Structure of GST in India: An Overview

The Goods and Services Tax (GST) is one of the most significant tax reforms in India’s post-independence history, fundamentally reshaping the country’s indirect tax structure. Knowing the structure of GST in India can boost your tax calculation process perfectly. Implemented on July 1, 2017, GST replaced a myriad of central and state taxes with a unified, transparent tax regime. However, the primary objective was to create a “One Nation, One Tax, One Market” structure, simplifying tax compliance for businesses, reducing tax evasion, and improving the overall ease of doing business in India.

In this blog, we will delve into the structure of GST in India, exploring its framework, components, tax rates, and administrative setup.

1. What is GST?

GST is a destination-based, multi-stage tax levied on every value addition in the supply chain. Unlike the earlier system, where taxes were there at various points by different authorities (central and state governments), GST seeks to consolidate multiple leives into a single tax. Furthermore, it applies to the supply of goods and services for consumption, where the ultimate burden falls on the consumer. However, you must know the structure of GST in India to make the process easier. 

Additionally, GST is there to eliminate the cascading effect of taxes, also known as “tax on tax,” thereby reducing the overall tax burden on goods and services.

2. Types And Structure Of GST In India 

The structure of GST in India is present into four major components, each governed by different authorities:

a) Central Goods and Services Tax (CGST)

CGST is levied by the Central Government on intra-state (within the same state) transactions. Additionally, this tax replaces various central taxes, including Central Excise Duty, Service Tax, Additional Duties of Excise, and Central Surcharges. However, the revenue collected from CGST goes to the central government’s account.

b) State Goods and Services Tax (SGST)

SGST is levied by the State Governments (or Union Territories) on intra-state transactions. SGST replaced taxes such as Value Added Tax (VAT), Central Sales Tax (CST), Luxury Tax, Entry Tax, and other state-level taxes. Furthermore, the revenue from SGST goes to the respective state government.

c) Integrated Goods and Services Tax (IGST)

IGST is there on inter-state transactions of goods and services, meaning transactions that occur between two different states or between a state and a Union Territory. However, this tax is also applicable to imports and exports. However, the collection of IGST is sharable between the central and state governments. Additionally, the central government collects IGST and then distributes a part of the revenue to the destination state where the goods or services are consumable.

d) Union Territory Goods and Services Tax (UTGST)

UTGST is applicable on intra-Union Territory supplies (in Union Territories that do not have their own legislatures, such as Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli, Daman and Diu). Furthermore, UTGST is equivalent to SGST but is applicable only in Union Territories.

3. Key Features And Structure Of GST in India

a) Dual GST Model

India has adopted a dual GST model, where both the central and state governments levy GST on the same transaction. However, this model allows both governments to simultaneously collect taxes. However, the dual model is necessary given India’s federal structure, where both the central and state governments have distinct powers.

b) Destination-Based Tax

GST is a destination-based tax, meaning the tax is collectible in the state where the goods or services are consumable, rather than where they are there. This eliminates the distortions in inter-state trade and encourages the free flow of goods and services across state borders.

c) Input Tax Credit (ITC) Mechanism

One of the significant advantages of GST is the Input Tax Credit (ITC) mechanism. ITC allows businesses to claim credit for the taxes paid on the inputs they use to manufacture goods or services. This ensures that taxes are only paid on the value addition at each stage, reducing the overall tax burden. For example, if a manufacturer buys raw materials worth ₹1,000 and pays ₹100 as GST, and then sells the final product for ₹2,000 with a GST of ₹200, they can claim the ₹100 already paid as a credit, thereby paying only ₹100.

d) GST Council

The GST Council is the apex body that governs GST in India. It consists of the Union Finance Minister (Chairperson), the Union Minister of State for Finance, and the finance ministers of all states. The council is responsible for making decisions on various aspects of GST, including tax rates, exemptions, threshold limits, and procedural rules. Decisions are made by consensus or by a majority vote.

4. Tax Rates under GST

GST in India is divided into multiple tax slabs, ranging from 0% to 28%. These slabs are designed to categorize goods and services based on their essentiality or luxury status:

• 0%: Basic necessities like unbranded food items, educational and health services, and agricultural goods are exempted from GST.
• 5%: Items of mass consumption like essential food products (packaged), medicines, and transportation services.
• 12%: Items of daily use such as processed foods, utility items, and business services.
• 18%: Standard goods and services including many consumer goods, financial services, and the majority of products fall under this category.
• 28%: Luxury items like cars, high-end electronics, and sin goods such as tobacco and alcohol are taxed at this higher rate.

In addition to these rates, a compensation cess is levied on certain luxury goods and demerit items, which is used to compensate states for revenue loss due to the implementation of GST.

5. Compliance Structure Of GST In India 

a) GST Registration

Businesses with an annual turnover exceeding a specified threshold are required to register under GST. As of 2023, the threshold limit for GST registration is ₹40 lakh for goods and ₹20 lakh for services in most states. However, for businesses operating in special category states, the threshold is ₹10 lakh.

b) GST Returns

Registered taxpayers must file periodic GST returns. Furthermore, these include details of sales, purchases, input tax credit availed, and the GST liability. The key returns include:

• GSTR-1: Outward supply of goods and services.
• GSTR-3B: Summary return for sales and purchases.
• GSTR-9: Annual return.

Additionally, timely filing of GST returns is crucial, as non-compliance can result in penalties and interest. This is one of the crucial structures of GST in India. 

c) E-Way Bill System

The e-way bill system is an essential part of GST compliance for the transportation of goods. It is a document generated electronically that tracks the movement of goods valued at ₹50,000 or more across state or within state borders. Furthermore, this system reduces tax evasion by ensuring that goods are tracked and accounted for during their movement.

6. Challenges in GST Implementation

While GST has simplified the tax structure in many ways, it has not been without its challenges. Some of the common issues faced include:

• Compliance Burden: Frequent changes in rules, multiple returns, and the complexity of the ITC mechanism have posed difficulties for businesses, especially small and medium enterprises (SMEs).
• Technical Glitches: In the initial stages, the GST Network (GSTN), the online portal for GST filing, faced technical glitches, leading to delays in compliance.
• Revenue Shortfalls: Some states have raised concerns about revenue shortfalls, as GST is a destination-based tax, and production-heavy states have seen reduced revenue compared to consumption-heavy states.
• Rate Rationalization: Furthermore, the multiplicity of tax rates has led to debates about whether GST should be simplified further with fewer slabs.

7. Way Forward for GST

As GST matures, there are ongoing efforts to refine and improve the system. The GST Council continues to rationalize tax rates and address concerns raised by different sectors. However, moving towards a simpler GST structure, with fewer tax slabs, could improve compliance and reduce the burden on businesses. However, strengthening the IT infrastructure and improving the user experience on the GSTN portal will also enhance the efficiency of the system.

Conclusion

The introduction of GST in India has been a landmark moment in the country’s tax history. It has unified the tax regime, promoted the ease of doing business, and made the tax system more transparent. However, like any major reform, GST is evolving, and its success will depend on continuous adjustments and stakeholder cooperation. While challenges remain, the long-term potential of GST to boost India’s economic growth is undeniable. Additionally, with proper implementation and reforms, GST can play a crucial role in streamlining the tax system and fostering economic integration across India.