What is GST? — The Big Picture

Meera had heard the word "GST" a hundred times. Every shopkeeper in Bageshwar complained about it. Her uncle said it ruined small businesses. The news channels debated it every night. But when Sharma Sir asked her on Monday morning — "Meera, tell me what GST actually is" — she went blank. "Sir, it's a tax... on goods?" Sharma Sir smiled. "Today you will understand it properly. And by the end of this week, you won't just understand it — you will file GST returns for our clients."

The World Before GST

To understand GST, you first need to understand what existed before it. Before July 1, 2017, India had a messy system of many different taxes.

Imagine Bisht Ji, our wholesale spice client in Haldwani. He buys raw spices from farmers in Rajasthan, processes and packages them, and sells them to shops across Uttarakhand and other states. Before GST, here is what he faced:

That is six different taxes! And each tax had its own rules, its own rates, its own forms, and its own officers.

The Biggest Problem: Tax on Tax

Sharma Sir picked up his chai cup and said, "Meera, let me explain this with chai."

Suppose you want to make a cup of chai. Here is the old tax system:

1. The tea estate grows tea leaves and pays Excise Duty of Rs 5 on the leaves.
2. The estate sells the leaves to a trader for Rs 100 + Rs 5 tax = Rs 105.
3. The trader sells the leaves to a chai shop for Rs 150. But VAT is calculated on Rs 150 (which already includes the Rs 5 excise duty!). So if VAT is 12%, the chai shop pays Rs 150 + Rs 18 = Rs 168.
4. The chai shop makes chai and sells a cup for Rs 20. Service tax is charged on Rs 20.

Do you see the problem? At step 3, the trader paid VAT on a price that already included excise duty. That means you paid tax on top of tax. This is called the cascading effect or "tax on tax."

The result? Everything became more expensive for the customer. And businesses like Bisht Ji had to file separate returns for each tax, maintain separate records, and deal with separate departments.

Other Problems With the Old System

GST Arrives: One Nation, One Tax

On July 1, 2017, India replaced almost all of those taxes with a single tax called GST — Goods and Services Tax.

The idea is simple: one tax on the supply of goods and services, applied at every stage, but with credit for tax already paid.

Sharma Sir said, "Think of it like this, Meera. The old system was like traveling from Haldwani to Delhi and paying a separate toll at every village. GST is like FASTag — one system, one payment method, everything tracked automatically."

What GST Replaced

GST replaced all of these:

• Excise Duty
• VAT / Sales Tax
• Service Tax
• CST (Central Sales Tax)
• Octroi and Entry Tax
• Purchase Tax
• Entertainment Tax
• Luxury Tax
• Several other cesses and surcharges

All of these disappeared. In their place: one GST.

Note: A few items are still outside GST — petroleum products (petrol, diesel), alcohol for human consumption, and electricity. These are still taxed under the old system.

The Three Types of GST

"But Sir," Meera asked, "if it is one tax, why do I see CGST, SGST, and IGST on every bill?"

Good question. GST is one tax in principle, but it is split into three components depending on who is selling and who is buying.

1. CGST — Central GST

This goes to the Central Government (Government of India).

2. SGST — State GST

This goes to the State Government (in our case, Uttarakhand Government).

3. IGST — Integrated GST

This goes to the Central Government first, and then gets shared with the destination state.

When to Charge Which?

The rule is very simple:

Suppose the GST rate on spices is 5%.

• Intra-state sale (Haldwani to Nainital): CGST = 2.5% + SGST = 2.5% = Total 5%
• Inter-state sale (Haldwani to Delhi): IGST = 5%

The total tax is the same (5%). The only difference is how it is divided between the Central and State governments.

Let us see a real example with Bisht Ji:

Example: Bisht Ji sells Rs 1,00,000 of spices to a shop in Dehradun (same state)

Example: Bisht Ji sells Rs 1,00,000 of spices to a shop in Delhi (different state)

"Same amount, different labels," said Sharma Sir. "The customer pays the same total either way."

Who Needs to Register for GST?

Not every business needs GST registration. The government set a threshold — if your turnover is below a certain amount, you do not need to register.

