In India, there are many direct and indirect taxes that you have to pay. Direct taxes are those which are directly paid to the government while Indirect tax is paid for purchases. Direct tax is liable for rich peoples or peoples with high income, peoples with less income are not liable for some direct taxes such as Income tax. But in case of Indirect taxes, customer or buyer has to pay tax on purchases it does not matter whether he/she is poor or rich.
- TYPES OF DIRECT AND INDIRECT TAXES
- Types of GST
- GST Tax slabs in India
- Advantages & Disadvantages of GST in India
- How GST is calculated?
- Who needs GST registration?
- What is the importance of GST in India?
- Previous tax system Vs GST
- Conclusion
Customer purchases many things in a day so, it is not possible that customer pay tax directly to the government. That’s why consumers pay tax on purchases to the supplier and then after a certain period supplier deposit it to the government. It becomes difficult for new businesses & startups to understand this complex tax system. It becomes more difficult when it includes constant changes with each financial year.
TYPES OF DIRECT AND INDIRECT TAXES
| DIRECT TAXES | INDIRECT TAXES |
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But know things change with GST which is also known as Goods & Service Tax.
Example: Rohit starts his new business in Jammu for which he needs raw material from Japan while importing it will first land a port and then travel to the manufacturing center at Delhi and then passes through various states. Now when Rohit will analyze the various taxes ( vat, sales tax, custom duty, etc.) which he needs to pay in just transporting the material to his business center. This will become very difficult for him to manage this complexity. In old tax structure, Rohit has to pay custom duty along with the shipping charges & he has to pay many other taxes to the central and state government like central excise duty, service tax, central sales tax, VAT, etc. It is very complex when he has to pay tax on taxes that are already collected by the government.
To get rid of this headache Goods & service tax is introduced in India, which means trade & industry has to pay a single indirect tax instead of paying the number of taxes. Such as, sales tax, purchase tax, service tax, etc will be absorbed in GST. There is no effect on direct taxes by GST. GST only affects the indirect taxes. GST has replaced all indirect taxes.
Types of GST
There are three types of GST in India:
- CGST stands for central goods & service tax and goes to the central government.
- SGST stands for state goods & service tax and it goes to the state government.
- IGST stands for integrated goods & service tax and it is shared between the center and state government on inter-state supply of goods & services.
CGST and SGST is applicable when goods are supplied within the state while IGST is applicable when goods are supplied outside the state.
Seller collects both SGST & CGST from the buyer. SGST goes to the state government while CGST goes to the central government. This happens in intra-state transactions. But in inter-state transaction IGST is collected from the buyer and then it goes to the importing state.
Intra-state supply & Inter-state supply:
| Intra-state supply (sale within the state) | Inter-state supply (sale between different states) |
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It means that tax rates will be the same CGST + SGST = IGST.
GST Tax slabs in India
There are about 2000+ items which are categorized under different tax rates. The different tax rates are- 5%, 12%, 18%, 28%.
| Nil tax: Goods |
Services |
| Fresh meat, butter, honey, curd, bread, fish chicken, salt, bhindi, stamps, eggs, milk, flour, fresh fruits, printed books, newspaper, bangles, etc. | Hotel, lodges with bill price below Rs.1000/- |
| Tax slab 5%: Goods | Services |
| Cream, skimmed milk powder, paneer, frozen vegetables, tea, coffee, rusk, pizza, bread, coal, kerosene, medicines, etc. | Transport services (railway, air), small restaurants. |
| Tax slab 12%: Goods | Services |
| Frozen meat, butter, ghee, cheese, dry fruits in packed form, animal fat, fruit juices, ayurvedic medicines, tooth-paste, sewing machine, umbrella, coloring and picturing books, | Non-Ac hotels, business class air tickets, fertilizers work contract. |
| Tax slab 18%: Goods | Services |
| Sugar, pasta, cakes, corn-flour, pastries, preserved food, camera, mineral water, soups, jams, souces, tissues, instant food mixes, tampons, monitors, notebook, steel products, etc. | Ac hotels, telecom services, IT services, branded garments, financial services. |
| Tax slab 28%: Goods | Services |
| Chewing gum, chocolates not containing cocoa, waffles & wafers coated with cocoa, pan masala, aerated water, paint deodorants, shaving cream, hair shampoo, sunscreen, weighing machine, dishwasher, automobiles, etc. | 5-star hotels, cinemas, etc. |
GST tax system reduces the taxes, multiple taxable points. This forms a uniform tax system for a common market.
Advantages & Disadvantages of GST in India
| Advantages | Disadvantages |
| Discarding the cascading effect of taxes: reduced number of taxes & it is a single tax for the whole of India. | Higher tax burden on SME’s: Small and medium enterprises. |
| Elimination of multiple layers of taxation & avoidance of double taxation. | Online taxation system. |
| Common National Market: One India one market. | Requires complete knowledge to file GST online, an inexperienced person cannot file GST. |
| Ease of running a business: cost of running a business will be lower. | Website issues. |
| Regulate unorganized sectors. | Lack of computer knowledge. |
| Transparent tax. | Difficult to understand the rules of GST or Lack of detailed clarity in rules. |
| Eliminates the duplicity of information. | |
| Transfer of goods from one state to another becomes easy. |
How GST is calculated?
If goods & services are sold at Rs.2,000 and it comes under the 12% GST tax slab, then the net price will be calculated as:
= 2000 + (2000*(12/100))
= 2000 + 240 = Rs. 2,240.
Who needs GST registration?
The businesses have aggregated turnover of Rs.20 lakhs in a financial year are required to get GST registration and liable to pay GST while the businesses have aggregated turnover less than Rs.20 lakhs do not require to obtain GST registration and not liable to pay GST.
What is the importance of GST in India?
- To boost India’s economy.
- To convert India into a single market.
- To provide a uniform tax system in India by reducing the number of indirect taxes.
Let’s have an example to understand the importance of GST in India:
The businessman A sells goods to another businessman B after charging sales tax, and then, B sells goods to the person C after charging the sales tax. After that, when B will calculating tax liability, he will find tax on tax. So, GST becomes crucial to avoid tax on taxes.
Previous tax system Vs GST
- The previous tax system such as VAT applied to the sale of goods while GST is applicable on both goods & services.
- VAT was quite complicated as compared to the GST.
- VAT was paid offline whereas GST is paid online.
Conclusion
GST has been introduced in India to mitigate the cascading effect of the number of indirect taxes, to make corruption-free tax administration. GST is the biggest indirect tax reform and provides a constant tax system. It is the need of time and organizations to run their business with easiness. It lowers the cost of doing business. GST has a great impact on the “Make in India” in the growth of the domestic manufacturing sector as well as the movement of foreign investment to the sector. There are 30 markets in India, which has been now converted into a single market with GST. It is a single tax for the whole of India i.e., One India One Market.