GST vs. Income Tax: Understanding the Difference
Updated: Aug 28
Income tax and the Goods and Services Tax (GST) are two distinct tax regimes with distinct goals. Aiming to streamline the tax system by replacing a number of other indirect taxes, the Goods and Services Tax (GST) is an indirect tax on the supply of goods and services based on consumption. On the other hand, income tax is a kind of direct tax that is imposed on individuals and companies according to their profits. It is enforced by the government to generate funds for public service and social welfare initiatives. Compared to GST, which focuses on taxing consumption and focusses on the earning potential of individuals and businesses, income tax is more personalised and based on income levels. In this article, we will compare and differentiate these two tax regimes in detail.
Table of content
GST: A Detailed Overview
India's tax system was completely transformed by the Goods and Services Tax (GST), which combined several indirect taxes into a single structure. It was put into effect on July 1, 2017, and it ensures efficiency by streamlining taxes through staged levies on products and services. This coordinated strategy promotes a smooth market and gets rid of tax cascades. GST improves individual tax compliance and corporate operations by displacing taxes such as VAT and Central Excise. Benefits include consistent tax rates, streamlined administration, and service accessibility through the GST site. In general, GST encourages economic growth by formalising firms, lowering tax costs, and promoting transparency.
Types of GST Returns
GSTR-1: Reporting outward supply of goods and services, it is filed by all regular taxpayers. Monthly by the eleventh for over Rs. 5 crore in turnover, or quarterly by the thirteenth for members of the QRMP plan.
GSTR-2A: An recipients-only view-only return that automatically populates with inbound supply from suppliers To claim the Input Tax Credit (ITC), use GSTR-1.
GSTR-2B: Provides monthly ITC data and is static, akin to GSTR-2A. Every month on the 12th, it is available.
GSTR-3B: A self-declaration detailing out-of-country supplies, claimed ITC, and paid taxes that are submitted on a monthly or quarterly basis. Deadline: quarterly for participants in the QRMP scheme, or on the 20th for turnover exceeding Rs. 5 crore.
GSTR-4: An annual return for taxpayers with compositions that took the place of GSTR-9A as of FY 2019–20. Deadline: April 30th of the upcoming year.
GSTR-5: Monthly report on inward and outward supplies filed by non-resident foreign taxpayers.
GSTR-6: Input Service Distributors (ISD) monthly return that describes the input tax credit that is received and disbursed.
GSTR-7: Monthly report on TDS deducted and claimed, filed by individuals subject to GST.
GSTR-8: A monthly return with details on suppliers and TCS collected that is filed by e-commerce businesses that collect TCS.
GSTR-9: A consolidated annual return that combines monthly or quarterly returns for all taxpayers with a few exceptions. Deadline: December 31st of the subsequent year.
GSTR-9C: Taxpayers having a turnover over Rs. 5 crore are required to file GSTR-9C, a reconciliation statement, by December 31 of the subsequent year.
GSTR-10: Filed within three months after cancellation by individuals whose registration is cancelled or surrendered.
GSTR-11: A form that lists inbound supplies and claimed refunds that is filed by people who have been given a Unique Identity Number (UIN) for refund reasons.
GST Deadlines and Penalties
Depending on the kind of return and the taxpayer's annual revenue, there are differences in the filing and due dates for other GST files. For example, GSTR-1 is due on the eleventh day of the next month, and GSTR-3B is due on the twentieth day. The following fiscal year's annual return, GSTR-9, is due on December 31. A taxpayer may choose to submit GSTR-1 and GSTR-3B on a quarterly basis instead of monthly if their revenue is up to Rs. 5 crores. In order to avoid late fines and interest, taxpayers must adhere to the deadlines.
Penalties for inaccurate or incomplete filings, fines, interest, and even jail time for tax evasion may be levied if the GST requirements are not fulfilled. With a cap of 0.25% of the taxpayer's revenue, late fees for late GST returns are assessed at a rate of Rs. 50 per day (or Rs. 20 for taxpayers who are not required to file). An additional 18% yearly interest rate is applied to any underpaid or past-due taxes. To cancel transferring their GST registration, compliant taxpayers must follow compliance guidelines and file their returns on time.
Income Tax: A Detailed Overview
All Indian earnings are subject to income tax, a direct tax, regardless of where they live. The earner is responsible for paying these taxes, which cannot be transferred. Individuals, HUFs, BOIs, AOPs, local governments, and businesses are all considered taxable entities. It is paid yearly and is computed as a proportion of taxable income. Presently, India has two tax systems: the new one, which was unveiled in the Union Budget of 2020, and the old one. HUFs and individuals can choose between these two regimes according to their preferences and financial circumstances.
Types of Income Tax Returns
Individual Income Tax: Determined by residency status and source of income, this tax is levied on an individual's yearly earnings. Income brackets influence tax rates. For those who choose not to choose between the old and new regimes, a new default taxation mode will be implemented in 2021.
