sells the products to the common man.
The Goods and Services Tax is levied in each of these stages and that makes it a multi-stage tax. This is one of the primary characteristics of the new tax.
Secondly, it is levied on the value addition. Let us understand it this way, with the help of an example. A manufacturer buys flour, sugar, and eggs to make cake. The value of the materials increases, once the final product is made. The manufacturer sends it to the warehouses, where all the labeling and segregation takes place. Then, the warehouse-agent sells it to the store or retailer. The retailer takes forward the task of making smaller packets and selling it locally. Thus, a monetary value is added at every stage to arrive at the final figure.
Thirdly, it is a destination-based tax. You can take the example of furniture being manufactured in Chennai and sent to a retail point in Kolkata. So, the entire tax goes to the Kolkata government and not Chennai. So, it depends upon where it is sold.
Types of GST
Now, we come to the different types of GST. There are 3 taxes under this system. We will describe it in a sentence. They are:
- CGST – It is basically applicable on intra-state supply of goods or services in India. It is levied by the central government. It stands for Central GST.
- SGST – It is also applicable on intra-state supply of goods or services in India. It is levied by the State. It is better known as State GST.
- IGST – It is applicable on inter-state supply of goods or services, exports and imports. The full form is Integrated GST.
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It is the abbreviated form of the Central Goods and Service Tax Act, 2017. The CGST Act applies to the collection and levy of tax on intra-state supply of goods or services or both by the central government.
The second one in the series, the State GST Act. It is the tax levied by the state on intra-state supply of goods or services or both.
Integrated Goods and Services Tax Act encompasses the inter-state transfer of goods or services. IGST is levied and collected by the center. The inter-state seller pays IGST on the value addition of goods after the adjustment of credit of IGST, CGST, and SGST on his purchases. The exporting state transfers the credit of SGST, which was used in payment of IGST to the center. Then, the importing dealer claims credit of IGST, while paying off his output tax liability. The center transfers the credit of IGST, which was used to pay SGST to the importing state. The entire transaction is monitored by the Central Agency.
Advantages of IGST
- An uninterrupted ITC chain on inter-state transactions is maintained.
- The inter-state seller or buyer breathes easy, as the funds are free moving. There is no payment demand of tax upfront.
- The ITC is used up in paying the tax.
- The business house can monitor the activity on its own.
- The taxation structure is kept simple.
- The accounting procedures are simple and transparent.
- Business-Business, as well as business-consumer transactions, are well-facilitated.
You can make the payment by ITC or by cash. There is a certain procedure to pay with ITC.
- You can use the first available ITC of IGST, to pay the IGST.
- After exhaustion of the ITC of IGST, the ITC of CGST is utilized.
- After both the above are exhausted, the dealer can utilize the ITC of SGST for the payment.
- You can pay the balance liability by cash.
After the above procedure is followed, the settlement of accounts takes place between the center and the state.
- The exporting state pays the amount equivalent to the ITC of SGST used by the supplier in the exporting state to the center.
- The center pays the amount equivalent to the ITC of IGST which has been used by the dealer, for payment of SGST on intra-state supplies.
Thus, the CGST Act, SGST Act, and IGST Act aim at making lives simpler and more conducive for business. The simple and transparent tax format allows taxpayers to avail of credit against one another. The cascading effect of the earlier indirect tax regime has been eliminated and the country awaits new dawn. The new regime promises to put the country on the global map.