Registration Thresholds

Special Category States include some northeastern states and Uttarakhand was in this list earlier but has been moved to the general category for goods.

What does this mean for our clients?

• Rawat Aunty (Rawat General Store, Almora): Her annual sales are about Rs 15 lakh. She sells goods. The threshold is Rs 40 lakh. So she does not need GST registration. She is too small.

• Bisht Ji (Bisht Traders, wholesale spices): His annual sales are about Rs 90 lakh. Well above Rs 40 lakh. He must register for GST.

Mandatory Registration (Even Below Threshold)

Some businesses must register for GST even if their turnover is below the threshold:

• Anyone making inter-state supplies (selling to another state)
• E-commerce sellers (selling on Amazon, Flipkart, etc.)
• Anyone required to deduct TDS (Tax Deducted at Source)
• Anyone required to collect TCS (Tax Collected at Source)
• Input Service Distributors
• Casual taxable persons (setting up a temporary stall at a mela, for example)

So if Rawat Aunty ever starts selling pickles on Amazon, she would need GST registration even if her turnover is Rs 5 lakh.

The GSTIN

When you register, you get a GSTIN — Goods and Services Tax Identification Number. It is a 15-digit number that looks like this:

05AABCT1234C1Z5

Let us break it down:

Bisht Ji's GSTIN starts with "05" because he is registered in Uttarakhand (state code 05).

The Composition Scheme — A Simpler Option

Sharma Sir said, "Now Meera, some small businesses don't want to deal with all this complexity. For them, there is the Composition Scheme."

What is the Composition Scheme?

It is a simplified scheme for small taxpayers. Instead of charging GST on every invoice and filing detailed returns, you just pay a flat percentage of your turnover.

Who Can Opt for Composition?

• Annual turnover up to Rs 1.5 crore (Rs 75 lakh in special category states)
• Cannot make inter-state sales
• Cannot supply through e-commerce
• Cannot be a manufacturer of notified goods (like ice cream, tobacco)

The Catch: No Input Tax Credit (ITC)

This is the most important rule of the Composition Scheme: you cannot claim Input Tax Credit. Whatever GST you pay on your purchases — you cannot use it to reduce your tax.

Also, you cannot charge GST on your invoice. You must write "Composition taxable person" on your bill. The customer cannot take ITC on your bill either.

Example: Should Rawat Aunty Go for Composition?

Suppose Rawat Aunty's turnover crosses Rs 40 lakh next year and she needs GST registration. Should she choose the Composition Scheme?

For a small kirana shop like Rawat Aunty's that only sells locally, the Composition Scheme might be a good choice. Less paperwork, simple tax calculation.

But for Bisht Ji, who sells spices across many states, the Composition Scheme is not an option — he makes inter-state sales. Also, with his high volume of purchases, he would lose a lot by not claiming ITC.

How GST Actually Works: The Supply Chain

Let us trace the journey of a packet of cumin (jeera) from the farm to your kitchen, with GST at every stage. Assume GST on spices is 5%.

Stage 1: Farmer to Bisht Ji (Wholesale Purchase)

The farmer sells raw cumin to Bisht Ji for Rs 500.

Agricultural produce is exempt from GST when sold by the farmer. So the farmer charges Rs 0 GST.

Bisht Ji pays: Rs 500 (no GST).

Stage 2: Bisht Ji Processes and Sells to a Retail Shop in Haldwani

Bisht Ji cleans, packages, and sells the cumin to a retail shop for Rs 800. Now GST applies.

Bisht Ji collects Rs 40 as GST. This is called Output Tax — the tax you collect on your sales.

Bisht Ji had no GST on his purchase (farmer was exempt). So his Input Tax is Rs 0.

He pays to the government: Output Tax - Input Tax = Rs 40 - Rs 0 = Rs 40.

Stage 3: Retail Shop Sells to Customer

The retail shop sells the cumin packet to a customer for Rs 1,000.

The retail shop collects Rs 50 in GST. But it already paid Rs 40 in GST to Bisht Ji.

The shop pays to the government: Rs 50 - Rs 40 = Rs 10.

