India Goods and Services Tax (GST)

The GST is a single, value-added tax levied on the manufacture, sale, and consumption of both goods and services at the national level. The GST subsumes most indirect taxes previously levied at the federal and state level.

Contributing Advisor

Nidhi Mittal

Assistant Manager, Corporate Accounting Services

It is a consolidated tax based on a uniform tax rate fixed for both goods and services across India, and is payable at the final point of consumption. At each stage of sale or purchase in the supply chain, the tax is collected on value-added goods and services, through a tax credit mechanism.

GST is levied on the supply of all goods and services except the supply of liquor for human consumption which is still liable to state excise duties and the VAT.

GST is not being levied on petroleum crude, high-speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel, however, central excise duty and VAT would be levied on these products.

GST rate

Different categories of goods and services are taxed differently under GST. The GST council has provided a different tax structure:

• 0 percent: Essential goods such as milk, eggs, curd, and educational services fall under this category, ensuring affordability and accessibility for consumers. 
• 5 percent:  Items like coal, edible oils, tea, domestic LPG, and life-saving drugs are taxed at 5%, promoting accessibility to basic necessities.
• 12 percent:  Goods such as butter, ghee, computers, fruit juice, and packed coconut water fall under this slab, striking a balance between affordability and revenue generation.
• 18 percent:  Products like hair oil, capital goods, toothpaste, industrial intermediaries, and toiletries fall in this category, aiming to maintain tax revenue while ensuring reasonable consumer prices.
• 28 percent:  High-end items like luxury cars, motorcycles, consumer durables (e.g., ACs, fridges), and sin goods like cigarettes and aerated drinks attract the highest GST rate, with additional cess applied on some items.

In addition to these five tax rates, there are also special tax rates of 0.25 percent and 3 percent imposed on certain luxury goods like precious stones and jewellery. There are also special rates for taxpayers under the composition scheme.

Indirect tax structure under GST

Components of GST

There are three components to GST:

• CGST: Central goods and services tax, 50% GST levied on an intra-state sale and collected by the central government;
• SGST/UGST: State/union territory goods and services tax, 50% GST levied on an intra-state sale and collected by the state or union territory; and
• IGST: Integrated goods and services tax, 100% GST levied on interstate sales and collected by the central government. The IGST is the aggregate of the CGST and SGST; the SGST is appropriated from the state where the supplies are consumed. The Central Government is bound to share a further 42% from its share of GST with the states.

Key features of GST

Dual tax

The GST is a dual levy, which means that both the federal and State government levy tax on supply of goods and services based on the nature of transaction (Inter-State or Intra-State). Accordingly, GST has two concurrent components:

• State/Union Territory GST (SGST/UTGST): It is levied and collected by the state or union territory (UT).
• Central GST (CGST): It is levied and collected by the federal government.

Integrated Goods and Services Tax (IGST)

Under GST, inter–State supplies between any two States and imports to the country are subject to the IGST, which is levied and collected by the federal government. The IGST is the aggregate of the CGST and SGST; it is appropriated from the State where the supplies are consumed.

Tax on supply

The GST is applicable on the “supply” of all goods and service. Under GST, the liability to pay CGST or SGST arises at the time of supply. Depending on whether the transaction is ‘inter-state’ or ‘intra-state’ separate GST provisions are applicable to help a business determine the place of supply for goods and services. GST is a destination-based tax, levied only at the final destination of consumption.

Input tax credit (ITC) mechanism

The ITC forms the backbone of the GST regime in India. The ITC mechanism helps in the seamless flow of tax-credits throughout the value-chain, and across boundaries of States.

The GST is essentially a tax on value addition at each stage of the supply chain; every supplier, who is the person supplying the goods and/ or services or an agent acting as such on behalf of such a supplier, can claim credits (over input taxes paid at each stage of supply chain) in the subsequent stage of value addition. Thus, a continuous chain of set off is established from the original producer’s or service provider’s level up to the retailer’s level, thus, eliminating the burden of double taxation.

Suppliers at each stage are permitted to set off the GST paid on the purchase of input goods and services against GST to be paid on the supply of goods and services.

It is important for dealers to note that no cross utilization of the ITC is permitted between the state and federal levy. This means that the credit of CGST paid on inputs may be used only for paying CGST on the output, while the credit of SGST on inputs may be used only for paying SGST, except in the case of inter-State supply of goods.

