Tax Cascading

Tax cascading refers to the situation where a tax is levied on a product at each stage of the
production and distribution chain, without providing relief for taxes paid at earlier stages.
This results in the tax being applied on a tax, inflating the final cost of the product.

Example: Before the introduction of GST, if a manufacturer bought raw materials worth
₹1,000 and paid a VAT of ₹100, the total cost would be ₹1,100. Now, if the manufacturer
adds value worth ₹500 and sells it for ₹1,600, VAT would be applied on the entire ₹1,600,
ignoring the tax already paid. Thus, VAT would be ₹160 (at 10%), and the final price would
be ₹1,760. This leads to a cascading effect, as the tax was applied on both the cost and the
already taxed value. Under GST, the manufacturer would get credit for the tax paid at earlier
stages, preventing the cascading of taxes.

UTGST (Union Territory Goods and Services Tax)

UTGST is the counterpart of SGST (State Goods and Services Tax) but is applicable in
Union Territories without legislatures. It is levied along with CGST (Central Goods and
Services Tax) on intra-UT supplies of goods and services.

Example: In the Union Territory of Andaman and Nicobar Islands, if a business supplies
goods worth ₹10,000, both CGST and UTGST would be applied. If the GST rate is 18%,
then 9% (CGST) + 9% (UTGST) would be levied on the transaction. Hence, the total tax
would be ₹1,800 (₹900 CGST + ₹900 UTGST), bringing the total cost to ₹11,800.

Acts Passed for Introducing GST in India

The following Acts were passed by the Parliament to implement the GST regime in India:

1. Central Goods and Services Tax (CGST) Act, 2017: Governs the levy and
collection of GST on intra-state supplies of goods and services by the central
government.
2. State Goods and Services Tax (SGST) Act, 2017: Governs the levy and collection
of GST on intra-state supplies by respective state governments.
3. Union Territory Goods and Services Tax (UTGST) Act, 2017: Governs the levy of
GST in Union Territories.
4. Integrated Goods and Services Tax (IGST) Act, 2017: Governs the levy and
collection of GST on inter-state supplies of goods and services.
5. Goods and Services Tax (Compensation to States) Act, 2017: Provides
compensation to states for revenue loss due to the implementation of GST.

GST Council and Quorum

The GST Council is a constitutional body that makes recommendations on GST rates, laws,
and procedures. It comprises the Union Finance Minister (Chairperson), the Union Minister
of State for Revenue or Finance, and ministers of finance or taxation from each state
government.

Quorum for GST Council Meeting: The quorum for a GST Council meeting is one-half of
the total number of members. For any decision to be approved, at least three-fourths of the
members present must agree. The Union government’s vote carries one-third of the weight,
and the votes of the state governments collectively hold two-thirds.

Value of Supply for Exchanged Mobile Handset

In the given case, a new mobile handset is supplied for ₹25,000 with an old phone
exchanged. Without the exchange, the price of the handset is ₹30,000. Under GST, the value
of supply is determined as the transaction value, which is the price actually paid or payable
for the supply.

In this case, the value of supply is ₹30,000, which is the price without the exchange offer.
The exchange discount or price reduction does not reduce the taxable value. Hence, GST will
be calculated on ₹30,000.

Inward Supply

Inward supply refers to the receipt of goods or services by a person in the course of
business. It is essentially the acquisition of inputs required for the production or provision of
goods or services.

Examples:

1. A manufacturer purchasing raw materials (e.g., iron and steel) from a supplier.
2. A company receiving professional consulting services for its business operations.

Documents Required to Claim Input Tax Credit (ITC)

To claim ITC under GST, the following documents are required:

1. Tax Invoice or Debit Note issued by a registered supplier.

2. Bill of Entry or similar documents for imported goods.
3. Document evidencing tax payment under the reverse charge mechanism.
4. ISD Invoice for input services distributed by the Input Service Distributor.

Additionally, the taxpayer must ensure that the supplier has uploaded the details of the supply
on the GST portal, and the ITC claim must reflect in the recipient’s GSTR-2B.
Interstate Supply under GST Law

A transaction is considered an interstate supply if the location of the supplier and the place
of supply are in different states, Union Territories, or outside India.

Examples of interstate supply:

1. A business in Delhi supplying goods to a buyer in Maharashtra.

2. A software company in Karnataka providing IT services to a client in Tamil Nadu.

In such cases, Integrated GST (IGST) is charged instead of CGST and SGST.

