Goods and Services Tax: What is GST? and How Does it Work?

Goods and Services Tax (GST) is a transformative indirect tax system implemented in India on July 1, 2017. It replaced various Central and State-level taxes like VAT, service tax, and excise duty, creating a unified tax structure. GST is designed to simplify tax compliance, reduce the cascading effect of taxes, and create a seamless national market by promoting the concept of ‘One Nation, One Tax’. 

This article explores the meaning, history, objectives, and functioning of GST, with examples to illustrate how it works in practice.

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Table of content

What is GST? (Goods and Services Tax)

GST Meaning and Scope

History of GST and GST Information

List of Taxes Subsumed after GST Implementation

Objectives of GST

Types of GST and GST Rules

Understanding the Dual Structure of Goods and Services Tax

Concepts of GST Levy – Multi-Stage, Destination-Based, and Value Added

Composition Scheme under GST

Concept of Input Tax Credit (ITC) under GST in India

TaxBuddy's GST Services

Most Asked Questions

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What is GST? (Goods and Services Tax)

Goods and Services Tax (GST) is a comprehensive, destination-based indirect tax levied on the supply of goods and services in India. It was implemented to replace a host of indirect taxes imposed by both the Central and State Governments. GST seeks to eliminate the cascading effect of taxes and simplify the overall tax structure. This system has led to a unified national market by removing interstate tax barriers and creating a single tax rate for goods and services.

GST Meaning and Scope

GST, or Goods and Services Tax, is a consumption-based tax that applies to the sale of goods and services at every stage of the supply chain. Its scope covers almost all goods and services, except items like petroleum, alcohol, and tobacco, which are taxed separately by the government. GST is categorized into CGST (Central Goods and Services Tax), SGST (State Goods and Services Tax), and IGST (Integrated Goods and Services Tax), depending on whether the transaction is intrastate or interstate.

History of GST and GST Information

GST was a landmark reform in India's taxation history, but its implementation was preceded by years of planning and debate. The evolution of GST can be tracked through several key milestones:

Year	Milestone/Key Event	Details
2000	Formation of the GST Committee	The government formed a committee to design a framework for the introduction of GST, marking the beginning of discussions about unifying India's indirect tax system.
2006	Union Budget Announcement	Finance Minister P. Chidambaram announced the plan to implement GST by April 2010. This statement reflected the government's commitment to tax reform.
2011	First GST Constitutional Amendment Bill Introduced	The government introduced the 115th Constitutional Amendment Bill to make provisions for the introduction of GST.
2014	122nd Constitutional Amendment Bill	The bill was reintroduced under the Modi government, progressing discussions and moving closer to final implementation.
2016	GST Bill Passed and Constitution (101st Amendment)	The GST Bill was passed, amending the Indian Constitution to enable the implementation of GST across the country.
2017	GST Launched on July 1, 2017	GST officially came into effect, unifying multiple indirect taxes under one umbrella. The slogan ‘One Nation, One Tax’ became a reality.

List of Taxes Subsumed after GST Implementation

The introduction of GST replaced a multitude of indirect taxes imposed by the Central and State Governments. Here is a breakdown of the taxes subsumed under GST:

Central Government Taxes Subsumed

• Central Excise Duty

• Service Tax

• Additional Customs Duty (Countervailing Duty)

• Special Additional Duty of Customs

• Central Sales Tax (CST)

  
  

State Government Taxes Subsumed

• Value Added Tax (VAT)

• Entry Tax and Octroi

• Entertainment Tax (except taxes levied by local bodies)

• Luxury Tax

• Purchase Tax

Objectives of GST

The primary objectives of GST were aimed at simplifying and streamlining India’s taxation system, making it more transparent and efficient.

‘One Nation, One Tax’

GST unified multiple taxes under one umbrella, eliminating interstate tax barriers. This harmonization created a more consistent tax environment and reduced the complexity of the previous tax structure, where different states levied various rates on similar products.

To Subsume Indirect Taxes in India

By merging multiple indirect taxes such as VAT, excise duty, and service tax, GST simplified the tax compliance process. The new system reduced the burden on businesses and made it easier to file taxes, which improved transparency and reduced disputes.

To Restrain Tax Evasion

GST introduced a comprehensive IT infrastructure for tax reporting, where businesses must file detailed returns via GSTR forms. The introduction of the Input Tax Credit (ITC) mechanism has made tax evasion difficult, as it requires full documentation at each stage of the supply chain.

Types of GST and GST Rules

India’s GST system operates under a dual structure. The types of GST are:

• CGST (Central Goods and Services Tax): Levied by the Central Government on intra-state transactions.