Business Income Tax: This tax is levied on the yearly income of enterprises and is determined by either presumptive taxation or standard rules. Taxable income is determined by deducting total sales under standard conditions. For companies with annual revenues of more than Rs. 2.00 crores, presumed taxation is applicable.
State and Local Income Tax: Stamp duty, state excise tax, and agricultural income tax are among the taxes imposed by the state government. In addition to service usage fees like water and drainage supply taxes, local governments also collect property taxes.
Income Tax Deadlines and Penalties
Individuals and corporations must file their income tax returns (ITRs) by the deadline to avoid fines. Normally, individual returns must be filed by July 31st of the assessment year; however, for the assessment year 2021–2022, the deadline has been extended to September 30th. Corporate and partnership firms alike are required to file their ITR by September 30th of the assessment year. Taxpayers have two options for submitting their ITRs: either via the Income Tax Department's e-filing website or by mailing a paper copy of the form to the tax division.
Income tax laws can be broken, with penalties ranging from 50% to 200% of the avoided tax, interest on overdue taxes, and fines of up to Rs 10,000 for late filing. There are situations where evading taxes or fabricating paperwork might land you in jail. To avoid these fines, income tax returns must be accurately filed and submitted on time.
GST vs. Income Tax: Scope and Application
GST (Goods and Services Tax):
GST is a comprehensive indirect tax levied on the manufacture, sale, and consumption of goods and services across India. It is applicable at every stage of the supply chain, from production to consumption, with tax credits available for any tax paid on inputs. The GST system is designed to eliminate the cascading effect of taxes and to simplify the tax structure by consolidating multiple indirect taxes into one.
Applicability: GST applies to both goods and services, covering all transactions including sales, transfers, barter, lease, or import of goods and services.
Different Rates: GST has different rates depending on the category of goods or services. Essential items, such as food grains, often attract a lower GST rate or are exempt, while luxury items and certain services may attract higher rates. The standard GST rates in India are 5%, 12%, 18%, and 28%, which are applied based on the classification of the goods or services involved.
Income Tax:
Income Tax is a direct tax levied on the total income of individuals, Hindu Undivided Families (HUFs), companies, firms, and other entities. The tax is calculated based on the income earned during a financial year, after considering various deductions and exemptions allowed under the Income Tax Act.
Applicability: Income Tax applies to the total income, including salary, business profits, capital gains, rent, and other sources of income. It is mandatory for individuals and entities with income above a certain threshold to file an income tax return and pay the applicable tax.
Different Tax Slabs and Rates: Income Tax is progressive in nature, meaning that the tax rate increases as the taxable income increases. There are different tax slabs for individuals based on their income levels, and different rates for other entities like companies and firms. For instance, individuals may be taxed at 5%, 10%, 20%, or 30% depending on their income bracket, while companies may have a flat rate.
Calculation and Rates
GST:
The calculation of GST is based on the value of goods or services supplied. The tax is levied at multiple rates depending on the category of goods or services. For example:
5% GST: Applicable to basic necessities and certain food items.
12% GST: Applicable to processed foods and some manufactured goods.
18% GST: Applicable to most goods and services, including electronics, restaurants, and services.
28% GST: Applicable to luxury items, such as luxury cars, premium consumer goods, and certain sin goods like tobacco and aerated drinks.
The tax rate applicable to a product or service determines the GST amount, which is collected from the consumer and remitted to the government.
Income Tax:
Income Tax is calculated based on the taxable income of the individual or entity. Taxable income is the gross income minus any deductions and exemptions allowed under the law. The tax rate varies according to the income level and type of taxpayer:
Individuals: Tax slabs for individuals are progressive, meaning higher income leads to higher tax rates. For example, an individual with an annual income up to Rs. 2.5 lakh may not pay any tax, while those earning more than Rs. 10 lakh could be taxed at 30%.
Companies: Companies are taxed at a flat rate, which may vary depending on the type and size of the company. For instance, domestic companies may be taxed at 25% or 30%, while certain concessional rates are available for new manufacturing companies.
Filing and Payment
GST:
GST requires businesses to file periodic returns to report their sales, purchases, and tax paid. The main returns include:
GSTR-1: Monthly or quarterly return detailing all outward supplies (sales) made by the business.
GSTR-3B: A summary return filed monthly, showing the tax liability, ITC claimed, and net tax payable.
GSTR-9: An annual return summarizing all the monthly returns filed during the financial year.
Businesses must calculate their GST liability monthly based on self-assessment and pay the tax by the due date to avoid penalties and interest charges.
Income Tax:
Income Tax filing is an annual process, where individuals and businesses must file their returns for the previous financial year using the appropriate ITR (Income Tax Return) forms. Key aspects include:
Annual Filing: All taxpayers must file their returns by the specified due date, typically by July 31st for individuals and September 30th for companies, unless extended by the government.
