Complete Guide to GST in India
In place since 2017, the GST or goods and service tax was introduced in India as a respite against the numerous indirect taxes that were previously levied.
It was the direct outcome of the Indian government’s efforts to establish a unified, centralized tax on both goods and services.
Now, approximately 7 years later, GST in India has become an important part of most businesses providing any form of goods and/or services in the country.
Are you also starting a new business in India? Or are you just curious to know how the new GST regime works? In this article, we cover all you need to know about GST in India.
What is GST in India?
The goods and services tax was introduced by the Indian government to free businesspersons and entrepreneurs from the burden of indirect taxes.
If you were doing business in India during the previous tax regime, chances are that you’ve had to manage a number of taxes such as excise duty, VAT, services tax, and so on. This was a major source of hindrances in business.
To solve this issue, GST in India was introduced as a general indirect tax to be levied on all goods and services bought and sold in the country, exceptions aside of course.
It serves as a replacement for all the different taxes that were previously in force.
Basically, GST in India is a comprehensive, multi-stage, destination-based tax that is levied every time value is added to a product.
How does GST work in India?
In India, GST is not levied in the state where the goods and/or services are manufactured. It is applicable only in the state where the goods and/or services are consumed.
This is why it is called a destination-based tax in this country. GST rates are included in the purchasing price of a product, it is levied at every point of sale. Here’s how GST in India works:
As we’ve already discussed, the goods and services tax in India works as a tool for unifying the Indian market.
It does this by replacing the numerous central and state taxes that were being levied during the previous tax regime.
The GST is also understood to be a value-based tax. This is because GST is levied at every step of supplying a good or service where value is added.
To explain, the tax is levied at every step of a supply chain where a supplier, wholesaler, manufacturer, distributor, or retailer adds value.
For instance, if a manufacturer produces a shirt with ₹ 100 and adds value worth ₹ 20 that means the amount taxable will be on the gross value of the shirt, i.e. ₹ 120.
The same is applicable for any entity to which the manufacturer sells the shirt.
GST works to reduce the tax burden that falls on manufacturers by eradicating the need to pay multiple taxes.
This has helped bring about economic uniformity in the country that has contributed towards putting the country at par with global markets.
The GST also promotes entrepreneurship in the country. In fact, taxpayers can reclaim any GST that they might have paid if they fulfill certain criteria outlined by the Indian government.
What is the difference between GST and VAT?
GST and VAT are two types of taxes that serve similar purposes, just in different countries.
GST can be understood to be a version of value-based or value-added tax. Similarly, VAT can also be construed as a form of tax accrued on goods and services.
If you are a business operating only in one country the difference between these taxes will not be of much significance to you.
It’s not the same, however, if your company has premises in both VAT and GST-based tax economies, or if you do a lot of business with such countries.
If the latter is true for you it would make sense to get a better understanding of the differences between GST and VAT:
Tax rates
The VAT rates in countries are usually higher when compared to GST rates in other countries.
For example, the VAT rate in the UK is 20%, however, the GST rates in Singapore, Australia, and Canada are 7%, 10%, and 5%, respectively.
Tax exempted items
Goods that are GST exempt might not always be VAT exempt, and vice versa. For instance, in Australia precious metals are GST-exempt. In the UK, on the other hand, silver, palladium, and platinum are not exempt, while gold is.
Registration requirements
Another point of difference between GST and VAT is the requirement for getting registered. This is very likely to differ from country to country.
For example, in India, the turnover threshold for compulsory GST registration is ₹ 40 lakh per year or above, in Australia it is AUD 75,000. Even within the same country, the requirements for getting GST or VAT registered may be different.
There are further, country-specific differences between GST and VAT as well. In the context of India, for example, some differences are:
• VAT in India is levied only on goods but GST is levied on all forms of supply, including both goods and services.
• In India, no Input Tax Credit (ITC) is available on VAT while ITC is applicable on GST.
• VAT is levied by Indian state legislatures while GST is shared by both states and the central government.
• In the GST regime taxes are transaction-based and come into effect at the point of supply; in the VAT regime taxes are summary-based and come into effect only at the point of sale.
GST registration
1. Who needs to get register?
If you are a business entity in India you need to obtain GST registration if any of the following criteria applies to you or your business:
• Business entities operating in Jammu and Kashmir, Manipur, Assam, Mizoram, Nagaland, Sikkim, Arunachal Pradesh, Tripura, Himachal Pradesh, Meghalaya, and Uttarakhand need to obtain GST registration if their aggregate turnover is at or more than ₹ 10 lakhs.