Difference Between Credit Note and Debit Note

1. Credit Note:
o Issued by a supplier when the value of goods or services decreases after the
invoice has been issued.
o Example: If goods are returned or a post-sale discount is given, the supplier
issues a credit note to adjust the GST liability.
2. Debit Note:
o Issued by a supplier when the value of goods or services increases after the
invoice has been issued.
o Example: If a supplier undercharged for goods, they would issue a debit note
to recover the additional amount.

IGST in Case of Electronic Commerce Operator

When a transaction is facilitated by an electronic commerce operator, IGST is levied if the

supply is interstate. The e-commerce operator is responsible for collecting and remitting the
tax on behalf of the sellers (Tax Collection at Source or TCS).

For instance, if a seller in Gujarat sells goods through an e-commerce platform to a buyer in
Delhi, IGST would be applicable on this interstate supply, and the e-commerce operator
collects tax at a rate of 1% on the net value of taxable supplies made by the seller.

E-Way Bill and Its Importance in GST

The E-Way Bill is an electronic document required for the movement of goods worth more
than ₹50,000. It contains details of the goods being transported, the transporter, and the
consignor/consignee.
Importance:

1. Facilitates smooth movement of goods across state borders.

2. Helps prevent tax evasion by tracking the movement of goods.
3. Streamlines the transportation process, reducing waiting times at checkpoints.

The E-Way Bill system is critical for the enforcement of GST compliance in transportation
and logistics.

Apportionment of Credit

Apportionment of credit occurs when a business uses goods or services for both taxable and
exempt supplies. In such cases, the ITC must be proportionately divided between taxable and
exempt activities.

Example: If a manufacturer produces both taxable and exempt goods, and uses the same
inputs for both, the ITC for those inputs must be apportioned. If 60% of the production is for
taxable supplies and 40% for exempt supplies, then only 60% of the ITC is claimable, and the
remaining 40% must be reversed.

Important Advantages of GST System

The Goods and Services Tax (GST) system has several advantages that have transformed
India's tax landscape:

1. Elimination of Cascading Effect: Under previous tax systems, a cascading effect

occurred where taxes were levied on goods or services at multiple stages, causing “tax
on tax.” GST eliminates this by allowing businesses to claim Input Tax Credit (ITC),
where tax paid on inputs can be set off against tax payable on outputs.
2. Simplified Tax Structure: GST consolidates multiple indirect taxes (such as VAT,
service tax, excise, etc.) into a single, uniform tax structure. This reduces the
complexity for businesses, as they only need to comply with one tax system instead of
various state and central taxes.
3. Increased Compliance: GST is backed by a robust IT infrastructure, requiring
businesses to upload invoices and file returns online. This has improved transparency
and encouraged compliance, minimizing tax evasion.
4. Reduction in Logistics Costs: With GST, interstate movement of goods has become
smoother due to the elimination of state-level entry taxes and check posts. The E-Way
Bill system further facilitates easy transport of goods across state borders, leading to
reduced logistical delays and costs.
5. Boost to the Economy: The efficient and transparent tax system has created a level
playing field for businesses, fostering competitiveness and improving the overall ease
of doing business. This is expected to increase productivity and attract more foreign
investment.
6. Uniformity in Taxation: GST ensures that the same tax rates and structure apply
across the country, promoting a common national market. This reduces the tax
arbitrage that previously existed between states.
 7. More Revenue for the Government: By reducing tax evasion and expanding the tax
base, GST has enhanced revenue collection for both state and central governments.
8. Encouragement for Startups: GST simplifies the taxation process for startups,
allowing them to focus on growing their businesses instead of dealing with multiple
taxes and registrations.

GST and Major Features

GST (Goods and Services Tax) is an indirect tax levied on the supply of goods and services.
It is a comprehensive, multi-stage, and destination-based tax that is applied throughout India,
replacing various indirect taxes previously in place.

