Get answers to the most common questions about GST in India

FAQ9 min read | Posted on July 5, 2024 | By Zoho Books Team

What is GST?

The Goods and Services Tax, or GST, is a new tax that is levied on the sale and purchase of goods and services. The GST is applied to the value added at each stage of the supply chain of a product, rather than on the total value of the product at each stage. Buyers will get input tax credits for the tax paid on the purchase of goods and services, which they can offset with the tax to be paid on the supply of goods and services. As a result, the customer who purchases the product at the end of the supply chain process will pay only the tax applied by the last seller in the supply chain.

Let’s take a look at an example of how the GST process works. Let’s assume that the raw materials to make a pair of shoes cost Rs.100. If the GST rate is 10%, then Rs.10 will be added as tax, and the manufacturer will purchase these supplies for Rs.110 (100 + GST 10%). After making a pair of shoes, he adds a value of Rs.100 (his profit margin). Now here, instead of applying that 10% tax to the new total value of Rs. 210 (Rs.110 + Rs.100), under the GST, that tax will only be applied to the value addition of Rs. 100 (this will add another Rs. 10). The manufacturer would then sell his shoes to a retailer for Rs. 220 (Rs. 210 + Rs. 10). The retailer then adds a value of Rs.100, and GST of 10% (Rs. 10) is applied to that value addition, which places the total cost of the shoes at Rs.320 (Rs.310 + Rs.10) for the end consumer.

Why has GST been introduced in India?

One of the main reasons why the GST was introduced in India is because of the cascading effect of taxes. In the previous tax system, multiple taxes were collected at each stage of the supply chain, without any credit for the taxes paid at previous stages. From the moment a manufacturer bought raw materials to the moment a customer purchased the finished product, taxes were applied in addition to the taxes levied at all the other stages. As a result, by the time a finished product reached the end consumer, it was unclear what was the actual cost of the product and how much tax was applied. This tax cascading made the previous structure complex, inefficient, and non-transparent.

The GST has integrated most indirect taxes, and applied a single tax on the sale and purchase of goods and services, with deductions available for taxes paid during previous supply chain stages. This simplified tax structure is easy to set up and track for both government authorities and business owners, which in turn has filled the gaps in tax compliance.

What taxes did GST replace?

There were several indirect taxes that were collected by both the state and central governments on every purchase and sale.

Below is a list of central taxes that the GST has replaced:

  • Central Excise Duty
  • Additional Excise Duties
  • Excise Duty (Medicinal and Toiletries Preparation)
  • Service Tax
  • Additional Customs Duty, commonly known as Countervailing Duty (CVD)
  • Special Additional Duty of Customs
  • Surcharges
  • Cesses

Here’s a list of state taxes that has been replaced by GST:

  • VAT / Sales Tax
  • Entertainment Tax (unless it is levied by the local bodies).
  • Luxury Tax
  • Taxes on lottery, betting, and gambling
  • State Cesses and Surcharges that are related to the supply of goods and services
  • Entry Tax, not in lieu of Octroi

How does the GST work?

  • The GST follows a dual model with two components: the Central GST (CGST), levied by the Centre, and State GST (SGST), levied by the State. The CGST and SGST is treated as separate entities. As a third statute, for the inter-state transaction of goods, the Integrated GST (IGST) is collected by the Centre from the buying state.
  • The CGST and SGST is applied to all transactions of goods and services, except for exempted goods and transactions whose values are below the prescribed threshold limit.
  • The CGST and SGST is paid to the Central and State accounts respectively. Tax returns should be filed with the appropriate CGST and SGST authorities respectively.
  • The dealers and manufacturers who pay the CGST are given input tax credit (ITC), or credit for taxes they paid on their purchases. This credit can be used only against the CGST paid. The same is applicable in the case of the SGST. The credits of the CGST cannot be used for paying the SGST, or vice versa.
  • Taxpayers are given a unique identification number linked to their PAN cards to facilitate income tax information exchange and business tax compliance.

How are Inter-state transactions of goods and services handled under the GST?

For inter-state transactions, the Centre will levy an IGST, or Integrated GST, which is the average of the CGST and SGST rates. The seller would apply his IGST, CGST, and SGST credits that he received with the purchases he made, and then pay the remaining IGST on the value added. The selling state would then transfer its SGST credits that were provided when it paid the IGST to the Centre. The supplier can then claim this IGST credit while selling in his state. The Centre would then transfer the IGST credits to the buying state when it pays its SGST. The Central Agency will act as the clearing house, which will verify the tax claims and notify the appropriate state governments about when to transfer funds.

Which goods and services are not covered by the GST?

The previous taxation that has applied to the following goods and services are not fully or partially covered by the GST:

  • Alcohol for human consumption (State Excise plus VAT will continue to be applied)
  • Electricity (Electricity Duty)
  • Real Estate (Stamp Duty plus Property taxes)
  • Tobacco products (GST plus Central Excise will be applied)

How are imports handled under the GST system?

A combination of both the CGST and SGST will be applied to the import of goods and services into India. The tax benefits and tax offset credits will be given to the state which consumes the imported goods and services.

In the case of international exports, custom duties will continue to apply. The Special Additional Duties (SAD) and the Additional Duty of Customs will be replaced by the GST.

What are the different GST rates?

