GST – What Is It and How It Affects You

GST is a concept that every common man thinks they know about, and some even try to advise the professionals on it.

But, what is GST?

As I said in my second post, GST is an indirect tax. You are paying taxes to the government irrespective of your income. It is levied as a percentage on product/service value.

How is GST different from previous taxes?

GST was introduced to achieve the objective of “One Nation, One Tax”. The primary taxes that GST replaced are Value Added Tax (VAT), Excise Duty, Customs Duty, Central Sales Tax (CST) and Service Tax. Other secondary taxes like entertainment tax, luxury tax, tax on gambling, betting, and lottery, etc.

Contrary to popular belief, GST was not introduced by the current government. In 2000, the then PM Sri Vajpayee set up the committee to draft the GST law. In 2006, the then Finance Minister P Chidambaram proposed the introduction of GST in the budget. So, in reality, neither political party can claim GST as their baby.

And also, contrary to another belief, GST doesn’t make things more complicated, neither does it increase the tax we pay. During the VAT era, sometimes there were multiple taxes on the same product. This is called the cascading effect of taxes. Taxes were levied on taxes. This used to lead to an increase in taxes.

Input Tax Credit

“Input” here means any purchases you have made that you are going to use in the business, be it sales or manufacturing of other goods. And “Input Tax” is the tax you have already paid on those purchases. Hence, “Input Tax Credit” means the credit you have for the payment of taxes on sales. Does this affect final consumers? Not directly. The following charts show you how GST has helped to diminish the cascading effect of taxes:

 

 The difference in the examples we are looking is small (Rs. 0.36). But, on a larger scale, the amount gets bigger and bigger. So, as we can see, the concept of input tax credit is not a new introduction in GST, just that GST made it more efficient.

Is GST mandatory for businesses?

No, it is mandatory only if it satisfies the following conditions:

1. If you are making interstate supplies.
2. Gross turnover of Rs. 40 lakhs for supplier of goods, Rs. 20 lakhs for others, and Rs. 10 lakhs for special category states has crossed.
3. Casual taxable person / Input Service Distributor (ISD).
4. Non-resident taxable person.
5. Supplier of goods through an e-commerce portal.
6. Liable to pay tax under the reverse charge mechanism (RCM).
7. GST TDS/TCS deductor.
8. Online data access or retrieval service provider.

These could be the GST doubts you may have had. But, for a business, there is a lot more to cover. In this post, I have only barely touched the cold waters of the ocean called GST. If I have missed anything, or you have any doubt, do reach out to me. Thank you for reading!