GST Tax Explained: Rates, Exemptions, and FAQs

The Goods and Services Tax (GST), introduced in India in 2017, is a major indirect tax reform that transformed the country’s tax structure. Before GST, a complex web of state and central taxes, such as VAT, excise duty, and service tax, applied at different stages of production and distribution. GST streamlined this process by bringing most goods and services under a single tax umbrella.

What is GST?

GST stands for Goods and Services Tax. It’s a comprehensive indirect tax levied on the supply of goods and services across India. The primary objective of GST is to streamline taxation, eliminate cascading effects, and create a seamless nationwide market.

Understanding the GST Mechanism

GST works on a multi-tier system with different tax slabs (0%, 5%, 12%, 18%, and 28%) assigned to various goods and services. The tax is calculated at each stage of the supply chain, but businesses can claim credit for the GST they paid on purchases (input tax credit or ITC) to avoid double taxation.

Let’s see this with an example:

• A manufacturer buys raw materials worth ₹100 (assuming 18% GST). They pay ₹18 as GST but can claim this as ITC.
• The manufacturer produces goods with a final price of ₹150 (including a profit margin). They add 18% GST (₹27) on the final price.
• The manufacturer pays a net GST of ₹9 (₹27 total GST – ₹18 ITC claimed).

This mechanism ensures that only the value added at each stage is taxed, reducing the overall tax burden on consumers.

Tax Slabs

GST operates under five tax slabs:

• 0%: Essential items such as food grains, milk, and healthcare services fall under this category.
• 5%: Items of mass consumption like footwear, textiles, and small restaurants.
• 12%: Processed foods, mobile phones, and financial services.
• 18%: Most goods and services, including electronics, cosmetics, and restaurant services.
• 28%: Luxury items, automobiles, and premium services.

Here’s a sample table illustrating common goods and services under each slab:

Calculating GST

To calculate GST, follow these steps:

• HSN Code and Service Code: Identify the HSN code for goods and the Service Accounting Code (SAC) for services. These codes determine the applicable GST rates.
• Intra-State vs. Inter-State: For intra-state transactions (within the same state), pay CGST (Central Tax) and SGST/UTGST (State/Union Territory Tax). For inter-state transactions, pay IGST (Integrated GST).
• Exemptions and Thresholds: Check if your supply qualifies for exemptions or falls under the threshold limit. If exempted, no GST is applicable.
• Tax Calculation: Multiply the applicable GST rate by the supply value (goods or services) and divide by 100 to yield the tax amount payable.

Exemptions under GST

Specific categories of goods and services are entirely exempt from GST. These exemptions make essential items and services affordable, particularly for low-income groups. Examples include fresh agricultural produce, primary healthcare, and public transportation services.

It’s important to distinguish between exempt, nil-rated, and zero-rated supplies under GST:

• Exempt: These supplies are not subject to GST, and ITC cannot be claimed.
• Nil-rated: These supplies are taxed at 0% GST, but ITC can be claimed.
• Zero-rated: This category applies explicitly to exports effectively outside the GST system. ITC can be claimed on these supplies.

GST has simplified the Indian tax system, making it more transparent and efficient. Businesses benefit from the ITC mechanism, and consumers generally enjoy a reduced tax burden on essential items. However, businesses must stay updated on GST rates, exemptions, and the registration process to navigate the system effectively.

FAQs on GST

Who needs to register under GST? Explain the Threshold Limit for GST registration.

Businesses with an annual turnover exceeding a specific limit (threshold limit) must register under GST. This limit varies depending on the location of the business:

• Normal States: Registration is mandatory if your aggregate turnover in a financial year exceeds Rs. 40 lakh.
• Special Category States:  Jammu & Kashmir, North-Eastern states, Uttarakhand, and Himachal Pradesh. The threshold limit for registration in these states remains Rs. 20 lakh.

Important Note: Even if your turnover is below the threshold limit, registration becomes mandatory if you:

• Make interstate supplies (sell goods/services to other states).
• Supply goods through an e-commerce marketplace (even as an unregistered seller).
• Opt for the composition scheme (a simplified compliance scheme for small businesses).

What are the benefits of GST registration?

There are several advantages to registering under GST:

• Claiming Input Tax Credit (ITC): You can claim credit for the GST paid on purchases (inputs) used to make taxable supplies, reducing your overall tax liability.
• Wider Market Reach: A GST registration allows you to legally sell and purchase goods and services across India without facing state-level tax barriers.
• Improved Brand Reputation: A GST registration portrays your business as professional and compliant, potentially boosting customer confidence.
• Eligibility for Certain Government Schemes: Registration may be required to participate in specific government schemes or avail tax benefits.

How to file GST returns?

GST return filing depends on your business type and turnover. Here’s a simplified overview:

• There are different types of GST returns, like GSTR-3B (summary return) and GSTR-1 (sales return).
• Filing frequency varies based on your turnover (monthly, quarterly, or annually).
• The process involves filing returns electronically on the GST portal.
• The official GST website and chartered accountants can provide detailed guidance on return filing.

What are the documents required for GST registration?

To register for GST, you’ll need the following documents:

• PAN card of the business entity.
• Aadhaar card of the authorized signatory.
• Proof of business registration (e.g., company registration certificate).
• Proof of business place (e.g., rent agreement, electricity bill).
• Bank account details linked to the business.

What are the penalties for non-compliance with GST?

Non-compliance with GST regulations can attract penalties like:

• Late fees for delayed filing of returns.
• Interest on unpaid tax dues.
• Monetary penalties for non-registration or non-payment of GST.
• Potential business disruption due to registration cancellation or legal action.

How does GST affect online sellers?

Online sellers need to be particularly aware of GST provisions:

• Registration: If your turnover exceeds the threshold limit or you make interstate supplies, you must register under GST.
• Place of Supply Rules: The place of supply for online sales is determined by the buyer’s location. This impacts the applicable tax rate (CGST & SGST for intrastate or IGST for interstate).
• Tax Collection at Source (TCS): E-commerce marketplaces collect TCS (a tax collected at sourcae) on online sales at a specific rate.