Goods and Services Tax (GST) | Meaning, Advantages and Characteristics

Table of Contents

1. Meaning of Goods and Services Tax
2. Major defects in the earlier structure of indirect taxes
3. Objectives and Advantages of Goods and Services Tax
4. Characteristics of Goods And Services Tax
5. Legal Provisions Regarding Alcoholic Liquor, Tobacco Products And Petroleum Products
6. Categories of Goods And Services Tax
7. Meanings of Goods, Services And Supply
8. Meaning Of Intra-state Supply And Inter-state Supply
9. Composition Scheme
10. Levy or Charging of GST

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In India, Goods and Services Tax, (GST), came into effect on July 1, 2017. Goods and Services Tax was introduced to avoid the cascading effect of indirect tax. GST Council was constituted to fix the rates of Goods and Services Tax. Union Finance Minister is the Chairman of the GST Council. Other members of the GST Councils are:

(i) Union Minister of State-in-charge of Revenue or Finance, and

(ii) Minister-in-charge of Finance or Taxation or any other minister nominated by each state Government and Union Territory.

1. Meaning of Goods and Services Tax (GST)

As per Article 366 (12A) of the Constitution of India, Goods and Services Tax means a tax on supply of goods or services, or both, except taxes on supply of alcoholic liquor for human consumption. For the time being, GST is not levied on petroleum products.

It is an indirect tax levied on supply of goods and services, except on exempted goods and services. The word used in Article 366(12A) is ‘supply’ and not ‘sale’. Thus, stock transfers, branch transfers will also get covered under GST net.

GST is a consumption or destination based tax. It is payable in the State in which goods and services are finally consumed. Most of the indirect taxes have merged into Goods and Services Tax.

States can levy tax on sale, within the state of alcoholic liquor for human consumption and on petroleum products.

Every registered person/tax payer who makes supply of goods or services or both which were leviable to tax and his aggregate turnover in a financial year exceeds the prescribed limit is required to register himself in the State or Union Territory where he makes a taxable supply.

Goods and Service Tax is chargeable by a registered person/tax payer at the prescribed rates until goods and/or services reach their final destination, i.e. the consumer. After reaching the final destination, i.e., the consumer, they are not further supplied.

2. Major defects in the earlier structure of indirect taxes

Following were the major defects in the earlier structure of indirect taxes:

1. Central Sales Tax was payable for every movement of goods from one state to another. Even in case of stock transfers and branch transfers, there was incident of tax and input tax credit was not fully available. (Note: Input tax credit has been explained later in this chapter). Thus, cascading effect of taxes could not be avoided due to Central Sales Tax.
2. Millions of man-hours and truck-hours used to be lost at check costs.
3. The Central Government could not impose tax on goods beyond manufacturing level. Central Sales Tax was collected by the Central Government and retained by the State Government only.

3. Objectives and Advantages of Goods and Services Tax

1. To make tax rate uniform throughout the country: Only of the main objective of GST is to have uniformity of indirect tax rates throughout the country. GST rates are same throughout the country. Earlier there were different rates of Sales Tax/Value Added Tax in the States. Its motto is One Nation, One Market. The main objective or advantage of GST is single tax structure right the manufacturing.
2. To remove cascading effect of Taxes: Cascading effect of taxes means levy of tax on tax. GST is levied only towards the net value added portion and not towards the full portion of value as the taxpayer enjoys input tax credit. Goods and services will cost less due to removal of cascading effect of taxes. Due to input tax credit, GST would be finally paid by the consumer for the goods and services purchased.
3. To Simplify Taxation Process: GST is a comprehensive indirect tax. The taxes which have been subsumed in GST include:

(i) Central Excise Duty (except on petroleum products),

(ii) Service Tax,

(iii) Value Added Tax levied by the State Government,

(iv) Central Sales Tax,

(v) Additional Customs Duties,

(vi) Entry Tax,

(vii) Entertainment Tax,

(viii) Luxury Tax,

(ix) Tax on Lotteries, etc.

Thus, GST has integrated different tax line and it prevents multiple tax layers imposed on goods and services.

GST reduces the burden of taxes and ensure compliance of tax payment. The number of compliances is lesser. Thus, GST simplifies taxation process and helps in ease of doing business. This is a huge benefit for the business enterprises.