• SGST (State Goods and Services Tax): Levied by State Governments on intra-state transactions.

• IGST (Integrated Goods and Services Tax): Levied by the Central Government on inter-state transactions.

• UTGST (Union Territory Goods and Services Tax): Applicable in Union Territories.

  
  

These rules ensure that tax revenues are distributed between the Centre and States, depending on the nature of the transaction.

Understanding the Dual Structure of Goods and Services Tax

India’s dual GST structure allows both the Central and State Governments to levy taxes on the same transaction. For intra-state sales, both CGST and SGST are charged. For inter-state sales, IGST is charged, which the Central Government later distributes to the relevant states.

Example of Intra-state Sale (Maharashtra to Maharashtra)

A seller in Maharashtra sells goods worth INR 1,00,000 to a buyer in Maharashtra. The GST rate applicable to these goods is 12% (6% CGST and 6% SGST).

• Total GST Charged: INR 12,000

• CGST: INR 6,000 (Central Government)

• SGST: INR 6,000 (State Government of Maharashtra)Since it is an intra-state sale, the tax revenue is split equally between the Central and State Governments.

  
  

Example of Inter-state Sale (Maharashtra to Karnataka)

A seller in Maharashtra sells goods worth INR 50,000 to a buyer in Karnataka. The applicable GST rate is 18%.

• Total IGST Charged: INR 9,000

• The entire INR 9,000 is paid to the Central Government, which later distributes the appropriate portion to Karnataka (the destination state), based on the place of consumption.

Concepts of GST Levy – Multi-Stage, Destination-Based, and Value Added

Multi-Stage Levy

GST is imposed at every stage of the supply chain, from manufacturing to the final sale to the consumer. Each stage is taxed only on the value added at that point.

Destination-Based Levy

GST is collected at the point of consumption, not at the point of origin. In other words, the state where the goods are consumed receives the tax revenue, not the state where the goods are produced.

Value Addition

GST is calculated on the added value at each stage of the supply chain. This ensures that the tax burden is only on the incremental value and not on the full price.

Composition Scheme under GST

The Composition Scheme is a simplified tax scheme for small businesses with a turnover below a certain threshold. Businesses under this scheme pay GST at a lower, fixed rate but are not eligible to claim input tax credit. This scheme reduces the compliance burden for small businesses by allowing them to file quarterly returns instead of monthly returns.

Concept of Input Tax Credit (ITC) under GST in India

Input Tax Credit (ITC) is one of the key features of GST. It allows businesses to reduce their tax liability by claiming credit for the GST paid on purchases of inputs (goods or services used for business purposes).

Example of Input Tax Credit

A manufacturer purchases raw materials and pays INR 300 as GST (input tax) during the purchase. The output tax on the final product is INR 450. The manufacturer can claim an ITC of INR 300, meaning they only need to pay the difference of INR 150 (INR 450 – INR 300) to the government as GST.

TaxBuddy's GST Services

TaxBuddy offers a wide range of services that simplify GST compliance for businesses. From GSTR filing and Input Tax Credit management to GST consultancy, TaxBuddy ensures businesses remain compliant with the latest rules and regulations. With TaxBuddy, businesses can automate their tax filings, reduce compliance costs, and optimize their GST credits, making tax management hassle-free.

FAQ

1. What is GST in India?

GST is a comprehensive indirect tax levied on the sale of goods and services across India. It replaced multiple taxes like VAT, excise duty, and service tax.

2. When was GST introduced in India?

GST was introduced on July 1, 2017.

3. Is GST a direct or indirect tax?

GST is an indirect tax. It is applied to the sale of goods and services, and the tax burden is ultimately borne by the consumer.

4. How does GST work for inter-state sales?

In inter-state sales, IGST is charged. The Central Government collects IGST and then distributes it between the Centre and the destination state.

5. What are the types of GST?

The four types of GST in India are CGST, SGST, IGST, and UTGST.

6. What is Input Tax Credit (ITC) under GST?

Input Tax Credit allows businesses to reduce their tax liability by claiming credit for the taxes paid on inputs used to produce their goods or services.

7. What is the Composition Scheme in GST?

The Composition Scheme allows small businesses to pay GST at a lower, fixed rate and simplifies their compliance requirements by allowing quarterly returns.

8. How is GST collected in intra-state sales?

For intra-state sales, GST is collected as CGST and SGST. The tax is shared equally between the Central and State Governments.

9. Does GST apply to all goods and services?

GST applies to most goods and services, with a few exceptions like alcohol, petroleum products, and electricity, which are taxed separately.

10. How is GST paid?

GST is paid online through the GST portal, where businesses file returns and make payments directly to the government.