India and GST: The New Tax Regime

Dec 31, 2017 | 11 months ago | Read Time: 2 minutes | By iKnowledge Team

According to the Collins Dictionary, ‘Tax is an amount of money that you have to pay to the government so that it can pay for public services.’

India and GST: The New Tax Regime

In India, the tax structure was divided into a three-tier hierarchy. The Central government, the state governments, and the local municipal bodies made up the trifecta. All the three bodies were dedicated to the collection of two types of taxes—direct tax and indirect tax.

  • Direct- Levied directly on individuals and corporates. Examples include income tax, wealth tax, gift tax. Out of all, income tax is the most popular. Deducted from the source, non-payment of income tax is the most common tax fraud in India.
  • Indirect-These taxes are not levied in a direct fashion. Instead, the government collects these taxes via intermediaries who sell goods and services. Some examples of indirect taxes were Value Added Tax(VAT), Octroi Tax, Service Tax.

However, in 2017, the Government of India passed the Goods and Service Tax (GST) Act on 29th March 2017 and it came into effect on 1st July 2017. This Act was created so as to subsume all indirect taxes in India.

Simply put, GST is levied on goods and services. It is a multi-stage tax—levied on each level of the supply chain whenever there is a value addition. For example:

  • The farmer produces cotton. The manufacturer buys it in large quantities to prepare shirts.
  • He stocks the shirts at a godown.
  • Retailer buys them at and showcases them at his stores.

The first and third point saw value addition. When cotton became shirts and retailer bought the shirts to sell them. GST is applied at these points.

Another notable feature of the GST is that it is destination based. It means the government of the place where the purchase of a good or service is made can collect GST. This means if a shirt is manufactured in Delhi but sold in Mumbai, it is the Maharashtra state government which has the authority to levy the Goods and Services Tax.

Who levies GST?

Central Goods and Services Act (CGST) and State Goods and Services Act (SGST) is levied when the supplier and buyer of the goods and services are within the same state. CGST goes to the Central government while SGST goes to the state government.

The Integrated Goods and Sevices Act is levied when the sale of goods and services happens on an interstate basis.

The GST was introduced to streamline India’s tax collection. Only time will tell if this investment pays the much-desired dividend.

Get a detailed explanation on tax sections under 80C, 80CCC & 80CCD here.

Want to know your taxes? Access our easy to use tax calculator, and plan your finances.


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