• Business entities operating in states other than those mentioned above need to obtain GST registration if their aggregate turnover is at or more than ₹ 20 lakhs.
• Entities undertaking the supply of inter-State taxables.
• Casual taxable persons.
• Entities who are liable to pay tax under reverse charge.
• Non-resident taxable persons.
• Any entities who are liable to deduct tax under section 51.
• Individuals or entities that are made responsible by other GST registered taxable persons to take on the supply of goods or services on their behalf, as an agent or otherwise.
• Input service distributor.
• Other than branded services, any individual or entity supplying goods or services via e-commerce.
• Any individual or entity supplying digital information and database access or retrieval services from outside the country to a person in the country, other than a registered person.
• Aggregators providing a supply of services under their trade name or brand name.
Related read - Online GST registration process: Step-by-step guide
2. Documentation required
Given below is a list of documents that you’ll need to keep in hand when you apply for GST registration:
By individual (Sole proprietor firm)
• Proprietor’ PAN card.
• Proof of address (e.g. passport, aadhar card or driving license).
• Passport Size Photo.
• Frontpage of your passbook along with the page of latest transactions or crossed bank cheque with a name and account number.
Registered address’s details:
1. For rented properties, the rent or lease agreement must be produced.
2. For owned properties, the electricity bill must be in name of the applicant.
3. For other cases, a No Objection Certificate (NOC) or Consent Letter from the property owner along with the electricity bill must be produced if the property in question is owned by a family member of the applicant.
By businesses (Other than Individual)
• Business PAN (LLP, Partnership firm, Company, etc.).
• Identity and address proof of the Partners’/Directors’/CEO’s proof of address and identity (e.g. passport, aadhar card or driving license).
• Passport Size Photo of the partners/directors/CEO.
• Bank statement with few latest transactions page or crossed bank cheque of the business.
• Registration document of the business (partnership deed or certificate of incorporation for companies or LLP or trust deed etc.).
• Only for companies and LLPs - DSC of the director or partner.
Additional details:
1. For rented properties, the rent or lease agreement must be produced.
2. For owned properties, the electricity bill must be in name of the applicant.
3. For other cases, a No Objection Certificate (NOC) or Consent Letter from the property owner along with the electricity bill must be produced if the property in question is owned by a family member of the applicant.
3. What to do after you obtain registration
Once you’ve gone through all the steps required in obtaining GST registration, you can then proceed to take the following steps:
• You can start putting up your GST Registration in your business place.
• Determine whether to charge CGST & SGST or IGST or UTGST, depending on your supply locations.
• Issue invoices that are GST compliant.
• Start collecting GST on your taxable sales.
• Use tax paid on purchases to obtain Input Tax Credit (ITC).
• Claim Input Tax Credit by filing ITC-01.
• Keep books and accounts in order and in compliance with GST regulations.
Related read - 6 benefits of GST registration in India for small businesses
GST rates in India
Unlike other countries, there is no uniform GST tax rate in India that is applicable across goods and services.
Instead, the tax authorities have divided GST tax rates in India into a structure that has six rate slabs, each applicable under its own circumstances. These are:
• No tax - 7% of goods and services in India are exempted from GST tax.
Items of commonplace consumption that fall under this slab include fresh fruits and vegetables, milk, buttermilk, curd, flour, natural honey, besan, bread, all kinds of salt, jaggery, hulled cereal grains, fresh meat, chicken, fish, eggs.
It also includes items like bindi, kajal, bangles, sindoor, coloring and drawing books, stamps, judicial papers, printed books, newspapers, jute and handloom, hotels, and lodges with rates under ₹1000, and similar.
• 0.25% GST slab rate - Any cut and semi-polished jewelry stones are taxed at a GST rate of 0.25%
• 5% GST slab rate - 14% of goods and services come under the 5% tax slab in India.
Goods under this slab include apparel costing less than ₹1000 and footwear under ₹500, packaged food items like cream and other goods like sugar, oil, ayurvedic medicine, branded paneer, frozen vegetables, coffee, tea, spices, pizza bread, cashew nut (with and without shell), raisin, ice, fish fillet, kerosene, coal, medicine, incense sticks, postage or revenue stamps, fertilizers, small restaurants, rail and economy class air tickets, and so on.
• 12% GST slab rate - 17% of goods and services fall under the 12% tax slab in India.
