The Goods and Services Tax (GST) is a complex indirect tax system implemented in India that has revolutionized the country's taxation structure. Under the GST regime, various taxes previously controlled by the central and state governments were subsumed into a unified tax system. In this blog post, we will focus on the taxes currently levied and collected by the Centre and the State.
Firstly, we will focus on the taxes currently levied and collected by the Centrral Government. Understanding these taxes is crucial to grasp the basics of GST and its implications on businesses and consumers.
Central Excise Duty is a tax imposed on the manufacture or production of goods in India. It is levied under the authority of the Central Excise Act, 1944. Prior to GST, Central Excise Duty was a key revenue source for the central government. However, under the GST regime, Central Excise Duty has been subsumed and is no longer separately levied.
Additional Duties of Customs, commonly known as CVD, are imposed on imported goods. CVD is levied under the Customs Act, 1962. It is charged in addition to the basic customs duty and is meant to provide a level playing field for domestically manufactured goods by countervailing the excise duties imposed on them. With the implementation of GST, CVD has been subsumed and is no longer levied as a separate tax.
The Special Additional Duty of Customs, also known as SAD, is an additional duty imposed on imported goods under the Customs Act, 1962. SAD was levied to counterbalance the sales tax or value-added tax (VAT) applicable on similar goods produced domestically. However, with the advent of GST, SAD has been subsumed and is no longer levied as a separate tax.
Service Tax was an indirect tax levied on specified services provided by service providers. It was governed by the Finance Act, 1994. Service Tax applied to a wide range of services such as telecommunication, transportation, accommodation, banking, insurance, and professional services. With the implementation of GST, Service Tax has been replaced by the Goods and Services Tax on services. Under GST, services are now taxed at a standardized rate, eliminating the complexity of multiple service tax rates.
In this installment, we will delve into the taxes currently levied and collected by the state governments. Understanding these state-level taxes is essential for comprehending the holistic impact of GST on businesses and consumers across the country.
State Value Added Tax (VAT) is a tax imposed on the sale of goods within a state. It was previously governed by separate state VAT laws. Under the GST regime, VAT has been subsumed and replaced by the State Goods and Services Tax (SGST). Each state now levies and collects SGST on intra-state transactions, ensuring uniformity and simplification in the taxation of goods within state boundaries.
Central Sales Tax, levied by the Centre and collected by the state governments, was applicable to inter-state sales of goods. It was governed by the Central Sales Tax Act, 1956. With the implementation of GST, CST has been abolished, and the tax on inter-state sales is now collected in the form of Integrated Goods and Services Tax (IGST), which is administered by the Centre.
Entertainment and Amusement Tax, unless levied by local bodies, is a tax imposed on activities such as cinema tickets, amusement parks, and cultural events. This tax was previously governed by state-specific laws. However, under GST, the power to levy and collect this tax has been transferred to the local bodies. Hence, state governments no longer impose this tax.
Taxes on lotteries, betting, and gambling are levied by the state governments. These taxes are imposed on activities such as the sale of lottery tickets, horse racing, and casino operations. With the introduction of GST, the taxation of lotteries has undergone significant changes. A uniform GST rate is now applicable to lotteries, and the taxable event is determined based on the supply of lottery tickets.
Entry Tax is a tax levied on the entry of goods into a local area or state. It was previously imposed by state governments to protect local industries and generate revenue. However, with the advent of GST, Entry Tax has been abolished and replaced by the Integrated Goods and Services Tax (IGST) for inter-state movement of goods.
Octroi was a tax collected by local bodies, such as municipal corporations, on the entry of goods into a specific jurisdiction. It was primarily imposed to regulate the movement of goods within municipal limits. However, under GST, Octroi has been abolished, resulting in the elimination of multiple checkpoints and facilitating smoother transportation of goods across state boundaries.
Input tax refers to the GST paid or payable on purchases of goods and services by a registered taxpayer. It includes the GST paid to the State Government (SGST), Central Government (CGST), and Integrated GST (IGST) charged on inter-state sales and imports. Input Tax Credit, on the other hand, refers to the mechanism through which this GST paid on purchases becomes available as a deduction against the output tax liability on sales.
The concept of Input Tax Credit operates on the principle of neutralizing the cascading effect of taxes. Cascading effect, also known as the tax on tax effect, occurs when tax is levied on the value that already includes tax. To eliminate this, the GST system allows taxpayers to claim credit for the taxes already paid during the purchase of goods or services.
To claim Input Tax Credit, certain conditions must be met. The taxpayer must be a registered entity under GST and must possess a valid tax invoice or document evidencing the purchase. The supplier must have filed their GST returns and paid the taxes to the government. Additionally, the credit can only be claimed for business-related purchases and not for personal or exempted supplies.
