What is GST in India? Tax Rates, Key Terms and Concepts Explained
India’s biggest tax reform, the goods and services tax (GST) was implemented on July 1, 2017.
The single tax system subsumed all the previously existing federal and state levies (see table below) with an aim to create a single, uniform market across India.
Below, we provide a glossary on the key concepts and terminologies used in the GST system in India, and a list of goods and services with revised GST rates.
What is GST?
GST is a single value-added tax levied on the manufacture, sale, and consumption of goods and services at the national level.
There are three components to GST in India:
- CGST – Central Goods and Services Tax, levied on an intra-state sale and collected by the federal government (commonly referred to as “the center” in India).
- SGST – State/Union territory Goods and Services Tax, levied on an intra-state sale and collected by the state or union territory government.
- IGST – Integrated Goods and Services Tax, levied on interstate sales and collected by the federal government.
The IGST is the aggregate of the CGST and SGST; the SGST is appropriated from the state where the supplies are consumed.
Tax on supply
The GST is applicable on the “supply” of all goods and services unlike the previous system wherein the tax was applicable to the manufacture, sale, or provision of goods and services. The liability to pay CGST or SGST, therefore, arises at the time of supply.
Depending on whether the transaction is ‘inter-state’ or ‘intra-state’ (between states or within a state, respectively), separate GST provisions are applicable to help a business determine the place of supply for goods and services.
Input tax credit
Input tax credit (ITC) forms the backbone of the GST regime in India.
The GST is essentially a tax on value addition at each stage of the supply chain; every supplier, who is the person supplying the goods and/ or services or an agent acting as such on behalf of such a supplier, can claim credits (over input taxes paid at each stage of supply chain) in the subsequent stage of value addition.
The end consumer, therefore, bears only the GST charged by the last supplier in the supply chain.
No cross-utilization of the ITC is permitted: the credit of CGST paid on inputs may be used only for paying CGST on the output, while the credit of SGST on inputs may be used only for paying SGST, except in the case of inter-state supply of goods.
GST exempted supply
The exempted supplies are those that do not attract any GST and are specifically exempt from GST through government notification.
However, no ITC can be claimed with respect to inputs or input services used for making exempt supplies. In other words, in case of exempted supply, only output is exempted from tax but tax is levied on the input side.
Some of the GST exempt goods include fish, fresh fruits and vegetables, live animals (except horses), jute fiber raw or processed, printed books, and handloom among others.
Zero rating means that the entire supply chain of a zero rates supply is tax-free. That means, no tax is levied either on the input tax side or on the output side.
Zero-rated supplies include:
- Exports of goods or services or both; or
- Supplies made to customers located in special economic zones (SEZ) or SEZ developers.
ITC is available on zero rates supplies.
Nil-rates supplies are those goods and services that attract zero percent GST. These are listed in schedule 1 under GST rate schedule. Some of the examples are salt, jaggery, and cereals.
No ITC is available on inputs or input services used in providing nil rated supply.
It is the supply of goods and services that do not come under the purview of GST. However, other taxes may be applicable.
Currently, only petroleum products and alcohol for human consumption fall under this category.
The Goods and Services Tax Network (GSTN) is a not-for-profit, private limited company, promoted by the government with the specific mandate to provide information technology support and the digital services required for implementing the GST. It provided a portal where all GST returns are filed electronically.
Invoice matching system
The GST allows for a seamless flow of ITC across the supply chain. One of the essential features of the GST is to check ITC claims by the taxpayer to prevent any leakages.
For this purpose, an invoice matching system has been developed under GSTN to match the purchase and sale invoices of taxpayers.
Accordingly, every registered taxable person under GST is required to issue a tax invoice, which will be uploaded on the invoice matching system.
After the sale and purchase invoices of a taxpayer have been matched, the ITC will be conferred.
Compliance rating system
It is a unique form to rate whether a taxable person in India has been compliant. In this system, every taxable person will have a rating based on his/her record of tax compliance.
Once the system is implemented, the score will be updated at periodic intervals and will be placed in the public domain to ensure transparency.
Anti-profiteering clause allows businesses to pass on the benefit of a reduced tax rate on goods or services, or both, to the consumers. This is to prevent any rise in the price of commodities following the GST implementation.
It is a federal forum that includes federal, state, and union territory governments on its board. The GST Council comprising of the federal Finance Minister as the chairman, the federal Minister of State (Revenue), and the state and union territory finance ministers make recommendations to the federal, state, and union territory governments on issues like tax rates, exemption lists, threshold limits, and all other matters relating to the GST.
Decisions by the GST Council are made based on a three-fourths majority of the votes cast: the federal government casts one-third of the votes, while the state and union territories cast two-thirds of the votes.
Each state and union territory have one vote, irrespective of its size or population.
Revised GST rates 2018
The GST council has divided the tax schedule for goods and services into four tax slabs – 5, 12, 18, and 28 percent.
Below is the list of goods whose rates have been revised in various council meetings:
- Hulled cereal grains like barley, wheat, oat, and rye;
- Human hair;
- Sanitary napkins;
- Palmyra jaggery;
- All types of salt; and
- Books for children.
- Cashew nut and cashew nut in the shell;
- Ice and snow;
- Coir mats and floor covering;
- Postage or revenue stamps; and
- Braille appliances, hearing aids and other equipment to compensate for a disability.
- Glasses for corrective spectacles and flint buttons;
- Fixed speed diesel engines;
- Fly ash blocks;
- Menthol and menthol crystals, peppermint, and its other chemical compounds;
- Preparations of vegetables, fruits, nuts or other parts of plants;
- Ketchup, sauces and mustard sauce;
- All diagnostic kits and reagents;
- Spoons, forks, ladles, skimmers, cake servers, fish knives, tongs;
- Two-way radio used by defense forces;
- Playing cards and other board games.
- Printers other than multifunction printers;
- Set-top box for TV;
- Computer monitors not exceeding 17 inches;
- Electrical filaments or discharge lamps;
- Plastic tarpaulin;
- Headgear and parts;
- Precast concrete Pipes;
- Salt-glazed stoneware pipes;
- Aluminum foil;
- Rear tractor tyre, tyre tubes, wheel rim, and tractor support front axle;
- Ball bearing, roller bearings, parts & related accessories;
- Electrical transformer;
- Static converters (UPS);
- CCTV and recorder;
- Winding wires, coaxial cables, and an optical fiber;
- Perforating or stapling machines, pencil sharpening machines;
- Baby carriages;
- Instruments for measuring length, for use in the hand; and
- Bamboo furniture.
GST council meetings have not added any new items to the 28 percent tax bracket.
- Railways-transportation of goods, passengers;
- Transport by air;
- Tour operator services;
- Goods transported in a vessel from outside India;
- Transport services with air conditioner (AC) contract or radio taxi; and
- Print media ad space.
- Rail transportation of goods in containers from a third party;
- Business class air travel;
- Restaurants without AC or liquor license;
- Hotels stay with rent more than Rs.1000 and less than Rs.2500 per day;
- Chit fund services by foremen;
- Construction of building for sale purpose; and
- IP rights on a temporary basis.
- Restaurants with AC and/or liquor license;
- Outdoor catering and party arrangement;
- Hotel stay with rent more than Rs.2500 but less than Rs.5000 per day; and
- Supply of works contract.
- Entertainment events-amusement parks, and sporting events;
- Race club services;
- Gambling; and
- Restaurant or hotel stay at five-star hotels or above.
Editor’s Note: This article was first published on April 11, 2017, and is updated on October 23, 2018, as per the latest regulations.