INDEX
GST on Goods in India
GST on Service in India
Key Difference in GST on Goods & GST on Service
Challenges in GST on Goods & GST on Service
GST on Goods vs GST on Services in India
GST on Goods vs GST on Services in India: A Comprehensive Overview
The Goods and Services Tax (GST), implemented in India on July 1, 2017, marked a significant shift in the country’s indirect tax regime. GST is designed to unify the taxation of goods and services into one single tax system, eliminating the complexity of multiple taxes levied by the central and state governments. However, while GST applies to both goods and services, there are key differences in how these two categories are treated under the law.
In this article, we will explore the GST on goods and GST on services in India, examining their key differences, tax rates, exemptions, and compliance requirements.
GST on Goods in India
Goods, in the context of GST, are tangible products that can be touched or seen. Under the GST framework, goods are classified into various categories, and different tax rates are applied based on their classification.
Classification of Goods under GST
Goods are classified based on the Harmonized System of Nomenclature (HSN) code, which is a standardized system used internationally to classify products. In India, businesses are required to mention the HSN code on invoices to specify the type of goods they deal with.
Tax Rates on Goods
Under GST, goods are taxed under five different tax slabs:
- 0% (Exempted Goods): Certain essential goods, like food grains, education materials, medicine, etc.
- 5%: Items like food products, shoes, small appliances, etc.
- 12%: Mid-range goods such as toothpaste, fruits, vegetables, etc.
- 18%: Standard goods like paints, cosmetics, electronics, etc.
- 28%: High-end goods such as luxury cars, sin goods like tobacco products, alcohol, etc.
Key Features of GST on Goods
- Input Tax Credit (ITC): Businesses that purchase goods for manufacturing or resale can claim Input Tax Credit (ITC) on the taxes paid on the purchase of goods. This allows them to offset the GST paid on inputs against the GST collected on output sales.
- Exemptions and Special Rates: Some goods are exempted from GST, such as agricultural products, and some are taxed at concessional rates, like the 5% tax on essential food items.
Example:
- GST on a Basic Food Product: Rice is a food item that falls under the 0% GST category, meaning it is exempt from GST.
- GST on a Luxury Car: A luxury car will attract a 28% GST rate, a higher tax slab given its luxury nature.
GST on Services in India
Services, under GST, include any kind of activity that is not classified as the supply of goods. Services range from professional services (like accounting, legal services) to business services (like transport, advertising, etc.).
Classification of Services under GST
Services under GST are classified based on a SAC (Services Accounting Code). The SAC code is a unique number assigned to each service category to ensure proper categorization and taxation.
Tax Rates on Services
Services are taxed under four main GST slabs:
- 0% (Exempted Services): Certain services like healthcare services, education services, transportation of goods by rail, etc.
- 5%: Some essential services like transportation of passengers in certain modes, e-commerce services, etc.
- 12%: Services like restaurant services, hotel accommodation below a certain rate, etc.
- 18%: Most business services such as telecommunication services, financial services, legal services, advertising, etc.
- 28%: Certain high-end or luxury services like cinema tickets, beauty services, etc.
Key Features of GST on Services
- Input Tax Credit (ITC): Similar to goods, businesses offering taxable services can claim ITC on the taxes paid on inputs used to provide services.
- Reverse Charge Mechanism (RCM): In certain cases, the recipient of the service may be required to pay GST instead of the service provider. This is known as Reverse Charge Mechanism (RCM), often applicable in cases of services provided by unregistered dealers or specific services like legal services.
Example:
- GST on Restaurant Services: A restaurant charges 12% GST on food and beverages served.
- GST on Legal Services: Professional services rendered by lawyers are generally subject to 18% GST.
Key Differences Between GST on Goods and GST on Services
Aspect | GST on Goods | GST on Services |
Definition | Tangible products that can be touched or seen | Intangible products or activities provided to another person |
Taxation Slabs | Goods are taxed under 5 slabs (0%, 5%, 12%, 18%, 28%) | Services are taxed under 4 slabs (0%, 5%, 12%, 18%, 28%) |
Input Tax Credit (ITC) | Available for goods purchased and used in manufacturing or resale | Available for services used to provide taxable services |
Exemptions | Some goods, such as food grains, medicines, etc., are exempt | Some services like healthcare, education, etc., are exempt |
Registration Requirement | Businesses dealing in goods above the threshold limit must register | Service providers above the threshold limit must also register |
Reverse Charge Mechanism (RCM) | Not applicable for goods | RCM may apply in cases where services are received from an unregistered person or specific cases like legal services |
Classification | Goods are classified using the HSN code | Services are classified using the SAC code |
Challenges in GST on Goods vs Services
GST on Goods:
- Classification Issues: There are frequent challenges in classifying goods under the correct tax slab. For instance, the tax rate for certain products might change depending on their specific use or classification (e.g., raw material vs finished goods).
- Complexity in Exemptions: Different goods fall under different exemption categories, and businesses often find it difficult to navigate these exemptions.
GST on Services:
- Determining Place of Supply: For services, determining the place of supply (whether the service is taxable in the place where it is provided or the place of the recipient) can sometimes be complicated.
- Compliance with RCM: In some cases, businesses may need to pay GST under the reverse charge mechanism, even though the service provider is not charging GST. This can create confusion.
Conclusion
While GST applies to both goods and services in India, the way these two are treated under the tax system differs significantly in terms of classification, tax rates, and compliance requirements. Goods are classified under specific HSN codes and taxed under five slabs, while services are classified under SAC codes and taxed under four slabs.
Understanding these differences is crucial for businesses to ensure proper GST compliance, claim Input Tax Credit (ITC) where applicable, and avoid any issues with the authorities. With the right knowledge, businesses can streamline their operations and take full advantage of the GST regime, enhancing their efficiency and minimizing tax liabilities.