How Does GST Work? Easy Answers to Your Questions

GST: Goods and Service Tax Definition

Discover how GST works with our comprehensive guide. Get easy answers to your questions and simplify your understanding of Goods and Services Tax 

What is GST?

The goods and services tax (GST) is an indirect federal sales tax that is applied to the cost of certain goods and services. The business adds the GST to the price of the product, and a customer who buys the product pays the sales price inclusive of the GST.

History of GST (Goods and Service Tax)

Goods and Services Tax (GST) is a single tax levied on goods and services from manufacturing to consumption, eliminating all indirect taxes previously levied. The implementation of GST was one of the biggest indirect tax reforms of recent times in India.

When did GST start?

France was the first country to adopt the GST in 1954, and more than 160 other countries have since followed suit. In 2015, Malaysia became one of the first nations to implement the Goods and Services Tax (GST), a value-based tax system. When India chose to implement a dual tax structure system in 2017, the GST was first implemented.

Who introduced GST in India?

The Constitution Amendment Bill was presented to the parliament in 2014 by Mr. Arun Jaitley, who was the Finance Minister at the time. The Constitution (122nd Amendment) Bill was approved by the Lok Sabha in May 2015. By April 20, 2017, the Lok Sabha and Rajya Sabha had approved the Integrated GST Bill, 2017, the Union Territory GST Bill, 2017, the Central GST Bill, 2017, and the GST (Compensation to States) Bill, 2017. The GST was formally implemented on July 1st, 2017.

Brief history of GST Bill and GST Act in India

The origins of GST go back over two decades to the year 2000, when the initial discussions about India implementing GST took place during the tenure of the Atal Bihari Vajpayee administration. An empowered committee consisting of state finance ministers was selected for this task, as they had prior experience with State VAT. In 2004, the Fiscal Responsibility and Budget Management Committee was established, and it recommended the introduction of GST.

The then-Union Finance Minister declared in the 2006–07 Budget Speech that the Goods and Services Tax (GST) will be implemented by April 1, 2010. However, the implementation of GST has to be hurried through for a number of reasons. The 2011 Constitution (115th Amendment) Bill was presented to the legislature. A Standing Committee thoroughly analyzed this bill, which was submitted to add specific GST provisions. The Bill expired in 2014 when the Lok Sabha was dissolved, necessitating the introduction of a new Constitutional Amendment Bill.

Timeline and evolution of GST

2000: 

• An Empowered Committee consisting of State Finance Ministers is set up.

 

2006:

• The then Finance Minister, P Chidambaram, announced the implementation of GST on April 1, 2010.

2009: 

• The Empowered Committee of State Finance Ministers submitted the first discussion paper on GST in India.

2010: 

• President Pranab Mukherjee announced the delay in introducing GST, proposing to introduce it in April 2011.

2011: 

• The Constitution (115th Amendment) Bill focused on the introduction of GST in India was introduced in the Lok Sabha.
• The Lok Sabha then refers the Bill to the Standing Committee on Finance for a detailed examination.

2013: 

• The Standing Committee on Finance submits the report on the Constitution (115th Amendment) Bill.

2014: 

• The Lok Sabha dissolution leads to the lapse of the Bill.
• The Constitution (122nd Amendment) Bill introduced in the Lok Sabha focused on introducing GST.

2015: 

• The Bill was passed by the Lok Sabha and referred to a Select Committee in the Rajya Sabha.
• The Select Committee submits the report.
• Chief Economic Advisor-led Committee submits a report on the possible GST rates.

2016: 

• The Bill is passed by both the Lok Sabha and the Rajya Sabha and is then notified as the Constitution (101st Amendment) Bill.
• The first state to ratify the Bill in Assam.
• President Pranab Mukherjee gives his assent to the Bill.
• The Union Cabinet approves the setting up of the GST Council, following which the first GST Council meeting is held in New Delhi.