Major Features of GST:

1. Dual Structure: GST has a dual structure where both the central and state
governments levy tax on a common base. This includes:
o CGST (Central GST) – levied by the central government on intra-state
supplies.
o SGST (State GST) – levied by state governments on intra-state supplies.
o IGST (Integrated GST) – levied by the central government on inter-state
supplies.
2. Destination-Based Taxation: GST is collected at the point of consumption, not at the
origin. This means the tax revenue goes to the state where the goods or services are
consumed, rather than where they are produced.
3. Input Tax Credit Mechanism: One of the key features of GST is the availability of
ITC, which allows businesses to claim credit for the tax they pay on inputs, reducing
the cascading effect of taxes.
4. Comprehensive Coverage: GST applies to all goods and services, except for a few
exempted items like alcohol for human consumption, petroleum products (for now),
and real estate (to some extent).
5. Threshold Exemption: Small businesses with an annual turnover below ₹20 lakh
(₹40 lakh for goods in some states) are exempt from GST registration and filing.
6. Composition Scheme: Small taxpayers with a turnover below ₹1.5 crore can opt for
the Composition Scheme, where they pay a fixed, lower tax rate but cannot claim
ITC.
7. Online System: GST is administered through a fully integrated online platform for
registration, returns, payments, and refunds, simplifying compliance and increasing
transparency.
8. Anti-Profiteering Measures: The law includes provisions to ensure that businesses
pass on the benefit of reduced tax rates to consumers.

Activities Neither Considered as Supply of Goods or Services

Under GST, there are certain activities that are not treated as a supply of goods or services,
and thus, no GST is applicable on them. These include:
 1. Sale of Land: Transactions involving the sale of land are outside the scope of GST.
2. Sale of Completed Buildings: Sale of buildings or immovable property after the
issuance of a completion certificate (or after first occupation) is not considered a
supply under GST.
3. Employer-Employee Services: Services by an employee to the employer during the
course of employment are not considered as a supply and are thus exempt from GST.
4. Actionable Claims (except lottery, betting, and gambling): These are claims that
can be enforced in court and are outside the ambit of GST, except for lottery, betting,
and gambling, which are taxable.

Definition of Business under Section 2(17) of CGST Act

As per Section 2(17) of the CGST Act, business is broadly defined and includes:

 Any trade, commerce, manufacture, profession, vocation, adventure, or similar

activity, whether or not for a pecuniary benefit.
 Any activity or transaction in connection with or incidental or ancillary to such trade,
commerce, manufacture, etc.
 Any activity of providing or agreeing to provide a service.
 A supply or acquisition of goods, including capital goods, by a person in connection
with the commencement or closure of business.
 Activities undertaken by the government or a local authority, whether or not for a
consideration.

GST as a Destination-Based Tax and IGST

GST is known as a destination-based tax, meaning the tax is collected by the state where the
goods or services are consumed, rather than the state where they are produced. This shifts the
tax revenue to the place of consumption, aligning the tax collection with the point of final
use.

In the case of IGST (Integrated GST), which applies to inter-state transactions, the tax
collected is first deposited with the central government. The center then distributes the IGST
to the respective state governments based on the destination of the goods or services. This
ensures that the tax revenue goes to the state where the goods or services are ultimately
consumed.

Accounts to be Maintained by a Registered Person under GST

A registered person under GST is required to maintain the following accounts and records:

1. Purchase Register: Recording all purchases of goods and services.

2. Sales Register: Documenting all outward supplies of goods and services.
 3. Stock Register: Reflecting details of stock, opening balance, receipts, and closing
balance.
4. Input Tax Credit (ITC) Register: Detailing ITC claimed on inward supplies.
5. Output Tax Liability Register: Tracking taxes collected on outward supplies.
6. Electronic Cash Ledger: Record of payments made through cash.
7. Electronic Credit Ledger: Record of ITC utilized against output tax liability.
8. Electronic Liability Ledger: Summary of total liabilities, including taxes, interest,
penalties, and late fees.

Additionally, the accounts must be maintained for at least six years from the date of filing of
the annual return.

Composition Tax under GST and Tax Impact on Becoming a Regular Dealer

Under the Composition Scheme, small taxpayers with a turnover of up to ₹1.5 crore can pay
a fixed percentage of their turnover as tax, which is lower than the standard GST rates. The
tax rates under the scheme are:

 1% for manufacturers and traders.

 5% for restaurants (not serving alcohol).
 6% for service providers with a turnover of up to ₹50 lakh.

A composition dealer cannot collect GST from customers and cannot claim ITC.

When a composition dealer becomes a regular GST dealer, they must follow the regular
GST regime, which includes:

1. Charging GST on supplies.

2. Maintaining proper records of ITC and output tax.
3. Filing regular returns (GSTR-1, GSTR-3B).
4. ITC on stock held before the transition can be claimed, subject to certain conditions.

