The introduction of GST marked a watershed moment in India’s tax history, signalling the beginning of a new era in taxation. It has transformed the way we deal with taxes on goods and services. Let’s take a journey to understand the fundamentals of how GST works in a business transaction. This blog will help us unravel the complexities and understand its importance.
Let’s get started.
GST is a tax that applies to most things we buy and sell in India. It replaced many different taxes, making things simpler and more accessible for both businesses and individuals. Think of it like a big box that contains all the different taxes. Now, when you buy something, you only have to pay one tax – GST – and that’s it!
For businesses, GST has made things simpler by eliminating the need to track and pay multiple taxes. Instead, they just need to focus on calculating and paying the single GST rate. This has reduced the administrative burden on businesses, allowing them to focus on their core operations and growth. Additionally, GST has removed the cascading effect of taxes, where taxes were applied on top of other taxes, leading to a lower total tax burden for businesses. Overall, GST has made doing business in India simpler, more efficient, and more sale
The GST Structure
GST operates under a dual model, with two components: Central GST (CGST) levied by the Central Government and State GST (SGST) imposed by the respective state governments. Additionally, Integrated GST (IGST) applies to interstate transactions and is collected by the central government.
The Transaction Process
Let’s break down the steps of how GST works in a typical transaction for better understanding:
Step 1: Identification of Taxable Event
The journey commences with identifying a taxable event, essentially the supply of goods or services. This supply can be either intrastate or interstate, determining the application of CGST, SGST, or IGST.
Step 2: Determining the Tax Rate
Once the supply is established, determining the appropriate tax rate is the next pivotal step. GST is categorised into various slabs, such as 5%, 12%, 18%, & 28%, based on the nature of goods or services. This step ensures that taxation is equitable and aligned with the product’s value.
Step 3: Calculation of GST
With the tax rate in place, the calculation of GST becomes straightforward. For instance, if the tax rate is 18% and the product’s value is INR 1000, the GST amount will be INR 180.
Step 4: Split into CGST and SGST/IGST
Here’s where the dual model comes into play. In an intrastate transaction, the total GST is divided equally into CGST and SGST. In the case of an interstate transaction, the entire GST amount goes into the IGST pool.
Step 5: Payment of GST
Depending on the transaction type, businesses collect the GST amount from the buyer and must deposit the CGST, SGST, or IGST with the respective tax authorities. This ensures that the government receives its due revenue.
Step 6: Input Tax Credit (ITC)
Now, let’s understand this from the buyer’s perspective. The buyer can claim Input Tax Credit (ITC) on the GST paid during purchases. This credit can be used to offset the GST liability on subsequent sales, reducing the cascading effect of taxes.
Step 7: Filing Returns
The seller and the buyer must file their GST returns periodically, providing a transparent record of transactions to the government. This step is crucial for accurate tax assessment and revenue collection.
Step 8: Assessment and Audit
The tax authorities review the filed returns and ensure compliance. They may also conduct audits to verify the accuracy of the information provided.
GST is a dynamic and comprehensive tax system that has revolutionised how taxation operates in India. Replacing multiple taxes with a unified system has eliminated tax cascading and streamlined the tax collection process.
Understanding how GST works in a transaction is crucial for individuals and businesses, as it affects a wide spectrum of economic activities.
So, whether you’re a buyer or a seller, comprehending the intricacies of GST can empower you to navigate the tax landscape with confidence and efficiency.