The GST is comprised of four-tier tax structure, which includes a base rate of 5% on goods like edible oil, spices, tea, coffee, etc., standard rates of 12% on products like computers, processed food, and cycles, an 18% on most services as well as items such as soap, shaving razors, etc., and a higher rate of 28% on demerit goods like SUVs, tobacco products, and aerated drinks. The goods coming under the 28% tax bracket attracts additional cess on top of GST. Apart from this, about 50% of the products in the consumer basket, such as food grains, are zero rated.

What is the exemption limit in the GST?

Businesses in India that have a turnover revenue of 20 lakhs and above will have to register and file for GST returns. Businesses in the north east and hill states with a turnover revenue of under 10 lakhs will be exempt from filing the GST.

How will businesses owners benefit from the GST?

  • Business owners can sell more in other states without worrying about interstate transaction costs. There will be no entry tax under the GST, which will save money and time spent at check posts at each state border.
  • Businesses can enjoy reduced tax burden and operating costs. With Input Tax Credits under the GST system, there is no tax cascading. Business owners can offset the tax paid on the purchase of goods and services with the tax on the supply of goods and services.
  • It will be easier for business owners to comply with tax laws under the GST. Previously there were up to 15 different legislatures with different definitions, tax rules and regulations. GST has replaced several of these taxes, simplifying the compliance process for businesses.

How will the GST impact customers?

Under the previous system, from the production to the consumption of a product, there were multiple taxes that were applied without the provision of tax credits. As a result, the price of the final product was increased, causing the customer to pay more. The GST has absorbed many of the previous taxes into a single tax, while also providing tax credits. This has reduced the price of final products for end consumers.

How are work contracts treated in GST law?

Under the previous regime, work contracts like building construction or repair and maintenance were treated as supplies made partly in goods and partly as service. And so, they attracted more than one tax including VAT (for goods supplied), service tax (for services rendered) and also a Central Excise Duty (wherever goods were manufactured). Today, such contracts are treated as supply of services under the GST and are taxed according to the primary service being supplied by the contractor.

Note: A work contract is treated neither as mixed supply nor as composite supply.

Is HSN/SAC code compulsory in all the invoices?

The Harmonized System of Nomenclature (HSN) is an internationally accepted method of naming, classifying and identifying products; each identified by a 2-8 digit code depending on your aggregate turnover. Check out the table below to learn more:

Aggregate Turnover of Taxpayer (in rupees)No of digits on HSN codes
< 1.5 croresOptional
1.5 to 5 crores2 digits
Above 5 crores4 digits
Imports or exports8 digits

What information is mandatory on a tax invoice? 

As per rule 7 (referenced to section 31), you as a registered taxpayer are required to specify the following information on all your tax invoices: 

  • Your name, address and GSTIN. 
  • An unique invoice number of no more than 16 characters. 
  • Invoice date. 
  • If you are selling your goods or services to a registered taxpayer, then include their name, address and their GSTIN or UIN. 
  • If your customer is an unregistered person, then include their name, billing address, shipping address along with the name of State and its code, (especially if invoice amount is above fifty thousand rupees) 
  • Specify the HSN code for goods and SAC for services sold. 
  • Add a description of goods or services sold. 
  • Specify the quantity of goods sold on the invoice. If you are into exports, then specify Unique Quantity Code of items involved. 
  • Mention the total value of supply of goods and/or services sold. 
  • To calculate taxes, you are required to declare the taxable value of goods and/or services sold including discount or abatement, if any.
  • Specify the appropriate GST rates against items and services (CGST, SGST/UTGST, IGST, and cess); 
  • Calculate and specify the amount of tax charged against every line item or service on the invoice. 
  • It is also very important to declare the place of supply (the state where you make your deliveries against this invoice). 
  • You are also required to specify the shipping address of the customer whenever it is different from the place of supply (location of the customer); 
  • Also mention whether the tax mentioned on your invoice is payable on reverse charge basis (where the customer pays the tax directly to the government on your behalf).  
  • Finally, the invoice must contain your signature (physically or digitally). 

Who are GSPs?

GSPs or GST Suvidha Providers are software and technological companies that have signed an agreement with the GSTN and are licensed to access the GSTN directly. GSPs build applications (like accounting software and GST filing applications) through which registered taxpayers and Tax Return Preparers (TRPs) access their GST accounts and file returns. 

GSPs are required to meet a lot of eligibility conditions including legal and security measures laid under their respective laws before they are given a license. Kindly refer to the GSP eligibility requirements laid out by the government to learn about them.

What is EVC? 

EVC or Electronic Verification Code is a 10 digit alphanumeric code/OTP that is required for validating a GST return. This can be generated from the GST portal by logging into your account and accessing the return filing page. Each EVC is valid for 72 hours.

How do I map my Aadhar and PAN information?

Under our tax laws, every taxable person in India is required to link their Aadhar information with their PAN. Here’s how you can do it very quickly and for free:  

  • Open a browser on your computer and visit this page.
  • Enter your PAN, Aadhar Number and your name (as on your Aadhar card).
  • If you do not have your full birth date on your Aadhar card then click on the checkbox near the option - I have only year of birth in Aadhar card.
  • You can either enter the captcha code shown on the page or request for an OTP to your registered mobile number to authenticate your request.
  • Click the Link Aadhar button to finish the process. 

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