GST FAQs Answered: How does GST work?

how gst works


Among the many questions being asked today, post the rollout of GST on 1st of July, the basic and significant question to understand is how GST works.

To understand how GST (Goods and Services Tax) works, it is essential to understand that GST replaces all the indirect taxes that were being levied on the provision of goods and services.

The major indirect taxes it replaces are State VAT, Central Excise, Service Tax and a few more. It is believed that the impact of this will be experienced by the end consumers in prices, as the cascading effect of taxes will be mitigated. At the same time, this system will also centralise all the trade and invoice information allowing the tax administration authorities to extend credit on all taxes paid by the manufacturer or the Service Provider.

Let’s take an example of VAT and Service taxes to understand this better.

You decide to skip the process of making dinner and just eat out. At the restaurant, when checking the bill before the 1st of July, you would have seen charges being levied as service tax and VAT. VAT is the tax that you pay for the food you have eaten and is a percentage of the total amount of the bill made on the food consumed. This is added to the bill amount. Service tax is the tax you pay for the service you receive while you are being served. This is also a percentage of the food consumed and is added to the total. In total, you pay the cost of food consumed + VAT + Service tax. The VAT and service tax is collected by the restaurant and paid to the government bodies. This is what is meant by cascading effect of indirect taxes and its impact on increasing prices. GST replaces VAT and Service Tax in this case and you pay only a single tax that is appropriated to the various state bodies by the GST Council.

To enable centralisation of the new taxation process, the GST council has formed the GST Network which forms the central system where all the trade of information of organisations across the country is collected. The restaurant (if it has less than 200 invoices in a month) logs into the G2B portal and uploads information on all the bills and invoices that have been generated in the previous month. If the restaurant has more than 200 invoices, they need to associate with services providers like ASP and GSP (GST Suvidha Providers) to translate and communicate this information to the GSTN. This is the approach that GSTN recommends. The GSTN will then enable the restaurant to conduct reconciliation with its Suppliers and make the final filing. Post this, they will be required to make payments based on the challan generated by the GSTN.

The same sequence of filing invoice information, reconciliation and payment is applicable to all goods and service providers across the country. In brief, this is how GST works.

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