To avail input tax credit, following conditions must be met:

• The dealer holds a tax Invoice, a debit note issued by the registered supplier or any such tax paying documents as may be prescribed;
• The details of such tax invoice or debit note must have been furnished by the supplier in GSTR-1;
• The said goods or services have been received;
• Returns (Form GSTR-3B) have been filed; and
• The supplier has paid the due tax to the government, either in cash or via claiming ITC.

Reverse charge concept:

• Unregistered dealer selling to a registered dealer: In such a case, the registered dealer has to pay GST on the supply.
• Services through an e-commerce operator: If an e-commerce operator supplies services, then reverse charge will apply on the e-commerce operator. He will be liable to pay GST.
• Supply of certain goods and services specified by CBEC: CBEC has specified a list of certain goods and services on which reverse charge is applicable.
• Input tax credit on reverse charge: Tax paid on reverse charge basis will be available for ITC if such goods and/or services are used, or will be used, for business. The service recipient (i.e., who pays reverse tax) can avail ITC. 

Invoice matching system

The GST allows for a seamless flow of ITC across the supply chain. One of the essential features of the GST is to check ITC claims by the taxpayer to prevent any leakages. For this purpose, an invoice matching system has been developed under GSTN to match the purchase and sale invoices of taxpayers. Accordingly, every registered taxable person under GST is required to issue a tax invoice, which will be uploaded on the invoice matching system. After the sale and purchase invoices of a taxpayer have been matched, the ITC will be conferred.

Who must obtain GST Registration in India?

Do foreign companies require GST registration in India ?

Yes, any foreign company that supplies goods and/or services to recipients in India, but operates without a fixed place of business or residence in India should mandatorily obtain GST registration.

Registering for GST in India

Eligibility for GST registration

If a business engages in buying and selling goods or services, they must register for GST if they meet the eligibility criteria. Those businesses with an annual turnover of more than INR 2 million (US$24,390) for service supply or INR 4 million (US$48,780) for goods supply are required to register for GST in India.

Documents required for GST registration

Procedure for GST registration

Validity of GST registration

A normal GST registration certificate issued to a regular taxpayer does not have a validity period and does not expire unless it is cancelled.

However, in case of GST registration for casual taxable persons and non-resident taxable persons, the GST certificate is issued temporarily with an expiry date.

Filing GST returns in India

A GST return is a document containing details of all income/sales and/or expenses/purchases that a GST-registered taxpayer (every GSTIN) is required to file with the tax administrative authorities. Tax authorities use this to calculate net tax liability.

GST return filing is a mandatory compliance even if there are no sales and purchases carried out by a business during the return period. Such taxpayers must file a ‘nil’ return. Failure to file returns in time may attract penalty, and in case of non-compliance, a notice from the tax authorities.

Under the GST regime, regular businesses having more than INR 50 million as annual aggregate turnover (and taxpayers who have not opted for the Quarterly Returns with Monthly Payment (QRMP) scheme) have to file two monthly returns and one annual return. This amounts to 25 returns each year.

Taxpayers with a turnover of up to INR 50 million have the option to file returns under the QRMP scheme. The number of GSTR filings for QRMP filers is nine each year, which include four GSTR-1 and GSTR-3B returns each and an annual return. Businesses must note that QRMP filers have to pay tax on a monthly basis even though they are filing returns quarterly.

QRMP Scheme is for eligible taxpayers to file their Form GSTR-1 and Form GSTR-3B returns on quarterly basis, while paying their tax dues on monthly basis through a challan. The QRMP scheme can be availed only by those taxpayers who are liable to file Form GSTR-1 and Form GSTR-3B returns and can be opted by:

• Registered taxpayer (Normal taxpayer, Special economic Zone (SEZ) developer, SEZ unit);
• Taxpayers who have opted out of composition scheme; and
• Persons applying for a fresh registration as Normal taxpayer.

The scheme is not available for taxpayers whose annual aggregate turnover is more than INR 50 million.

There are also separate statements/returns required to be filed in special cases such as composition dealers where the number of GSTR filings is five each year (four statement-cum-challans in CMP-08 and one annual return GSTR-4).

What is composition scheme?

Small businesses and taxpayers with a turnover below INR 15 million (INR 7.5 million for special category states) have the option to choose the composition scheme. This scheme levies taxes at a nominal rate of 0.5 percent or one percent (for manufacturers) for CGST and SGST each. However, this option is only available to small businesses dealing in goods, and not available to interstate sellers, e-commerce traders and operators, and service providers.

Types of GST returns

The period for filing GST returns and types of returns vary among different categories of taxpayers. Below is a brief description of the types of returns to be filed under the GST.