4. To make Indirect Tax Management Effective: The State Government and Central Government has to administer now mainly one indirect tax, i.e., GST after implementation of GST. Therefore, administration of GST will be more effective. As a result, tax evasion is likely to reduce. Previously, management of indirect taxes was a complicated tax for the Government.
5. To attract more Foreign Direct Investment: Goods and Services Tax helps in ease of doing business. Therefore, it will attract more Foreign Direct Investment.
6. Simple and Easy online Procedure: GST returns are filed online. The online procedure is simple and easy. Online filing of GST returns helps in making tax administration corruption free.
7. Composition Scheme for Small Businesses: Composition Scheme is a simple and easy scheme under GST for small tax payers as they can get rid of GST formalities and pay GST at a fixed rate of turnover. This scheme can be opted by small tax payer whose turnover is less than the prescribed limit and is not engaged in making inter-State supplies.
8. Enhanced Productivity of Logistics: After abolition of octroi and entry tax restriction on inter statement movement of goods has reduced. This has increased the productivity of logistics companies.
9. Creation of Common National Market: GST has given a boost to India’s tax to Gross Domestic Product ratio which helps in promoting economic efficiency and long-term growth. GST has led to uniform tax law and it has formed a common national market.
10. Regulation of Unregulated and Unorganised Sector under GST: GST has brought unregulated and unorganised sectors such as textiles and construction under regulation.

4. Characteristics of Goods and Services Tax

1. Comprehensive Indirect Tax: GST is a comprehensive indirect tax. It has subsumed 17 indirect taxes levied by the State Governments and the Central Government under the earlier indirect tax regime. GST has integrated various taxes on goods and services into one unified tax. Thus, GST has brought about unified tax regime.

2. Consumption or Destination Based Tax: GST is payable in the state in which goods and services are finally consumed. Thus, it is a consumption or destination based tax.

3. Same GST Rates throughout the country: The motto of GST is One Nation One Tax One Market. Under the GST regime, the GST rates are same throughout the country. Earlier, the rates of VAT/Sales Tax were different in the States.

4. Tax on Supply of Goods and Services: GST is a tax on supply of goods and services, or both, except taxes on supply of alcoholic liquor for human consumption. At present petroleum products will be out of GST. Petroleum products can be brought into the GST network if the GST Council so decides. Petroleum products means petroleum crude, high speed diesel, motor spirit, i.e., petrol, natural gas and aviation turbine fuel.
The word used is “Supply” as against the earlier concept of tax on the manufacture of goods or on sale. Therefore, stock transfers and branch transfers will also come under the GST net. GST is charged by the registered person/tax payer from the purchaser of goods and services.

5. No Tax on due to Input Tax credit: Goods and Services Tax belongs to family of Value Added Tax. GST is levied on the incremental value of the goods. Further, Input Tax Credit (in short, ITC) is allowed which avoid cascading effect of taxes. Every registered taxable person who carries on business at any place in India is entitled to credit of tax on inputs admissible to him which will be credited to the electronic credit ledger of such person in the records of the Government. Thus, there is no tax on tax.

6. Collection of GST by Registered Person/Tax payer: GST can be collected only by a person/tax payer who is registered under the Central Goods and Services tax Act, 2017.
Person includes:

(a) an individual;

(b) Hindu Undivided Family;

(c) a company;

(d) a firm;

(e) a Limited Liability Partnership;

(f) an association of persons;

(g) any corporation established by or under any Central Act, State Act or a Government Company;

(h) any body corporate;

(i) a cooperative society;

(j) a local authority;

(k) Central Government or State Government;

(l) trust.

7. GST Collected is Payable to the Government: GST is collected on supply of goods and services. GST collected on supply of goods and/or services, after deduction of GST paid on purchases of good and/or services, is payable to the Government.

8. Multiple Rate Structure: GST has multiple rate structure. GST rates for goods include 5%, 12%, 18%, 28% and 3%. GST rates for services are 5%, 12%, 18% and 28%.

9. Types of Tax: There are four types of tax leviable on supply of goods and services.
These are as follows:

It means that on supply of goods and services within the State/Union Territory both CGST and SGST/UTGST are levied.

Integrated GST is distributed between the Central Government and the States as per the recommendation of the GST Council.

5. Legal Provisions Regarding Alcoholic Liquor, Tobacco Products And Petroleum Products

(a) Manufacture of alcoholic liquor for human consumption has been kept out of GST. States would continue to levy State Excise Duty and Sales Tax/VAT on alcoholic liquor for human consumption.