2017: 

• The CGST Bill, IGST Bill, UTGST Bill, and GST (Compensation to States) Bill is introduced in the Lok Sabha.
• The Bills are passed by the Lok Sabha and the Rajya Sabha, after which the GST Acts are notified.
• The GST Council notifies GST rates and cess on goods and services.
• 1st July, the official rollout of GST.2018Introduction of TDS provisions along with the filing of GSTR-7
• Introduction of E-way bill system for inter-state movement of goods

2019: 

• The reverse charge mechanism is made applicable
• Restrictions on availment of ITC for Section 36(4)

2020: 

• Introduction of e-invoicing voluntarily 
• Quarterly return monthly payment scheme
• June – Relief to taxpayers in view of COVID-19

2021: 

• Introduction of GSTR-8 and GST on service supplied by restaurants through e-commerce operators
• GST on services supplied by State Govt. to their undertakings or PSUs by way of guaranteeing loans taken by them

Taxes before GST introduction

Prior to the implementation of GST, the major taxes were:-

VAT (State level tax)

Value Added Tax, or VAT, is an indirect tax that is applied to intrastate sales of goods and services. Dealer sales were subject to output VAT. However, input VAT could be used as a tax credit to offset the VAT that is assessed on business purchases.

Excise Duty

The Central Government imposed an excise tax on goods made domestically, or within the nation. Another name for it was CENVAT, or Central Value Added Tax.

Customs Duty

A customs duty is a tax imposed on goods that are imported and exported during international transactions. The primary purpose of implementing customs duties is to protect domestic products and to regulate the flow of goods across borders.

Central Sales Tax

Central Sales Tax was an indirect tax levied by the central government on the sale or purchase of products at the interstate level.

Service Tax

The tax imposed on service providers for the services rendered, with the exception of those included in the negative list, is referred to as a service tax. While the tax is officially charged to the service providers, it is ultimately the customer who bears the cost at the moment the service is utilized.

Changes after GST introduction

Goods and Services Tax (GST) emphasizes the "supply" of goods and services, distinguishing it from previous taxation systems that were applicable during the manufacturing phase. Due to its focus on supply, GST is classified as a destination-based tax.

• It has replaced a host of taxes, including-Service tax
• Central Excise Duty
• Additional duties related to Excise
• Special Additional Customs Duty
• Additional duties related to Customs
• Other cesses and surcharges
• GST has absorbed the following taxes-Central Sales Tax
• Value Added Tax (VAT)
• Luxury Tax
• Purchase Tax
• Entertainment Tax (except taxes levied by local entities)
• Taxes on lottery, gambling, advertisements
• Entry Tax
• Since it follows the ”one nation, one tax ideology, the cascading effect of taxes is now mitigated.
• Fresh GST registrations are necessary for every state where the business has branches or intends to make outward supplies.
• The components of GST include-CGST – Central GST
• SGST – State GST
• IGST – Integrated GST
• Section 9 (4) deals with the Reverse Charge Mechanism, which is unique to GST, where a person buying goods from an unregistered dealer will be liable to pay GST on a reverse charge basis.
• Section 9 (5) deals with the GST charged on the supply of services by restaurants through e-commerce operators.
• Sections 51 and 52 of the GST Act came into effect to state the authority and procedure with regard to the TDS mechanism under GST.
• E-way bill system was introduced to track the inter-state movement of goods and is mandatory where the value of the goods transported exceeds Rs.50,000.
• The introduction of e-invoices is a significant step towards combating tax evasion.
• GST is a digital tax since the returns, and their related details are filled through the web portal. The supporting documents are also submitted on the portal, thus enabling easy tracking of transactions.

Conclusion

GST in India, which was implemented on July 1, 2017, marks a crucial development in the relatively short history of Goods and Services Tax in the country. This important tax reform has consolidated various indirect taxes into a single, cohesive framework, thereby simplifying the taxation process for goods and services throughout the nation.

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