GST: An introduction to the Goods and Service Tax in India

Published Jul 17, 2017 By Manisha Sing

Goods and Service Tax or GST is an indirect form of tax which is levied on all forms of goods and services at various stages of their production or completion. It is a more comprehensive form of tax as it has replaced most forms of taxes except a few indirect taxes. Even if it is a multi-staged form of tax, GST is supposed to be returned to the vendors at every stage except the final consumer. GST is split into 5 slabs- 0%, 5%, 12%, 18% and 28%. These slabs apply to various kinds of products and services. Certain product segments are not taxed under GST and have a separate taxing system for them; these products are alcoholic drinks, electricity and petroleum goods and services. There are special GST rates for some products like jewelry raw materials. Rough and semi-precious stones have a GST rate of 0.25% and gold has 3%. Similarly, other luxury items also carry the topmost tax slab of GST on them.

GST has made the tax system much simpler since its implementation on July 1, 2017. Replacing multiple taxes imposed upon by multiple state governments and the central government, GST has reshaped the Indian economy.

The GST council is a team of the finance ministers of all states including the central finance minister.

The evolution of the tax system in India

The tax system hasn't been the same since India's independence. It has evolved to keep up with changing times and the economy. The reform of the tax system started in 1986 when the Modified Value Added Tax was introduced. Later on, Prime Minister Narasimha Rao initiated the discussion to implement VAT or Value Added Tax on a state level. On 1999, Prime Minister Atal Bihari Vajpayee created a committee to design the GST model. The committee was led by the finance minister of West Bengal Asim Dasgupta. In 2011, after the defeat of the CPM government in Bengal, Asim Dasgupta decided to resign from his position as the head of the GST committee. He, however, mentioned that 80% of the work was done in terms of GST modeling. With a lot of changes happening in the political scenario, finally, in May 2016, a constitutional bill was passed which made GST a legit part of the Indian tax system. The GST laws were reviewed by a 21 member council who approved the Central Goods and Services Tax Bill (CGST), the IGST or the Integrated Goods and Services Tax Bill, the Union Territory Goods and Services Tax Bill or the UTGST and the Bill to compensate to the states. The J & K state legislature passed its GST act on July 2017 to ensure that the entire nation was following a single taxing system

The Launch and the Controversy

The launch of GST took place at midnight on July 1, 2017. The President and Government of India launched it. The launch event was attended by VIP guests from both business and entertainment backgrounds. The opposition, however, chose to boycott the event as they believed that GST would not favor the middle-class Indian citizens. The political parties that boycotted the GST launch event include the Indian National Congress, Trinamool Congress, the Communist Parties of India and the DMK. They believed that GST is just a way to rebrand the already existing tax system. They also stated that GST would raise the tax rates, which would create a financially tricky scenario for the middle class and the lower middle class. They were totally against the idea of increasing the tax rates on daily use products and services.

There was much political drama already going on before the launch of GST. During the GST meet, when the government proposed lower tax rates for specific slabs, the opposition still didn't agree to support the GST tax system.

It was essential for the opposition parties to state some critical reasons to boycott the GST system and the entire launch event, which they eventually didn't. GST has come a long way since its launch, and in 2019 now it has come up with an even more upgraded format to simplify the entire tax filing process for various business vendors with the efficient GST billing software in the market.

The dual GST Modely

Once implemented, GST replaced all other forms of taxes which includes central excise duty, surcharges, custom duties, state-level VATS, and Octroi. GST was also imposed on any forms transaction which involved buying, selling, import of goods, barter of goods or services, and lease. A single GST tax also replaced the taxes imposed on inter-state goods transportation.

However, a dual GST model was implemented, which meant that both central and state governments would be able to administer the GST tax system. Any transaction happening within a state has CGST, i.e., Central Goods and Service Tax and SGST, i.e., State Central Goods and Service Tax imposed on them. Integrated Goods and Service Tax or IGST is imposed on any inter-state transactions. IGST complicated things for state governments as they could no longer collect the tax directly from the central government as before

The E-way bill

Just like courier waybills, an e-way invoice is an electronic permit for shipments. Instead of filing for GST for every delivery vehicle out there, all that businesses had to do was generate an online invoice for the purchases. For every inter-state movement of goods, an e-bill was mandatory for actions upto 10km with shipments valued upto 50000INR. It is a smart technology solution that makes everything paperless and also trackable. The Billing Software reduces frauds and financial miscalculations. It was introduced in February 2018 but was withdrawn due to technology glitches. At present, an e-way bill is mandatory and can be in digital or printed form. The tax officers match the e-way bill details with the shipment details to verify the delivery. Pin code and a transporter Id has also been made mandatory. The GSTN has come up with a system that can process up to 75 lakh e-way bills every day.

