GST: The illustrative guide to how transactions will take place after tax reform

India shall adopt a Dual GST model, which means that the GST would be administered by both the Central and the State Governments. The dual GST model and the taxes levied on each kind of transaction can be seen as below:

The GST to be levied by the Centre on intra-state supply of goods and/or services is Central GST (CGST) and that by the States is State GST (SGST).

On inter-state supply of goods and services, Integrated GST (IGST) will be collected by Centre. IGST will also apply on imports.

Read Moneycontrol's full coverage on GST here

GST is a consumption based tax i.e. the tax should be received by the state in which the goods or services are consumed and not by the state in which such goods are manufactured. IGST is designed to ensure seamless flow of input tax credit from one state to another. One state has to deal only with the Centre government to settle the tax amounts and not with every other state, thus making the process easier.

Illustration I: Selling within the state

Suppose a manufacturer in Pune sells goods to dealer in Nasik worth Rs 10,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%. The tax collected is Rs. 1800; Rs. 900 will go to the central government and Rs. 900 will go to the Maharashtra government. Now the dealer sells the goods to customers in Mumbai for Rs 15,000. Here again CGST at 9% and SGST at 9% will be levied. The sale price increases and so does the tax liability. In case of resale, the credit of input CGST (Rs 900) and input SGST (Rs900) is claimed as shown, and the remaining taxes go to the respective governments.

Illustration II:  Selling within the state and then outside the state

Suppose a manufacturer in Pune sells goods to dealer in Nasik worth Rs 10,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%, in such case, the tax collected is  Rs. 1800 - Rs. 900 will go to the central government and Rs. 900 will go to the Maharashtra government. Now the dealer sells the goods to customers in Bangalore for Rs 15,000. The applicable GST now will be IGST – at 18% (IGST will be the sum of CGST and SGST) this will work out to Rs 2700. But the dealer will be able to take the input tax credit – CGST (to the tune of Rs 900) and SGST (to the tune of Rs 900).

Against IGST, both the input taxes are taken as credit. But we see that although SGST never went to the central government, the credit is still claimed. This is the crux of GST. Since this amounts to a loss to the Central Government, the state government compensates by transferring the credit to Central Government.

Illustration III: Selling outside the state and then within the state

Suppose a manufacturer in Pune sells to a dealer in Bangalore, goods worth Rs 10,000. The applicable GST is IGST at the rate of 18%. The manufacturer collects Rs 1800 and this will go to the Central government. Now the dealer sells it to customers in Mysore for Rs 15,000. The applicable GST will now be CGST (at 9%) and SGST (at 9%).

Against CGST and SGST, 50% of the IGST — that is, Rs. 900 is taken as a credit. But we see that although IGST never went to the state government, the credit is still claimed against SGST. Since this amounts to a loss to the state government, the Central Government compensates the state government by transferring the credit to the state government.

How should one avail of the tax credit?

Availability of Input Tax Credit (ITC) at various levels is one of the most important features of GST.

For claiming of the ITC, billions of buyer and seller invoices will have to be uploaded and matched every month. The Common GST Portal which has been developed by GSTN (Goods and Services Tax Network) will handle this task on the basis of invoice level data filed as part of return by all the taxpayers.

In the case of Inter-state supplies where goods or services will be supplied from the state of origin to the state of consumption, the taxation will be done accordingly, as GST is a destination based tax. The claim of IGST and the utilisation of credit will be done on the basis of the returns filed on the GST portal.

So every entity with an annual turnover of greater than Rs 20 lakhs will have to be registered and every transaction detail will have to be uploaded in the portal.

Watch: What does GST mean for you?

So if a good or service is procured from an entity with annual turnover of less than Rs 20 lakhs GST has introduced a reverse charge mechanism  -  the buyer is the responsible person to pay the GST tax because the registration was not taken from the department by the seller.

Here the buyer should not claim any input tax credit but GST will be collected from him on his sale. 

What happens to smaller entities?

As the above-mentioned process highlights – GST will entail significant amount of compliance work to start with. Hence, companies will have to hire the right kind of skill set and be ready with the IT infrastructure prior to the roll out.

Small businesses need not fret. The GST System will have a G2B portal for taxpayers to access the GST Systems. However, that would not be the only way for interacting with the GST system as the taxpayer may choose third party applications, which will provide all user interfaces and convenience via desktop, mobile, other interfaces, to interact with the GST system. All such applications are expected to be developed by third party service providers who have been given a generic name, GST Suvidha Provider or GSP.

(This is the first of a two-part series to make our readers understand the basics of GST)