Definition of Related Person under GST Law

As per GST law, related persons are those who have a pre-existing relationship that may
influence the price of the transaction. Examples of related persons include:

1. Officers or directors of one another’s businesses.

2. Employer and employee.
3. Legal partners in business.
4. One person who holds more than 25% of the voting shares or stock in another
company.
5. Members of the same family.
6. Entities where one person controls, is controlled by, or is under common control with
another entity.
Transactions between related persons may be scrutinized for fair valuation, as prices may not
reflect the open market value.

Contents of the Electronic Liability Ledger

The Electronic Liability Ledger is a record maintained by the GST portal for each taxpayer,
which shows their total tax liability under GST. It records the following:

1. Tax Liability: Arising from outward supplies (sales) or any other taxable events
declared in the return.
2. Interest: If there’s a delay in paying GST, interest is automatically added to the
ledger.
3. Penalties: Imposed by tax authorities for non-compliance or incorrect returns.
4. Late Fees: Charged for delays in filing returns.
5. Demand Notices: If the tax department issues a demand notice for any reason (such
as incorrect ITC claims), the liability is updated in the ledger.

E-Way Bill: Importance in GST System and Provisions

An E-Way Bill is an electronic document generated on the GST portal that is required for the
movement of goods whose value exceeds ₹50,000. It contains details of the goods being
transported, the supplier, the recipient, and the transporter. It is a vital tool for ensuring
compliance under the GST system.

Importance of E-Way Bill in GST System

1. Prevention of Tax Evasion: The E-Way Bill system ensures that every movement of
goods is recorded and tracked, reducing the possibility of tax evasion. Authorities can
verify whether the goods transported match the details provided in the E-Way Bill.
2. Transparency and Accountability: With electronic tracking, the movement of goods
is more transparent. Suppliers, transporters, and recipients all have their roles defined,
making it easier to trace the movement of goods.
3. Streamlined Movement of Goods: The introduction of the E-Way Bill has helped
reduce the need for physical check posts and manual documentation, facilitating faster
and smoother transportation of goods, especially across state borders.
4. Real-Time Tracking: The system allows for real-time tracking of goods, enabling
authorities to monitor whether goods are being transported lawfully and reducing
unnecessary delays at checkpoints.

Provisions Relating to E-Way Bill

1. Threshold for E-Way Bill: An E-Way Bill must be generated when the value of the
goods being transported exceeds ₹50,000. This includes the taxable value of goods
and GST.
2. Mandatory for Certain Goods: In some cases, such as inter-state transport of goods
for job work, the E-Way Bill is mandatory even if the value of goods is less than
₹50,000.
 3. Validity Period: The validity of an E-Way Bill depends on the distance of
transportation:
o Up to 100 km: 1 day
o For every additional 100 km: 1 additional day
4. Who Can Generate the E-Way Bill:
o Supplier: If the supplier is registered and is transporting goods.
o Recipient: If the supplier is unregistered, the recipient is responsible for
generating the bill.
o Transporter: If neither the supplier nor the recipient generates the bill, the
transporter must do so.
5. Part A and Part B:
o Part A: Contains information like GSTIN of the supplier, recipient, HSN
code, and value of goods.
o Part B: Contains transportation details, such as the vehicle number.
6. Cancellation: The E-Way Bill can be canceled within 24 hours of generation if the
goods are not transported or if there is an error in the information provided.
7. Penalties for Non-Compliance: If goods are transported without a valid E-Way Bill,
both the goods and the vehicle can be detained by authorities, and a penalty of
₹10,000 or the tax amount (whichever is higher) may be levied.

Composition Scheme under GST: Rules, Rates, and Filing of Returns

The Composition Scheme is a simplified tax regime available for small taxpayers under
GST. It allows small businesses to pay GST at a fixed rate based on their turnover instead of
the standard tax rates, thereby reducing their compliance burden.