Reverse charge mechanism or the RCM

Reverse charge mechanism is an interesting and advanced process in which the receiver of the goods or services pays the tax on behalf of unregistered vendors. This makes the receiver eligible to apply for Input Tax Credit. From January 29, 2019, the Government of India implemented RCM and got exemptions up to 5000INR removed.

The GST Council

At present, the Goods and Services Tax Council has 33 members. This governing body is led by the Union Finance Minister and has the authority to modify or procure any rule or regulation related to the Goods and Service Tax. The council is responsible for any change in laws or rates of the various GST slabs. Currently, the council is led by the Union finance minister Miss Nirmala Sitharaman, and she has all state finance ministers in her chamber.

The Goods and Services Tax Network Software

Infosys Technologies developed the esteemed GSTN software which process lakhs of GST returns, filing and online invoicing every day. NIC maintains the network that provides the computing resource for the GSTN software. The portal can be accessed by the tax officials to track every transaction while taxpayers can access it to file and check for their returns. The GSTN is coming up with an offline tool to come up with an easier GST return process. It will be available for taxpayers from July 1, 2019.

The evolution of GST in 2019

But with than edge over the online version due to a variety of reasons.

The E-way bill

On the 31st meeting of the GST council, it was decided that an updated GST return system will be introduced to the taxpayers. The Goods and Services Tax Network has come up with an offline tool for taxpayers to make the uploading and downloading invoices easier. The GST Network came up with a prototype of the offline tool in May 2019 and shared the same with the council. The new return system has three segments-




From July 1, 2019 taxpayers will be able to access the offline tool to upload their invoices using FORM GST ANX-1. They will be able to access and download the invoices of inward supply using the FORM GST ANX-2. This will be a trial version available for the users to get familiar with the new system. To avoid any confusion, the taxpayers can import their purchase register into the offline tool and check with the downloaded invoices.

During the trial period between July to September, taxpayers need to continue filling out their usual FORM GSTR-1 and FORM GSTR-3B. Taxpayers who will skip this filing will be penalized by the government and tax bodies.

The GST FORM ANX-1 will become mandatory from October 2019, and it will replace the existing FORM GSTR-1.

Special instructions regarding filing and processing of the returns will be shared by the government before the new GST scheme becomes mandatory.

For B2Cs there is a special return form called ‘Sahaj' which covers all details regarding outward and inward supplies, making it easier for a reverse charge or claiming the input tax credit.

The Advantages and Disadvantages of GST

GST came with its share of advantages and disadvantages like any other government scheme.

1. It eradicates multiple steps in the tax systems:

GST took care of the cascade created by the tax system. It removed multiple kinds of taxes and sub-taxes to create a uniform tax system. It brings all forms of taxes under a single umbrella, removing all kinds of complicated calculations. Earlier it was all about imposing one tax on another and so on. This entire cascading of tax came to a stop with GST.

2. Increased registration threshold:

Value Added Tax or the VAT structure, required any business with a minimum turnover of 500000INR to pay VAT. The turnover limits varied from one state to another. GST has increased the threshold to 2000000INR, which means many small and medium traders will not be liable to pay GST. It is a move that favors the middle-class businessmen.

3. Benefiting small businesses with composition scheme:

The composition scheme was created specifically for small businesses. This scheme allows them to lower the taxes by mentioning their annual turnover and other financial elements of their business.

4. Easy online tax procedure:

GST is a more advanced form of the tax system. From registration to filing for the returns, everything can be done online. This is highly beneficial for small enterprises and startups who are not aware of the GST process. Instead of navigating from one office to another, they can go to the GST website and find the information they need

5. Reduced number of compliances:

With multiple numbers of taxes reduced and replaced by GST, the number of returns to be filed also reduced. Vendors didn't have to file for the central excise returns, service tax or VAT returns. It saved a lot of time by eradicating these time-consuming activities.

6. The defined tax system for e-commerce:

Before GST was imposed, the ecommerce sector had no specific taxing system. They were paying VAT at variable rates, and nothing was defined. It was a pretty complicated scenario and the fact that websites like Flipkart and Amazon had to file for VAT declaration mentioning the number of delivery vehicles. If documents weren't produced if asked for, the tax authorities could even seize the vehicle and goods. GST was a welcome change as it brought uniformity and removed any such confusion over inter-state transportation of goods.

