The Goods and Services Tax (GST) in India is an indirect tax applied to all goods and services. Passed by Parliament on March 29, 2017, the GST took effect on July 1, 2017, effectively replacing many previous indirect tax laws in India. For businesses with operations—or plans to begin operating—in India, understanding the details of the India GST is key.
The India GST is a Multi-Stage Tax
A multi-stage tax is levied on every stage of the product supply chain, or each time a sale occurs. For example, a typical supply chain might consist of: (1) purchasing raw materials, (2) manufacturing the product, (3) warehousing the completed product, (4) sale to wholesalers, (5) sale to retailers, and (6) sale to consumers. The GST will apply at each of these points. Sales within a state will be charged both Central and State GST, while sales between states will be charged an Integrated GST.
The Tax Applies to Every Value Addition
The value of a product increases as it moves down the supply chain. For example, a ketchup manufacturer purchases tomatoes, sugar, and other ingredients. When these ingredients are combined into ketchup, the value increases. The value increases again when the ketchup is packaged and labeled at the warehouse and again when the retailer markets it for final sale to the consumer. The India GST will apply to each monetary increase across the supply chain.
The Tax Revenue Goes to the Destination
The total GST tax revenue will go to the destination at which the product is sold to the end consumer. The location of manufacturing, warehousing, etc. is irrelevant. For example, if a product is manufactured in Bihar and purchased by a consumer in West Bengal, the total value of the GST will go to West Bengal.
Benefits of the India GST
The GST reduces the overall cost of goods and aims to improve efficiency. Before the GST, India applied a tax to tax, creating a cascading tax; the removal of this procedure saves businesses money. All GST activities are performed on the online GST portal, making the procedure much more organized and efficient than the previous tax structure. Businesses can register, file, apply for refunds, and respond to inquiries online, eliminating delays and paperwork. The GST generates "E-way bills" that are visible by all parties involved in the supply chain. This simplifies compliance and helps minimize tax evasion. The GST effectively eliminates indirect tax barriers, simplifies and standardizes taxes on goods and services throughout India, and facilitates growth of the Indian economy.
The Three Types of India GST
There are three types of GST in India. The Central GST (CGST) and State GST (SGST) will both apply to sales within a state; for example, within West Bengal. The Integrated GST (IGST) will apply to sales between states; for example, from Bihar to West Bengal.
Buyers Can Claim an Input Tax Credit
A buyer who has already paid a tax on input can claim an input tax credit when filing. Whenever an input tax credit is successfully claimed, the price of the product decreases, making it more affordable for the end consumer.
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