It is important to note that taxpayers who have opted for the composition levy scheme are not eligible for Input Tax Credit. The composition scheme offers certain relaxations and a simplified tax structure but does not allow for the offsetting of input taxes against output tax liability.
Input Tax Credit plays a crucial role in streamlining the tax structure and promoting efficiency in the GST system. By allowing businesses to claim credit for the GST paid on purchases, it reduces the burden of tax on tax, ultimately benefiting the end consumers. It also incentivizes compliance and encourages businesses to deal with registered suppliers, as Input Tax Credit can only be claimed for purchases from registered taxpayers.
A taxable person is an individual or entity that carries on any business in India and is either registered or required to be registered under the GST Act. This definition encompasses a wide range of economic activities, including trade and commerce. The term "person" includes various entities such as individuals, Hindu Undivided Families (HUFs), companies, firms, Limited Liability Partnerships (LLPs), Association of Persons (AOPs), Bodies of Individuals (BOIs), foreign corporations, co-operative societies, local authorities, governments, trusts, and artificial juridical persons.
Several criteria determine whether a person is liable to be registered under GST:
Any business whose annual turnover exceeds Rs 20 lakhs (Rs 10 lakhs for North Eastern and hill states) is required to register under GST. However, if the turnover exclusively consists of goods or services that are exempt under GST, this threshold does not apply.
Individuals or entities registered under earlier tax laws such as Excise, VAT, or Service Tax are also required to register under GST.
In the case of a transfer or demerger of a registered business, the transferee or the resulting entity must obtain registration from the date of transfer.
Any person engaged in the supply of goods or services across state boundaries is liable to be registered under GST, regardless of their turnover.
A casual taxable person refers to an individual or entity that occasionally supplies goods or services in a territory where GST is applicable, but does not have a fixed place of business in that territory.
A non-resident taxable person is an individual or entity that occasionally supplies goods or services in a territory where GST applies but does not have a fixed place of business in India.
Several other categories of individuals or entities are also required to register under GST, including agents of a supplier, those paying tax under the reverse charge mechanism, input service distributors, e-commerce operators or aggregators, persons supplying via ecommerce aggregators, and persons supplying online information and database access or retrieval services from a place outside India to a person in India.
Reverse charge refers to a scenario where the liability to pay tax is shifted from the supplier to the recipient of goods or services. In other words, instead of the supplier being responsible for paying the tax to the government, the recipient becomes liable to pay the tax directly. The categories of supplies to which reverse charge applies are notified by the Central or State Government.
Under the GST regime, reverse charge may apply to both goods and services. It is important to note that similar provisions existed in the previous Service Tax regime for specific services like manpower supply, works contract, mutual fund agent, and goods transport agencies. However, in GST, the reverse charge mechanism may be applicable to a broader range of goods and services.
Here are some important considerations related to the reverse charge mechanism under GST:
Every person liable to pay tax under reverse charge is required to furnish details of inward supplies. This ensures that the recipient reports the relevant information to the tax authorities for compliance purposes.
Persons who are required to pay tax under reverse charge are required to be registered under GST, regardless of the threshold limit. This helps in ensuring proper monitoring and compliance by all parties involved in the reverse charge transactions.
GST has specific provisions related to the time of supply of goods and services when tax is payable on a reverse charge basis. These provisions determine when the liability to pay tax arises for the recipient.
The reverse charge mechanism in GST has several implications:
By shifting the tax liability to the recipient, the reverse charge mechanism promotes compliance by ensuring that tax obligations are met by both suppliers and recipients.
Reverse charge helps in creating a level playing field by ensuring that tax liabilities are properly addressed, irrespective of whether the supplier or the recipient is responsible for paying the tax.
Reverse charge mechanism acts as a deterrent against tax evasion. It reduces the possibility of suppliers avoiding their tax obligations by placing the onus on the recipient to fulfill the tax liability.
The implementation of GST in India has brought about a significant shift in the country's taxation structure. Taxes like Central Excise Duty, Additional Duties of Customs (CVD), Special Additional Duty of Customs (SAD), and Service Tax, which were previously levied and collected by the Centre, have been subsumed under the GST regime. This integration has simplified the tax system, eliminated cascading effects, and enhanced the ease of doing business. In the next part of this blog series, we will explore the taxes levied and collected by the state governments under GST, providing a comprehensive understanding of this transformative tax system.
State-level taxes such as State VAT, Central Sales Tax (CST), Entertainment and Amusement Tax (except when levied by local bodies), Taxes on lotteries, betting, and gambling, Entry Tax, and Octroi have been subsumed under the GST regime. This integration has eliminated multiplicity of taxes, reduced compliance burdens, and fostered a seamless flow of goods and services within and between states. In the next part of this blog series, we will delve into the GST registration process and its significance for businesses.
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