This includes items like meat products that are frozen, ghee, dry fruits in packaged form, animal fat, butter, cheese, sausages, ketchup & sauces, ayurvedic medicines, fruit juices, namkeen, all diagnostic kits and reagents, cellphones, spoons, forks, umbrella, tooth powder, spectacles, sewing machine indoor games like ludo, playing cards, carom board, chessboard, apparels costing more than ₹1000, non-AC restaurants, business class air ticket, state-run lottery, work contracts and so on attract a 12% GST.
• 18% GST slab rate - 43% of goods and services fall under the 18% tax slab in India.
Items that fall under this slab include jams, soups, cornflakes, cakes and pastries, preserved vegetables, ice cream, pasta, biscuits, mayonnaise, mineral water, mixed condiments and seasonings, footwear costing more than ₹500, camera, speakers, monitors, printers, electrical transformer, optical fiber, tissues, sanitary napkins, notebooks, steel products, headgear and its parts, liquor serving AC restaurants, restaurants in five-star and luxury hotels, telecom services, aluminum foil, bamboo furniture, branded garments, IT services, and financial services and so on.
• 28% GST slab rate - 19% of goods and services fall under the 28% tax slab in India.
Any edibles other than those mentioned above like molasses, chewing gum, waffles and wafers coated with chocolate, non-cocoa chocolates, pan masala, aerated water, items for personal care like aftershave, deodorants, shaving creams, sunscreen, paint, hair shampoo, dye, water heater, dishwasher, washing machine, weighing machine, automobiles, motorcycles, vacuum cleaner, 5-star hotel stays, private lottery, race club betting, and movie tickets costing upwards of ₹100, etc. are taxed at a GST rate of 28%.
These goods and services, those that fall under the 28% tax slab in India, are further divided into items with cess and items without cess.
Advantages of GST implementation in India
Eliminate the cascading effect of tax
In the previous tax regime a prominent hindrance to business was the cascading effect of multiple taxes that had to be paid.
Because of the numerous taxes that were levied by the previous tax regime, there was a tax-on-tax effect.
Taxes were accrued on a value on which the previous buyer had already paid tax. by the previous buyer, thus, making the end consumer pay “tax on already paid tax”.
As a result of this, the end consumer had to pay taxes on already paid taxes. By introducing a universal tax - GST - this problem has been completely eradicated.
Suggested read- How will GST impact your business' working capital?
Increase efficiency of logistics
During the previous tax regime businesspersons would often have to maintain warehouses in different locations across the country.
This had to be in order to avoid the numerous, complicated CST and other state-entry taxes that were levied on the movement of goods between states.
With the introduction of the goods and service tax, however, taxes on inter-state business has been made much easier.
Regulations are far simpler and as a result of this, the Indian logistics industry is thriving.
Easy online procedure
The older tax regime was restricted by the shackles of manual processes and systems.
The GST regime, however, enjoys the perks of being in force during a time when technology is booming.
In fact, the Indian government has made the entire GST system online.
From obtaining your GST registration to filing your returns, everything can be done online.
Simplified eCommerce
E-commerce businesses were faced with multiple, variable tax laws when the need to supply goods internationally arose.
Under the previous tax regime, international e-commerce used to require a lot of documentation (e.g. VAT declarations and registration numbers) and there were several hoops to skip through before you could actually ship your products.
Under the GST regime, however, this issue has been completely eradicated.
It replaced differential treatments across states and confusing protocols with clear-cut provisions for e-commerce, both domestic and international.
Reduced tax compliances
Since the implementation of the new GST regime in India, tax compliance has become far easier.
During the older regime, there were multiple taxes in effect, each with its own compliance regulations and filing schedules.
Depending on the nature of your holding, these taxes would have to be filed quarterly or monthly.
After the introduction of GST in India, taxes can be done with a single filing.
Regulation of unorganized sector
During the older tax regime, the unorganized sector (including industries like construction and textile) was not regulated very well.
The unorganized sector also referred to as the informal economy of a country, is a potent source of state revenue that is often hard to collect.
With the Goods and Services Tax, however, factors like easy online payments and compliances, Input Tax Credit and others have helped promote regulation and increased accountability amongst entities operating in the unorganized sector.
Things you should know about the GST composition scheme
This scheme was introduced by the Indian finance ministry to help reduce the tax burden on small businesses.
It is a tax-paying mechanism that guarantees reduced paperwork, easier compliance, and reduced tax liabilities.
Who is eligible to avail GST composition
Generally speaking, you can avail of the GST composition scheme as long as your business’s annual turnover is less than ₹ 1.5cr.