(b) On tobacco and tobacco products the Central Government would continue to levy Central Excise Duty in addition to GST.

GST has been levied on most of the tobacco products at the highest tax bracket of 28%. Further, Cess has also been imposed on most of the to- bacco products.

(c) At present, petroleum products are out of GST, Petroleum products can be brought into GST network if the GST council so decides. The specified petroleum products are as follows:

(i) Crude Petroleum

(ii) Diesel (i.e. High Speed Diesel);

(iii) Petrol (motor spirit);

(iv) Natural Gas; and

(v) Aviation Turbine Fuel

All other fuels and petroleum products other than these five would be covered under GST.
Notes: Basic Customs Duty on Imports, Stamp Duties and Motor Vehicles Taxes would continue even after implementation of GST.

Entertainment Tax can be imposed by Municipality, Panchayat, Regional Council and District Council.

6. Categories of Goods And Services Tax

Dual GST for Supply of Goods and Services within State and Union Territory: As per Article 246A of the Constitution of India, there will be State Goods and Services Tax (in short, SGST) and Central Goods and Services Tax (in short, CGST). State Goods and Services Tax will be applicable in States and in Union Territories having Legislature (e.g., Delhi, Puducherry and Jammu and Kashmir). SGST and CGST are levied on supply of goods and services within the state or within Union Territory having Legislature.

Union Territory Goods and Services Tax (in short, UTGST) is applicable in Union Territories which do not have Legislature (e.g. Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli, Daman and Diu, Chandigarh, Ladakh and ‘Other territory’). UTGST is levied on supply of goods and services with Union Territory not having Legislature.

Integrated Goods and Services Tax: As per Article 269A(1) of the Constitution of India, there will be Integrated Goods and Services Tax (in short, IGST) on supply of goods and services from one State to another State or from one State to Union Territory or one Union Territory to another Union Territory or from one Union Territory to State. In short, IGST is levied on supply in case of interstate trade or commerce.

Further, IGST is also levied on import of goods or services or both. IGST is collected by the Central Government. Revenue from IGST will be apportioned among the Centre and the States on the basis of recommendation of the GST Council.

CGST, SGST and UTGST: CGST is the revenue of the Central Government. SGST is the revenue of the respective State Government and Union Territory having Legislature. UTGST is the revenue of the Union Territory not having Legislature. IGST is levied on inter-State supply of goods and services. It is collected by the Centre.

Apart from the above three categories of GST, Cess may be imposed in certain cases. Cess means the goods and services tax compensation cess. It is levied on tobacco products such as cigarettes, gutka, etc. in addition to GST at the highest rate of 28%. It is collected by the Central Government and also used to compensate the States for shortfall in GST collections.

7. Meanings of Goods, Services And Supply

Goods: Goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be served before supply or under a contract of supply.

Services: Services means anything other than goods, money and securities but includes activities relating to use of money or its conversion by cash or by any other mode, from one form of, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

Supply: Supply includes:

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental lease or disposal made or agreed to be made for a consideration by a person in the course of furtherance of business;

(b) import of services for a consideration whether or not in the course or furtherance of business; and

(c) the activities specified in Schedule I, made or agreed to be made without a consideration (e.g., supply of goods by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal).

8. Meaning Of Intra-state Supply And Inter-state Supply

Intra-State Supply: Supply of goods and/or services is termed as intra-State supply if the location of the supplier and the place of supply are in the same State or Union Territory. For example, if supply of goods is made from Kota (Rajasthan) to Jaipur (Rajasthan), it is intra-State supply. In such transactions both CGST and SGST/UTGST are levied.

Inter-state Supply: Supply of goods and/or services is termed as inter-State supply if the location of the supplier and the place of supply are in

(i) two different states, or

(ii) two different union territories, or

(iii) one state and another union territory. For example, if supply of goods is made from Ahmedabad (Gujarat) to Mumbai (Maharashtra), it is termed as inter-state supply. In such transactions IGST is levied.

9. Composition Scheme

Small traders and small restaurant service providers, having annual turnover of not more than the specified amount (which the GST Council changes from time to time), can opt for composition scheme which is available for intra-State supply only, i.e. for supply within the State or UT. In this case input tax credit is not allowed and GST cannot be charged from the persons to whom goods or services, or both, are supplied.

Persons opting for the composition scheme is required to pay composition fee as per the rules, In this case, usual entries are passed for purchase and sale of goods and rendering of services.

