Structure of GST in India: Breakdown of the Four-Tier System

The Goods and Service Tax has an organised structure that places some food items and necessary services in the lowest tax bracket. Similarly, it places de-merit goods, luxury products, and services in the highest bracket. India's GST tax system comprises four tiers designed to exempt items from taxes and tackle worries about inflation. In the sections, we will explore the GST tax structure in India and its importance and examine the tax brackets in place.

What is the Structure of GST in India?

The GST Council has decided on the framework of the GST tax structure consisting of a four-tier system. Its primary purpose is to place essential goods and a few food products in the lowest tax bracket and high-value luxury goods and services in the higher tax brackets. The four-tier GST rate structure in India includes 5%, 12%, 18%, and 28%, starting from essential goods to luxurious items, respectively.

Structure of GST

The structure of GST levies different types of taxes in India based on their sources and destinations. Here is an explanation of each type:

Importance of GST Structure

To effectively manage the GST framework in India, business proprietors must uphold tax regulations, minimize tax-related consequences, and operate their enterprises with integrity and accountability. With this knowledge, taxpayers can avoid fines, enhance financial management practices, and make informed choices.

Exempted (0%) Slab

The zero tax rate is a nil tax imposed on goods and services. After deciding which goods and services are eligible for a 0% tax rate, the government exempts them from tax. Such products include milk, bread, curd, fresh fruits, etc. Moreover, supplies made to Special Economic Zones come under a 0% GST tax structure.

Lower Rate (5%) Slab

The 5% tax slab is a lower rate applicable to services and commodities like packaged food, cream, branded paneer, skimmed milk powder, footwear under ₹ 500, and clothes under ₹ 1,000.

Standard Rate (12%–18%)

12-18% is a standard GST rate applicable to various products or services in India. The standard 12% rate applies to products like ghee, paneer, frozen meat, cheese, sausages, namkeen, packaged dry fruits, animal fat, ketchup, sauces, fruit juices, etc. 18% GST applies to products like cakes, pasta, pastries, panels, hair dryers, telecom services, wires, IT services, vacuum cleaners, etc.

Higher Rate (28%)

The highest GST rate of 28% applies to luxury items, such as paint, cement, washing machines, aerated water, shampoo, motorcycles, automobiles, sunscreen, etc. The government fixes an extra cess for items under the 28% slab rate.

GST's Impact on Business Loans

A Business Loan has become slightly costlier since implementing the GST tax structure in India. That is because it does not qualify for any remittance under the GST provisions. Thus, one may notice the following effects of GST on business loans:

GST on Processing Fees

The processing fee covers various individual charges a lender spends to evaluate a Business Loan application and initiate the disbursement. Besides, they have to bear several administrative costs to perform actions related to determining compliance. The GST applies to processing fees, so the lender passes on some of these costs to the borrowers. Generally, the processing fee is 1-2% of the loan amount. Before GST implementation, this was a service tax of around 15%. With the new tax regime, the GST charged on processing fees is now 18%.

GST on Interest Rates of Business Loans

GST does not directly impact the applicable interest rate on a Business Loan. It also does not affect the principal payment, leading to no additional interest rate.

GST on Pre-Payment Charges

If the borrower plans to repay the Business Loan early, they must bear pre-payment charges ranging from 5-6% of the outstanding balance. Before the GST implementation, pre-payment charges were liable for a taxation of 15%. After 2017, the pre-payment charges attract a higher GST of 18%.

Business Impact in the GST Era

The introduction of the GST tax structure has increased the overall cost of borrowing a Business Loan. It has increased the processing and pre-payment charges, though not the interest rate and principal payment. Therefore, owing to the constant evolution in the GST tax structure in India, aspiring borrowers must reassess their business plans, attracting additional charges that impact their loan eligibility, creditworthiness, and profitability.

Business owners can mitigate the GST impact by optimising their tax compliance, adopting tech-advanced financial systems, and availing of ITC benefits to boost their creditworthiness and borrow credit at competitive interest rates. Paying the GST on time is an important responsibility that business owners should always fulfil. Moreover, they become eligible to enjoy various tax exemptions, subsidies, and schemes provided by the government.

Why are Business Loans Important?

Although Business Loans have become costlier after implementing the GST rate structure in India, the financial impact is negligible. As a result, Business Loans continue to be an integral part of business growth and expansion plans. For entrepreneurs looking to boost their cash flow, expand their team, grow their business, or upgrade equipment and machinery, Business Loans remain a source of support, offering funds conveniently.

Conclusion

The GST has been a game-changer in the Indian tax system. Creating a uniform national market has simplified tax compliance for business owners. Understanding the structure of GST in India can be complicated. However, the basic GST tax structure involves a single tax applicable at different rates depending on the nature of goods or services. The reason behind a four-tier approach is to ensure necessary items stay within easy reach of customers and luxury goods generate a higher revenue. The GST rate structure in India has streamlined the tax collection process, bringing business setups under formal economic zones.

Frequently Asked Questions About Structure of GST

1. What is the purpose of the GST structure?

The structure of GST in India has several tax slabs based on the goods and services being handled. Its main purpose is to simplify the taxation system, streamline indirect taxation, and promote business operations in the country. The introduction of the four-tier taxation system aims to make essential things affordable and generate more revenue from luxurious items.

2. What are the key components of the GST structure?

The four components of the GST tax structure are CGST, SGST, IGST, and UTGST. The tax type to be paid depends on the destination of supply rather than the source.

3. What are the GST rate slabs?

5%, 12%, 18%, and 28% are the four GST rate slabs applicable in the GST tax structure in India. Essential things like packaged food and cheap footwear and clothes are taxed at 5%, while luxurious items like aerated water, shampoo, washing machines, and automobiles are taxed at 28%.

4. What is the GST Council?

GST Council is the Indian constitutional body that handles issues related to GST implementation in India. Union finance minister Nirmala Sitharaman heads the council, and the finance minister of all Indian states assist her.

5. How does GST impact the pricing of goods and services?

GST reduces the overall tax burden on various goods and services according to their nature and necessity. The higher the tax rate, the costlier will be the good’s price. Essential goods have a lower tax rate, while luxurious goods and services have higher rates.

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