This could include any business that is registered with a PAN. Some examples of entities that can opt for this scheme are:
• Shopkeepers.
• Small manufacturing entity.
• Food-services.
• Trade sector unit.
• Fruit and vegetable vendors.
• Service sector entities.
• Truck operating services.
• Repairing businesses.
• Artisans, and so on.
Rules governing GST composition scheme
As we’ve already observed, most small businesses in India can avail of the GST composition scheme as long as they fulfill certain conditions.
However, this does not mean all small businesses can avail of this scheme; there are some rules that govern who can and who cannot.
If any of the following rules apply to you, you cannot avail of the GST composition scheme:
• If you are supplying goods that are GST exempt.
• If you supply services that are not related to restaurant services.
• If you are involved in the manufacture of ice cream, pan masala, or tobacco.
• If you are involved in the manufacture of edibles.
• If you are a casual taxable person.
• If you are a non-resident taxable person.
• If you are a business supplying goods via e-commerce operators who collect tax at the source.
• If you are an individual or business purchasing goods from suppliers who are without GST registration (this can be exempted if GST is paid on these goods via reverse charge mechanism).
GST composition scheme tax rates
GST tax rates in the composition scheme are a little less complicated than the normal tax rates in India. There are three uniform GST rates, given below is a table with more details on these rates:
- Goods manufacturers and traders
- Restaurants (no alcohol provided)
- Service providers
What is GST return and how to file GST return?
GST returns are filed by taxable entities in India to provide information regarding all details of its purchases, sales, output tax (tax collected via sales), and input tax (tax paid on purchases).
After filing your GST returns document you will then know how much you will have to pay to the India tax authorities in the form of tax liability, funds that you owe to the GST department.
All taxpayers in India (including manufacturers, dealers, suppliers, and consumers) are obligated to file GST returns.
Since the introduction of the GST regime, tax filings have been made fully online.
You can easily file for GST returns via GSTN (Goods and Services Tax Network) approved software or apps. See below to get a step-by-step guide on filing GST returns in India:
Step 1: Go to the online GST portal.
Step 2: You will receive a number that signifies your state code and PAN number. This is your 15-digit GST identification number.
Step 3: On the GST portal or software of your choosing you will then have to upload files containing invoices, receipts, and other proofs of sale/purchase. Against each document, you upload you will receive a reference number.
Step 4: Once you’ve uploaded the aforementioned documents you will then have to file online for your outward return, inward return, and cumulative monthly return. This is the step where you get the chance to correct errors if any.
Step 5: Next, locate the GSTR-1 form and file outward supply returns using it. Ensure this step is completed on or before the 10th of the following month.
Step 6: The details you as the supplier have furnished regarding your outward supplies in the previous step will be made available in GSTR-2A to the recipient.
Step 7: Your outward supply details will then have to be verified and validated by the recipient. The details of outward supplies also have to be modified by the recipient who then has to file credit or debit notes details.
Step 8: The recipient has to use the GSTR-2 form to provide details of inward supplies of taxable goods and services.
Step 9: Lastly, the modifications that the recipient made in GSTR-1A to the details of inward supplies will have to be either accepted or rejected by you, the supplier.
Related read - Common mistakes to avoid when filing GST returns
GST reporting and invoicing in India using Volopay
Managing GST filing can get a little tricky when the question of consolidating all your sales and purchase data comes in.
To ensure compliance, and to avoid legal issues, you need to make sure all your data is error-free and accurate.
Manually locating, verifying, recording, and consolidating expense data from invoices and receipts is a mammoth task.
It can take accountants hours, even days to complete. Moreover, manually processing invoices can also get quite expensive.
With Volopay you can make these obstacles magically disappear.
While it’s less magic and more because of excellent technology, Volopay ensures that you never have to worry about GST invoices getting lost or incorrectly recorded ever again.
Invoice processing can be as simple as clicking a few pictures and pressing a few buttons.
All you have to do is upload your GST invoice (or just a photo of it) to the Volopay dashboard.
From here the system automatically extracts the data on the document using Optical Character Recognition (OCR) technology.
Once the data is extracted it is promptly recorded by the system itself and categorized as required on your ledger.
There is also a separate tab where details of the transactions that the invoices were issued against are stored by the system.
Volopay also seamlessly integrates with your pre-existing accounting software. This helps the software extract your historical data and integrate it with its dashboard.
To know more about GST and accounting, check out our article - Your complete guide to GST and accounting
Moreover, the best part is that this whole process is automated - so no manual data entry and no more errors!