7. Efficient and smart logistics:

The logistics industry had a tough time dealing with inter-state taxation due to the movement of goods. This made them create multiple warehouses in different states to avoid the inter-state taxes. This increased costs ultimately. GST simplified the situation by removing the inter-state logistics taxes. The vendors could maintain a single warehouse and transport the goods without the worry of taxes or other kinds of warehouse maintenance costs.

8. Regulation of unorganized sectors:

There were industries like the textile and construction industry, which were extremely unregulated before the implementation of the GST system. GST organized how it worked for these industries by implementing an online medium of payment and availing a credit only when a supplier accepts the amount of payment. The logistics segment has also been facing a lot of corruption problems with illicit transport of goods between the states. GST has brought peace in that part of the country.

Like every coin has two sides, GST also comes with its own set of disadvantages. Despite being one of the most advanced forms of taxation, it is flawed in the way it affects a certain set of consumers or the advanced way of working which India isn't prepared for yet.

9. Updating of software systems:

Businesses who use have a dedicated team of accountants to take care of their business finances, will need to get new software or update their existing ones. Also, it will bear some cost to train the current employees so that they can use the GST-friendly invoicing software. Being an essential part of the financial system in India, GST is an unavoidable element, and businesses cannot help but upgrade their billing system.

10. Going the GST way:

All businesses, both small and big, have to become GST compliant. This means they need to have retail billing software systems that support GST, have invoices with space for GST details and a team that is digitally efficient as GST is an online tax filing system.

A. Increase in costs:

From getting new resources to hiring GST experts, it is not going to be a cheap affair for businesses. GST is an all-new system, and existing accountants need to upgrade their knowledge, or companies need to hire new experts. The training expense also comes along when companies want to train their employees. There is no choice for enterprises in this case.

B. The middle of the year crisis:

The new GST is going to be implemented in July, which is the middle of the financial year. All businesses had already planned their money and taxes according to the old tax scheme. They would take quite some time to adjust to the new scheme. Business owners need to redo the calculations and paperwork to make most of the new scheme.

GST- the tax revolution

The GST council has worked around diplomacy well and has come up with a well-crafted GST system in place. They are also continuously working with the GSTN to come up with easier and better GST solutions. The new GST system will be running with a strong technology background and is going to be a more straightforward process for those businesses who hated GST for being an online system. With a more simplified return filing system in place, it won't be a chore for small and micro businesses to get themselves registered and file for returns.

The low points of introduction of the GST system are that it can lead to a delay in the sanction of refunds. It may frustrate import and export businesses as they deal with a lot of money and a delay in refund for even a few months can affect their business. However, the tax authorities are working on it to ensure no such situation comes up in the first place. It's also going to be tough for taxpayers to fill out the existing GST forms while managing accounts on the offline trial version of the new GST tool.

The tax system will have to keep updating itself to stay at par with the global economy. A unified tax system only brings financial balance in a country with so many diverse industries trying to work it out with each other. With the government taking steps to simplify the whole tax process, it is important that businesses also accept the changes and upgrade themselves to ensure seamless and transparent transactions.

Sectors like ecommerce have been impacted hugely by GST, just like ecommerce has impacted the way people shop. Without GST the entire process of shipping to different cities and facilitating cash on delivery and calculating the tax returns on returned goods, it was a mess. Being an online system, GST simplified all this and brought everything under the same roof.

Is it meant for the big enterprise owners?

Initially shamed as a rebranded version of the good old tax system, GST is a very different version of the previous tax system. It has also been criticized for siding with the bigger businesses. Any small business that has a turnover more than 2000000INR will have to pay GST while earlier businesses with a turnover more than 1.5Cr were supposed to be the central excise duty tax. This is one of the basic reasons why the criticism came up. However, we cannot ignore the fact that being digital it has become much easier for smaller businesses to get themselves registered and get recognized by government bodies. It is a less painful job to file for returns using the online portal. Another significant fact is that GST does not discriminate and has brought a lot of uniformity. It is also an example of how technologically advanced we have become with a GSTN processing lakhs of GST feeds every day without any glitches. GST has also brought corruption in the logistics to an all-time low with e-way bill facility which tracks everything. Businesses cannot illegally pass goods from one state to another without verification by tax authorities nor can situations like bribing can come up as everything is monitored on the system. Also looking at the council's attempts to come up with an offline tool, it seems they are trying to work to get small businesses in smaller towns with poor network condition to be part of the GST system.

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