GST or Goods and Services Tax came into effect on July 1, 2017. Till then India’s tax system was very complicated. A new tax was introduced in the last decade called service tax. Besides, there were a plethora of central and state taxes that required separate invoices (challans). The scope for tax evasion and avoidance was high, and there was scope for disputes and litigation.
In 2007, the then Finance Minister B. Chidambaram talked about implementing GST by 2010. After huge delays due to slow processes, the new tax regime came into effect.
But so far many people do not have a clear idea about GST. That’s why we’ve written about 10 ways it affects small businesses and their owners.
Converts Under the previous system, it was line by line. Say – X, a manufacturer sold a telephone to Y, 10,000 to the retailer and charged sales tax of 5%.
If Y charges 10% profit, he sells the phone for Rs 10,500 (his total purchase price) + 10% of Rs 10,000 + 5% sales tax = Rs 12,075 to his customers.
This had the effect of driving up prices. 5% paid to X is also taxed again to Y. GST removes this anomaly with input tax credit system.
Y has paid tax (other than X paid) only on the value added by him (his profit).
So the customer will pay INR 10,000 + 10% profit + 5% GST = INR 11,550.
Y pays Rs 550 as tax to the government and gets Rs 500 back. X will pay Rs 500 as GST.
The government will receive 5% INR 11,000 or 550 INR tax.
VAT, CENVAT confusion
Avoidance VAT was introduced 15 years ago at the state level in India to avoid multiple taxation.
However, since VAT (including excise tax and service tax) cannot be set against Senwat, it is not fully functional because one is administered by the state and the other by the federal government.
The great thing about GST is that it imposes multiple taxes on almost everything except petroleum and alcohol.
- State VAT
- State Chess
- Purchase tax
- Central Excise
- Additional Duties (Special Importance Items)
- Service tax
- Central Sales Tax
- Entertainment tax of GST
Boards One of the most confusing aspects of GST is that there are multiple layers. It was envisioned as a single rate tax on everything from salt to champagne.
At the time of writing, GST has 4 slabs of 5%, 12%, 18% and 28%. Certain goods like cars, luxuries face additional cess.
5% GST is charged on all necessities including medicines.
Some products like milk do not attract any GST.
Going forward, the 12% and 18% slabs will be merged to form a three-tier GST.
In almost every country except India, the GST rate is around 16%.
However, keeping in mind the needs of the very poor, it was necessary to have a lower tier of 5% and raise it to 28%.
CGST, SGST, IGST
There are three different GST lines – Central GST, State GST and Intra State GST.
If you sell goods within a state, you have to charge both CGST and SGST. Let’s say you sell hair oil at 18% GST. It is equally divided into 9% and 9%.
But what if you make hair oil in Gujarat and sell it in Bihar? GST (18% if there is hair oil) and deposited with the Central Government on the appropriate slap for transaction between any of the states.
GST Registration Registration for GST
Every business with an income of more than 20 lakh rupees should be done.
For special category states, every business with a turnover of more than Rs 10 lakh must be registered for GST.
Any business providing services is required to register for GST irrespective of revenue.
In addition, any business selling goods or services within the state border must register for GST.
GST LedgerGST Ledger
Every business should maintain the following information (or set of ledgers).
- Input SGST
- Input CGST
- Input IGST
- Release SGST
- Output CGST
- Release IGST
Also, an electronic cash balance must be maintained.
Provide at least the following data about GST registration whenever asked by tax authorities:
- Buying and selling of goods and services Products
- Stock records
There should be separate accounts for GST payable and receivable.
Length of maintenance
All books of records must be maintained for at least 6 years from the last date of filing the annual return.
Failure to maintain the accounts and records as specified will result in a penalty as determined by the tax authorities.
GST returns include GST paid payments, GST refunds and details of purchases and sales.
GSTR Form 1, 2, 3 should be filed monthly and GSTR 9 should be filed annually. GSTR 9 will come on December 31 following the end of the financial year. GSTR 9 for the period 2018-19 will be filed on December 31, 2019.
GST Composition Scheme
The compounding scheme is a simplified form through which taxpayers who have not sold more than Rs 50 lakh in the previous year can only make a quarterly return.
The main advantage is low compliance. The disadvantage is that goods cannot be sold outside the state and input tax credit cannot be availed.
At the moment, GST is at a new stage. The implications are still being understood, and the government needs to figure out whether GST is taxing higher or lower.
As the protocol is still being finalized there are changes in the law on a monthly basis.
The business community, as a whole, faced great difficulties. Most of the problems are due to non-refund of taxes by the government and GST looting by vendors (GST collected but not deposited).
In August, Finance Minister Nirmala Sitharaman promised that all outstanding GST for MSMEs would be removed within 30 days. Within a year, we hope the contractions will be out of the system.