The Goods and Services Tax (GST) has been enforced throughout India as of 1 July 2017. Any taxpayer or business entity registered under the current tax administration must register under GST. The GST tax regime has replaced all other taxes. Since the inception of GST laws and rules, most indirect taxes, central excise duty, entertainment tax, service tax, purchase tax, central sales tax, and lottery tax are non-operational.
As a massive relief to taxpayers, the GST council has doubled the threshold limit to 40 lakhs. The government has also doubled the threshold limit for northeastern states to 20 lakhs wherein, the limit for hilly regions in the northeast is 10 lakhs. Indirect taxes have been merged into tax packages under the GST system. These relaxations in tax calculation have removed the tedious return filing procedures.
GST has made it easier to manage the financial operations of a business. The Goods and Services Tax is no longer an odd concept; it has been successfully functioning in 160 countries across the globe. According to India’s financial experts, the GST system is likely to boost the GDP to around 1-2% and reduce input costs by 10%. Essential customs duties, petroleum, alcohol, and property tax are still kept away from the purview of GST.
Without registering under GST, one can neither collect GST from his clients nor claim ITC for the bills that he/she pays. This article is part of our basic GST guide; Part-1 briefly explains GST rules’ basic laws and regulations, Compensation Scheme, Valuation of Supply, Transition Rules, and Input Tax Credit.
Fundamental Factors Influencing the Applicability of GST
The Goods and Services Tax in India is applicable based on various criteria, that includes:
- GST is applicable for individuals or businesses involved in the interstate supply of services and goods.
- GST rates apply to supplies worth more than or equal to rupees 20 lakhs in a FY (Financial year).
- Businesses or individuals who operate online or deal with e-commerce operations must adhere to GST taxation policies.
- It is also applicable to the services provided under a brand.
- Casual and non-taxable individuals are also subjected to GST rates.
- GST applies to the deduction and collection of taxes (TDS/TCS).
- GST also applies to input service distributors.
- It applies to the supply of online information and database access from India’s location to a person in India, other than a registered person.
- A person supplying goods on behalf of another taxable person is subject to GST.
GST Laws and Rules – Composition Scheme
The GST system’s introduction has gradually increased the number of registered businesses and taxpayers in the country. The Goods and Services Act has also introduced an alternative tax registration composition scheme that favors small businesses in India. The composition scheme entails some significant changes when compared to schemes that existed under the previous VAT regime. The scheme applies to businesses with an aggregated turnover of 1.5 crores or less (a lower limit applies to businesses that operate in northeastern states).
GST Composition Scheme Rules
The provisions of GST law allow small businesses in manufacturing sectors, service sectors – restaurants and merchants, register under the composition scheme. However, the scheme does not apply to the following taxpayers or businesses.
- A non-resident person subject to tax or a potential taxable person.
- Businesses and individuals who supply goods through an e-commerce portal operator collect taxes from sources (under section 52).
- Businesses and individuals involved in the interstate supply of goods.
- Manufacturers of edible ice cream and ice cream with or without cocoa additives.
- Manufacturers of pan masala, tobacco substitutes, and tobacco products.
- Businesses and individuals who have purchased products from a non-registered supplier (permitted if GST is paid for these products on a reverse charge basis).
- Suppliers involved in the supply of goods exempt under the Goods and Services Tax Law.
The list mentioned above is only indicative; it is subject to change. Note that, according to the current GST rules and regulations, the composition scheme does not allow businesses and individuals to participate in Interstate supplies. However, they can obtain goods or services from suppliers who are authorized to carry out interstate supplies under the GST law.
Businesses or individuals registered under this scheme can purchase goods or services from other states, but they are restricted from selling their goods or services to other states. No business other than restaurants were allowed to register under the composition scheme. The government changed this rule in January 2019 and announced that businesses in the service sector could also register under this scheme.