Rules Relating to Composition Scheme

1. Eligibility:
o Taxpayers with a turnover of up to ₹1.5 crore in the previous financial year
can opt for the Composition Scheme.
o For service providers, the turnover limit is ₹50 lakh.
2. Conditions:
o A composition dealer cannot collect GST from customers.
o They cannot claim input tax credit (ITC).
o The scheme is not applicable to businesses involved in interstate supply of
goods, e-commerce operators, or manufacturers of certain notified goods (e.g.,
ice cream, tobacco).
3. Tax Rates:
o Manufacturers and traders: 1% of the turnover in a state.
o Restaurants (not serving alcohol): 5% of the turnover.
o Service providers: 6% of the turnover, applicable to service providers with a
turnover of up to ₹50 lakh.
4. Returns:
o A composition dealer is required to file GSTR-4 annually and CMP-08
quarterly to declare the turnover and pay taxes.
 o The dealer must also issue a Bill of Supply instead of a Tax Invoice, as GST is
not collected from the recipient.

Who Cannot Opt for the Composition Scheme?

 Dealers engaged in the supply of interstate goods.

 Service providers (other than those eligible under the Composition Scheme for
services).
 Manufacturers of notified goods like ice cream, pan masala, and tobacco.
 E-commerce operators.

Value of Supply in Different Situations

Value of Supply under GST refers to the amount on which GST is calculated. The value of
supply includes the price paid or payable for the goods or services, as well as any additional
costs associated with the transaction.

General Provisions for Value of Supply

1. Transaction Value:
o The primary rule for determining the value of supply is the transaction value,
i.e., the price actually paid or payable for the supply of goods or services.
o This value includes all charges (packing, commission, etc.) but excludes
discounts, provided they are mentioned on the invoice.
2. Inclusion in Value of Supply:
o Taxes other than GST (e.g., customs duties).
o Incidental expenses such as packing, transportation, and insurance.
o Interest, late fees, or penalties for delayed payment.
3. Exclusion from Value of Supply:
o Discounts: Discounts are excluded if they are mentioned on the invoice and
agreed upon at the time of the supply.

Valuation in Special Cases

1. Supply between Related Persons: When the transaction occurs between related
parties (such as branches or associated enterprises), the value is determined as the
open market value or the price at which such goods or services would normally be
sold to an unrelated party.
2. Exchange Offers: If goods are supplied in exchange for other goods (for example,
exchanging an old phone for a new one), the value of supply is the price of the new
product less any amount paid for the old product. In case the transaction value is not
determinable, the open market value is used.
3. Free Supplies: For supplies made without consideration (such as free samples), the
value is the open market value of the goods or services.
4. Composite Supply: In case of a composite supply, where multiple goods or services
are supplied together, the value of the dominant supply (the main product or service)
is considered for valuation.
Determining Place of Supply of Goods and Services

The place of supply is crucial in determining the applicability of GST (whether CGST/SGST
or IGST) as GST is a destination-based tax. Different rules apply for goods and services.

Place of Supply of Goods

1. Domestic Supplies:
o Intra-State Supplies: When both the supplier and recipient are in the same
state, the place of supply is the location where the goods are delivered.
o Inter-State Supplies: When the supplier and recipient are in different states,
the place of supply is the state where the goods are delivered.
2. Exports and Imports:
o Exports: The place of supply for goods exported from India is the location of
the recipient outside India. Exports are treated as zero-rated supplies under
GST.
o Imports: The place of supply for imported goods is the location where the
importer receives the goods. IGST is applicable on imports.
3. Supply Involving Movement of Goods: When the supply involves the movement of
goods (e.g., transportation of goods from one state to another), the place of supply is
the location where the goods are delivered after the movement.
4. Goods Supplied on Board a Conveyance: In cases where goods are supplied aboard
a conveyance (e.g., in-flight catering), the place of supply is the location where the
goods are taken on board.

Place of Supply of Services

1. Domestic Supplies:
o Intra-State Services: If both the service provider and recipient are located in
the same state, the place of supply is the location of the recipient.
o Inter-State Services: If the service provider and recipient are in different
states, the place of supply is the location of the recipient, and IGST is
applicable.
2. Services Related to Immovable Property: The place of supply for services related to
immovable property (e.g., construction, real estate services) is the location where the
immovable property is located.
3. Event-Related Services: The place of supply for services related to events (such as
fairs, exhibitions, or cultural events) is the location where the event is held.
4. Telecommunication and Digital Services: For services like telecommunications or
digital content, the place of supply is the location of the service recipient.
5. Exports of Services: The place of supply for exported services is the location of the
recipient outside India, and exports of services are treated as zero-rated supplies
under GST.
6. Import of Services: The place of supply for imported services is the location of the
service recipient in India, and IGST is applicable on such imports.