The following journal entry is passed for payment of composition fee:

Composition Fee A/c    Dr.
to Bank A/c
(Being the composition fee paid)

10. Levy or Charging of GST

The following are the provisions regarding levy of GST in summarised form:

1. Levy by registered supplier of goods and/or services: GST is levied, i.e. charged by the supplier of goods or services, or both, who is registered under the GST Act. It is levied each time when the goods or services, or both, are supplied and at the prescribed rate of GST.

2. On intra-State Supply: When the supply is intra-state (e.g., when the supplier is located in Delhi and place where goods are supplied is also in Delhi), both CGST and SGST are charged at half the prescribed rate. For example, if the GST rate is 18%, then both CGST and SGST will be charged @ 9% each.

3. On inter-State supply: When the supply is inter-state i.e. outside the state (e.g., if the supplier is located in Delhi and goods are supplied in Haryana), IGST is charged at the prescribed rate. For example, if the GST rate is 18%, then IGST will be charged at 18%.

4. Value on which GST is charged: When goods are sold, GST is levied by the seller of the goods at the prescribed rate on the net sale value after adjusting trade discount and also cash discount, if any, given at the time of sale.

5. Input GST and Output GST: Input GST is paid on Inward Supply. Inward Supply, in relation to a person, means receipt of goods or services or both whether by purchase, acquisition or any other means with or without consideration. Inward supply may be good (inputs or capital goods) or of input services. In simple words, Input GST is the GST paid by the purchaser of goods or services or both on the purchases.

Input GST is paid on Outward Supply. Outward Supply, in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business. In simple words, Output GST is the GST levied and collected by the seller of goods or services or both for and on behalf of the Government.

6. Input Tax Credit and Set-off of Input GST against Output GST: GST paid by a registered taxable person on purchase of goods and/or services which can be set-off against the Output GST is called the Input Tax Credit. GST paid on purchases, i.e. Input GST is set-off against GST collected on sales, i.e. against Output GST in the prescribed manner, except where input tax credit is not allowed. Where Input GST can be set-off against Output GST, Input GST is not treated as cost of the goods purchased, asset purchased, etc. Similarly, Output GST is not treated as income. Input GST is treated as an asset until it is set-off against Output GST. After setting-of Input GST against Output GST the balance of the Output GST is payable to the Government. Until it is paid, it is shown as liability. Usually Output GST is more than the Input GST. However, if Input GST is more than the Output GST, the excess of Input GST over Output GST is receivable from the Government. Until it is received, it is shown as an asset.

The manner in which Input GST is set-off against Output GST has been ex- plained later in this chapter.

The Input Tax Credit (In short, ITC) is the tax paid by the buyer on purchase of goods and/or services which is used to reduce his tax liability on the sale of goods and/or services. Thus, businesses can reduce their tax liability on sale of goods and/or services by claiming credit to the extent of GST paid on purchases.

For example, a trader sells goods to consumer and collects GST based on the goods sold and the place of destination. Let us assume that selling price of the good is ` 10,000 excluding GST and the rate of applicable GST is 18%. The consumer will, therefore, pay a total of ` 11,800 for the goods including GST of ` 1,800. Without, ITC, the trader will have to pay ` 1,800 to the Government as GST. With ITC, the trader can reduce the tax that he will have to pay to the Government.

Let us assume further that he has purchased those goods for ` 9,440 including GST ` 1,440. The trader can claim ` 1,440 as input tax credit and reduce his original tax liability of ` 1,800 by ` 1,440. The trader will be required to pay only ` 360 (i.e. ` 1,800 – ` 1,440) to the Government. Thus, Input GST can be set-off against output GST.

7. GST belongs to family of Value Added Tax: As stated above, Input GST can be set-off against output GST. It means that GST is levied on the incremental value of the goods and/or services. Thus, it belongs to the family of Value Added Tax.

8. Cases where Input Tax Credit is not available: GST paid is not allowed to be set-off against Output GST in some cases. In other words, Input Tax Credit is not allowed in certain cases. Where Input Tax Credit is not allowed, GST paid is not treated as Input GST. GST paid debited to Expense Account or capitalised, depending on the circumstances.
In the following cases, Input Tax Credit is not allowed:

(a) Motor Vehicle for transportation of persons having approved seating
capacity of not more than 13 persons (including driver), except when they are used for making the following taxable supplies:

(i) further supply of such motor vehicles; or

(ii) transportation of passenger; or

(iii) imparting training on driving such motor vehicles.