GST Laws and Rules – Value of Supply
The value of the supply in general terms, is the tax amount paid to the supplier as consideration of the supply. The valuation rules define the value of goods or services or, at times, both that are taxable under the GST law. These rules are established under the GST regime to determine the fair market value for the registered taxpayers’ goods and services.
Valuation Rules under GST
Here is a list of valuation rules that determine the value of goods and services supplied under section 15(4).
- Rule 27 – The value of the supply of goods or services when the consideration is not entirely monetary.
- Rule 28: Value of the supply of goods or services, or both, when consideration is between distinct individuals or related entities (apart from those linked through agents).
- Rule 29: The value of supply of goods carried out through an agent.
- Rule 30: The value of the supply of goods or services, or both, on a cost basis.
- Rule 31: The residual method for determining the value of the supply of goods or services, or both.
The value of supply is the amount taxed and collected. For proper tax collection, it must be determined what is and is not a part of the value of supply. The previous tax regime resulted in instances in which there were many disputes over the value of sales that would be collected.
GST Laws and Rules – Transition to GST
Transition to GST from the previous tax regime might give rise to several questions. According to the GST law, a taxpayer can claim ITC for the amount of tax paid while purchasing goods. The tax credit from the previous tax system can be converted as ITC collected in GST during the transition to the GST system. Taxpayers can claim ITC under GST only if all goods and services are mentioned in the returns filed that are eligible for credits under the Goods and Services Law.
To transfer input tax credit to the GST system, taxpayers must log in to the GST portal and submit an electronic form; TRAN-1 or TRAN-2 as applicable, stating the amount of tax or duties they wish to claim as a credit. The application forms submitted must entail the following information:
- The supplier’s name, serial number, and date invoice was issued by the supplier or any document based on which the tax credit was acceptable under the current law.
- The description, value of goods or services, and quality.
- The amount of taxes and duties payable, or, where applicable, the value-added tax [or entry tax] imposed by the supplier in connection with the goods or services.
- The date the goods or services are received and recorded in the recipient’s books of accounts.
The tax department will process the application submitted. Once approved, the credit amount allowed will be added to the applicant’s e-ledger under the GST PMT-2 form on the public portal. Transferring the credit to Goods and Services Tax (GST) is similar to previously registered businesses under excise duty, value-added tax, or service tax.
GST Laws and Rules – Input Tax Credit
Goods and Services Tax in India is one of the most extensive reforms in history. However, one thing that has become a center of attraction is the mechanism of Input Tax credit (ITC). In simpler words, ITC is the means to reduce the tax to be paid on sales by availing credits on tax that a business or individual has already paid on purchases. It implies the reduction of input tax paid from taxes to be paid on output tax.
When any services or goods are provided to a taxable person, the tax collected goods and services are known as input tax. In India, taxpayers are well aware of ITC as it already existed under the excise taxation system before GST. However, the implementation of GST has widened the scope of ITC. Previously, taxpayers could not claim ITC on central sales tax, luxury tax, entry tax, and other taxes. Moreover, service providers and manufacturers were not allowed to claim central excise duty either.
Before the implementation of the GST regime, there was an interdependency of VAT against excise/service tax. Under GST, these taxes are included in a single tax calculation system; there are no restrictions that offset claiming the input tax credit. Post-implementation of GST, claiming ITC is one of the crucial accounting activities for all businesses and taxpayers.
ITC does not apply to all input goods and services; each state or province might have different GST rules and regulations. It is also applicable to the merchant who purchased an asset for resale. Input Tax Credit is the backbone of GST and taxpayers in a significant concern. ITC has always been in line with the pre-GST system, and thus, these rules are strict in their approach.
The relaxations on new GST rules provided by the government were implemented earlier this year. Documents concerning GST rules were shared by the GST Council and CBIC authorities. These documents address the events that are subjected to tax under the new GST laws and regulations. GST rules 2020 aim to simplify the pre-process of transition, ITC claim, the value of supply, GST return filing, and more!
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