The Goods and Services Tax (GST) system has been a gamechanger in India’s tax landscape. By replacing the number indirect taxes it has streamlined and simplified how businesses pay taxes on the purchase and supply of goods. Here we understand the main features of GST and how it enables businesses to avoid the cascading effect of multiple indirect taxes. We also understand how it functions as a multi-stage, destination-oriented tax and how GST features are designed.

Salient features of GST (Goods and Services Tax)

The GST system has some distinct features that not only makes it popular but also explains its growing success. By merging multiple indirect tax in GST it brings ease of doing business and widens the tax base. Here we take a look at some of the key GST features.

1. Single, unified indirect tax system in GST

Of the multiple features of the GST system in India, the most important is how it has replaced multiple indirect taxes and unified India’ tax structure. Under the GST regime, businesses no longer have to pay different indirect taxes like VAT, excise duties, sales tax or service tax. It is all merged as a single, comprehensive tax. This not only streamlines the process but also enhances compliance.

Moreover, under this system, goods and services are taxed in the same framework. That is, taxation on all inward and outward supply of goods and services follow the same workflow.

A manufacturer for instance, will have to pay GST when purchasing raw materials, but can claim input tax credit on the same during filing returns. This means that not only is tax paid a single time, but it also reduces the burden of cascading taxes on the end customer.

2. Turnover based registration

GST registration is based on the business’s annual turnover. Currently, the GST registration annual turnover threshold limit is set at ₹40 lakhs for goods and ₹20 lakhs for services. The number is further reduced to ₹20 lakhs (goods) and ₹10 lakhs (services) in annual turnover for businesses in north eastern states (special category states).

This has been instrumental for small businesses as it enables them to focus on their business operations. Considering that small businesses often lack sufficient resources, the exemption from GST registration allows them the flexibility to operate without the challenges of complex taxation rules.

3. Destination based tax

GST is a destination-based tax. That is, the tax is collected where the goods are consumed and not where they are produced. Since taxation is at the final point of consumption it increases revenue for the destination state.

For example, if a good is manufactured in Karnataka, but consumed in Maharashtra, the revenue from GST will accrue to Maharashtra. That is, at 18% GST on goods valued at ₹10,000 (i.e., ₹1,800), the revenue from GST will be shared equally between the center (CGST) and the state of Maharashtra (SGST) at ₹900 each. (Also read: Different GST types)

This GST feature is most beneficial for states that are high consumers of goods and services but have low production capabilities. This enables to distribute tax income based on where the goods are actually being used.

It also prevents leakage of taxes and gives every state the fair share of revenue generated, making state-growth possible.

4. Multiple tax slabs

Another top feature of GST is that it follows a 4-tier tax structure. That is, not all goods and services are taxed equally. While goods that are considered essential and basic are either taxed as NIL or at minimum rates, other items that are viewed as luxury items (or goods whose consumption the government is trying to reduce) is taxed at premium rates.

This brings uniformity across taxes on goods and services across the country and makes it easier to conduct business.

Here’s what the GST 4-tier tax structure looks like:

5. Input Tax Credit system

The introduction of Input Tax Credit under GST has been a prominent feature of GST system in India. It gives businesses the option to claim credits on GST amount paid during purchases (inputs) thereby lowing their overall tax burden. This also ensures that tax on goods/services is charged on the value added at every stage.

For instance, consider a steel railings manufacturer buying steel (raw material) for manufacturing the railings. GST on steel is 18%. So, if the raw material price is ₹1,00,000, and the manufacturer has to pay 18% GST on it, the total amount stands at ₹1,18,000 (where ₹18,000 is the GST paid on raw material).

During the sale of the railings to the end customer, 18% GST would be charged. So, if the sale price is ₹1,50,000, the actual sale price will be ₹1,77,000 (of which ₹27,000 is GST).

This is where ITC comes into the picture. When filing returns, the manufacturer can claim the initial ₹18,000 paid as GST on raw materials during purchase. Thus only ₹9,000 as remit to the government will be needed.

As can be seen, this reduces tax burdens, improves compliance, and creates a more efficient tax system.

*Image fore representation purpose only

6. Reverse Charge Mechanism

Another essential feature of GST system is Reverse Charge Mechanism (RCM). Under this system, the receiver of goods and services is liable to pay taxes directly to the government. This system enables the government to collect taxes especially from the informal sector.

For example, Company A (GST registered business) buys goods from a small business for ₹10,000. The GST applicable rate is 5% which will ideally raise the amount to ₹10,500 (of which ₹500 is GST). However, under RCM, this tax will not be paid by the small business, but Company A will pay ₹500 directly to the government.

As can be understood, this mechanism ensures that the tax is collected even if the supplier is outside the GST framework (e.g., non-GST registered business). This helps to reduce tax evasions as all transactions are being captured. It also streamlines compliance making it obligatory for both GST-registered and non-registered businesses to follow GST rules.

7. Nation-wide, unified markets

What makes the GST system unique is how it removes challenges of doing business across state borders. That is, it removes the barrier of paying taxes multiple times across state borders and creates a single national market for conducting business transactions.

Let’s understand this with the example of the impact of GST on logistics. Before the implementation of GST, logistics companies and transporters had to pay taxes at state entry borders (check posts). This often varied as states levied taxes at different rates. This made the process complex and multiplied the impact of taxes.

With the implementation of GST’s single, unified tax structure, the need to pay inter-state taxes is removed. This has not only helped businesses to lower their logistics costs, but also save time and optimize routes.

8. Invoice matching

When considering the top features of GST systems, invoice matching is another one that stands out. Tax reporting under GST is designed in a way that supper invoices must match details provided by the buyer/recipient.

So, a supplier must update GSTR-1 with all sales made by the business. Details of the same are updated in GSTR-2A in real time. When the buyer/recipient files GSTR-3B the data must match GSTR-2A details to ensure that details on transactions are correctly reported and the business can claim ITC under GST (i.e., review if GSTR-2B). (Also read: Difference between GSTR-2A and GSTR-2B)

In order for the GST to accept the data provided by both parties, it’s essential for supplier data to match buyer data. In case of mismatches or discrepancies, the system flags the error, and the concerned party is intimidated to make the required corrections. Delay in rectifying errors can lead to fines and penalties, or even cancellation of GST registration.

Ushering in a new era with GST systems

GST features are designed to make tracking of transactions easy, efficient, and quick.

• It is driven and conducted entirely online to ensure lesser cases of frauds, tax duplicity and even evasion
• It boosts the economy by ensuring stable, accurate, fair revenue collection across different states
• It reduces tax burdens and makes it easier for business to operate inter and intra state thereby creating a competitive nation-wide market

In order to promote GST compliance and enable more businesses to adopt the GST system, the CBIC has set up GST Seva Kendra centres across India.

*This article is for information only. For more details please visit the official GST website or consult with a GST practitioner or CA or tax consultant for professional advice.