(b) Vessels and aircraft except when they are used for a purpose similar to those mentioned in (a) (i), (a) (ii) and (a) (iii) above.

(c) Services of general insurance.

(d) Servicing, repair and maintenance insofar as they relate to motor vehicles referred to in point (a) or vessels and aircraft referred to in point (b).

(e) Food and beverages

(f) Outdoor catering

(g) Beauty treatment

(h) Health Services

(i) Cosmetic and health surgery

(j) Leasing of motor vehicles, vessels and aircraft referred to in point ( a) except when used for the purposes mentioned (a) (i), (a) (ii) and (a) (iii).

(k) Life insurance and health insurance.

(l) Membership of clubs.

(m) Membership of health and fitness centres.

(n) Travel benefits extended to employees on vacation such as leave or home travel

9. Reversal of GST Paid: Input GST paid on purchase of goods and/or services is reversed in the following cases:

(a) Purchases Return;

(b) Goods taken by the proprietor for personal use;

(c) Goods given as charity or donation;

(d) Goods lost by theft or destroyed by fire, floods, or any other natural calamity;

(e) Goods distributed as free samples;

(f) Rebate received on purchases; and

(g) Good used as furniture.

10. Reversal of GST collected: Output GST collected on sale of goods and/or services is reversed in the following cases:

(a) Sales return;

(b) Cash discount allowed after the invoice has been made.

11. No GST on certain Supplies: GST is not levied on the following supplies:

(a) Education Services;

(b) Health Services (Consulting only);

(c) Electricity and water services;

(d) Salaries and Wages;

(e) Interest;

(f) Supply of Services to the Government;

(g) Supply to Embassies of other countries; and

(h) Supply to United Nations Organisation.

Note: GST Council reviews, from time to time, the GST rates and goods and services on which GST is to be levied to be abolished. In the GST Council meeting held in July, 2022, it has imposed GST on hospital rooms where charges are more than ` 5,000 per day. Thus, on certain health services GST has been imposed.

12. No GST on Advance to Suppliers and from Customers: GST is not charged when advance is received from customers for supply of goods or services. Similarly, GST is not paid on advance given to the suppliers for purchase of goods or services.

13. Reverse Charge: Reverse charge means the liability to pay tax by the recipient of supply of goods or services or both, instead of supplier of such goods or services or both.
Recipient of the goods and/or service is liable to pay tax on the notified categories of supply of goods and/or services.

Example In case of Goods Transport Agency, the Government has given option to it to deposit the GST or it may ask the factory, etc. to whom the services are supplied to deposit the GST for supply of service. If the Goods Transport Agency opts not to deposit GST itself, supply of services by any goods transport agency in respect of goods by road to any factory is one such supply of services. In this case, supplier of service is goods transparent agency and recipient of service is any factory registered under or governed by the Factories Act, 1948. GST will be payable by the factory and not by the goods transport agency.

Goods on which tax is payable under reverse charge include bidi wrapper leaves (i.e. tendu leaves), tobacco leaves, silk yarn, etc.

Services on which tax is payable under reverse charge include services by goods transport agency, legal service, sponsorship service, import of service i.e., payment of fees outside India, etc.

14. Accounts to be Debited and Credit: It is explained as follows:

(a) When ITC on GST Paid is Allowed
For CGST paid: Input CGST is debited
For SGST paid: Input SGST is debited
For IGST paid: Input IGST is debited

(b) When GST Paid is Reversed
For CGST paid is reversed: Input CGST is credited
For SGST paid is reversed: Input SGST is credited
For IGST paid is reversed: Input IGST is credited

(c) When GST is collected
For CGST collected: Output CGST is credited
For SGST collected: Output SGST is credited
For IGST collected: Output IGST is credited

(d) When GST is collected is Reversed
For CGST collected is reversed: Output CGST is debited
For SGST collected is reversed: Output SGST is debited
For IGST collected is reversed: Output IGST is debited

15. Exempt Supply: Exempt supply means supply of any goods or services or both which attract nil rate of GST or which is wholly exempt from GST.

16. Electronic Cash Ledger: Electronic Cash Ledger is maintained by the Government on the GST Portal. It is the Government record of the GST deposited by a registered taxable person. In this ledger, GST paid is credited by the Government in the account of the registered taxable person who pays it and GST collected by him/it is debited in his/its account. The cash register segregates information headwise such as IGST, CGST, SGST and Cess.