Payment of Taxes: Taxpayers may need to pay advance tax during the year if their tax liability exceeds Rs. 10,000. Self-assessment tax and any balance tax liability must be paid before filing the return.
Compliance and Documentation
GST:
Compliance under GST involves several key components:
Invoicing: Issuing GST-compliant invoices that include specific details such as GSTIN, HSN/SAC codes, and GST rates applied.
GST Registration: All businesses meeting the turnover threshold or engaged in specific activities must register for GST.
Maintenance of Records: Businesses must maintain records of all transactions, including sales, purchases, and tax payments, for at least six years.
Input Tax Credit (ITC): The ITC mechanism allows businesses to claim credit for GST paid on inputs and adjust it against their output tax liability. Accurate matching of invoices is necessary to claim ITC.
Income Tax:
Income Tax compliance requires:
Maintenance of Books of Accounts: Businesses must maintain detailed records of all financial transactions, including income, expenses, and investments.
Form 16/16A: Employers must provide Form 16 to employees, detailing the income earned and tax deducted at source (TDS). Form 16A is provided for non-salary income.
Tax Audit Requirements: Certain businesses must undergo a tax audit if their turnover exceeds specified limits.
Documentation for Deductions and Exemptions: Taxpayers must retain documentation for all deductions and exemptions claimed, such as proof of investments under Section 80C, interest on housing loans, and donations.
Difference Between GST and Income Tax
GST | Income Tax |
Indirect tax. | Direct tax. |
Imposed on the consumption of goods and services. | Imposed on income from annual salary, capital gains, house property, etc. |
Levied and collected by both the central and state governments | Levied and collected only by the central government |
Levied on different levels, but the ultimate burden of the tax borne by the final consumer. | Tax burden cannot be transferred from one person to the other. |
Mandatory registration required for businesses exceeding an annual turnover above Rs.40 lakh. |
|
The goal is to simplify indirect taxes and limit the cascading effect of multiple indirect taxes. | The goal is revenue generation for the government. |
Difference Between GST and ITR Filing
GST Returns | Income tax Returns |
Total of 13 returns | Total of 7 forms |
Filed by businesses providing goods and services to consumers. | Filed by anyone earning an income in India. |
Filed monthly, quarterly, and even annually. | Filed only once a year. |
Conclusion
In summary, the main difference between the income tax and the GST is their structure. GST is an indirect tax that is levied on the provision of goods and services, whereas income tax is a direct tax that targets individuals and companies according to their income levels. While the goal of income tax is to generate revenue for the government and finance public services, the goal of the Goods and Services Tax (GST) is to simplify the tax system and preserve tax structure uniformity. To properly fulfil their tax obligations and navigate the tax landscape, individuals and companies need to be aware of these distinctions.
FAQ
Q1. What is a direct tax?
A direct tax is one that is placed directly on a person's earnings or assets, and the tax payer is unable to transfer the tax burden to another party. Income tax is a direct tax.
Q2. What is an indirect tax?
An indirect tax is one that is imposed on the cost of a good or service. When indirect taxes are paid, the tax payer transfers the liability to a different party. GST is an indirect tax.
Q3. Is it mandatory to pay tax if I have a GST number?
Under the GST Act, a person conducting business in any part of India or requiring registration is referred to as a "taxable person." Everybody who conducts business, trade, or other economic activity is regarded as taxable.
Q4. How much GST do I have to pay?
There are five distinct tax rates under the GST for goods and services: 5%, 12%, 18%, and 28%. But other products are not subject to GST taxes, such as those made from petroleum, alcohol, and electricity. The government of each state used to tax these goods differently under the previous tax structure.
Q5. What is the difference between GST and income tax?
The goods and services tax, or GST, is an indirect tax levied on the provision of goods and services, whereas income tax is a direct tax paid on the money earned by individuals and corporations.
Q6. Do business people pay both income tax and GST?
Yes, depending on their taxable income, small firms could also have to pay income tax. To calculate taxable income for a given financial year, the total revenue is divided by the business expenses. The type of taxpayer determines the taxes imposed in India on business revenue.
Q7. Why is GST better than other taxes?
Several indirect taxes that were in force under the former tax system have been replaced by the GST. A single tax has the benefit of applying the same rate to a certain good or service in every state. As the Federal Government establishes the tax laws and rates, tax administration is simpler.
Q8. What is the purpose of income tax?
Tax revenue is used by the government to fund a number of welfare programs, including efforts to generate employment. The thousands of staff across the many departments' administrative costs must be paid for by the government.
Q9. Is paying income tax necessary?
Taxes are a source of funding for the government's welfare programs, including employment ones. Numerous departments employ thousands of people, and the government is in charge of paying for their administrative expenses.
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This article provides a clear and concise comparison between GST and Income Tax. It's helpful to understand the distinct roles they play in the economy, with GST focusing on consumption and Income Tax on earnings. The breakdown of their applications and implications for businesses and individuals is particularly informative. Great read for anyone looking to grasp these essential tax concepts!