The Total Tax Collected by the Government

The final customer paid Rs 50 in GST (5% of Rs 1,000). The government collected exactly Rs 50 — not a rupee more, not a rupee less. There is no tax on tax. Each person in the chain only paid tax on the value they added.

This is the beauty of GST. This is what "Input Tax Credit" means. We will study ITC in detail in Chapter 19.

The GST Council

"Who decides the GST rates?" Meera asked.

The GST Council is the body that makes all major decisions about GST. It is chaired by the Union Finance Minister and includes finance ministers of all states and union territories.

The Council decides:

• Which goods and services are taxed and at what rate
• Which items are exempt
• The threshold limits
• The model GST laws and rules
• Any changes to the system

The GST Council meets periodically and any rate changes are usually announced after these meetings. This is why you sometimes hear in the news that "GST Council reduced the rate on XYZ item."

GST Tax Slabs

GST has four main tax slabs:

There are also items at 0% (exempt): fresh fruits, fresh vegetables, milk, eggs, unbranded flour and rice, books, newspapers.

We will study these tax slabs in detail in the next chapter.

Hands-On: Looking at Bisht Ji's GST Registration

Negi Bhaiya called Meera over to his computer. "Let me show you Bisht Ji's GST profile in ERPLite."

In Udyamo ERPLite, GST details are stored in the company and party master records.

Step 1: Open ERPLite and go to Settings > Company Profile.

Here you can see:

• Company Name: Bisht Traders
• GSTIN: 05AADFB1234R1Z8
• State: Uttarakhand (05)
• Registration Type: Regular

Step 2: Go to Masters > Parties and click on a customer.

For each customer, you can see:

• Customer GSTIN (if registered)
• State
• Whether the sale is intra-state or inter-state (ERPLite figures this out automatically based on the state codes)

Step 3: Look at a recent sales invoice.

Negi Bhaiya opened a recent invoice for a sale to a Dehradun customer. The invoice showed:

• CGST @ 2.5% and SGST @ 2.5% (because both are in Uttarakhand — intra-state)

Then he opened an invoice for a Delhi customer. This one showed:

• IGST @ 5% (because Uttarakhand to Delhi is inter-state)

"ERPLite does this automatically," Negi Bhaiya said. "Once you set up the customer's state correctly, it knows whether to charge CGST+SGST or IGST."

Quick Recap

• GST stands for Goods and Services Tax. It replaced many old taxes (VAT, Excise, Service Tax, CST, Octroi, etc.) from July 1, 2017.
• The old system had tax on tax (cascading effect). GST fixes this with Input Tax Credit.
• GST has three types: CGST (Central), SGST (State), IGST (Integrated).
• Intra-state sale = CGST + SGST. Inter-state sale = IGST. Total rate is the same.
• Registration threshold: Rs 40 lakh for goods, Rs 20 lakh for services.
• Composition Scheme: Flat 1% tax, less paperwork, but no ITC and no inter-state sales.
• The GST Council decides rates and rules.
• Every registered business gets a 15-digit GSTIN.

Practice Exercise

Exercise 1: Identify the Tax Type

For each of the following sales by Bisht Traders (Haldwani, Uttarakhand), write whether CGST+SGST or IGST will be charged:

1. Sale to a shop in Almora, Uttarakhand
2. Sale to a restaurant in Lucknow, Uttar Pradesh
3. Sale to a customer in Pithoragarh, Uttarakhand
4. Sale to a wholesaler in Jaipur, Rajasthan
5. Sale to a hotel in Nainital, Uttarakhand

Exercise 2: Calculate the GST

Bisht Ji sells turmeric powder worth Rs 50,000 (taxable value) to a buyer in Haridwar (Uttarakhand). The GST rate is 5%. Calculate:

• CGST amount
• SGST amount
• Total invoice amount

Now calculate the same for a buyer in Chandigarh (different state/UT):

• IGST amount
• Total invoice amount

Exercise 3: Composition or Regular?

For each of these businesses, decide whether they should choose the Composition Scheme or Regular GST. Give your reason.

1. A chai stall in Haldwani with Rs 8 lakh annual turnover, sells only locally.
2. A handicraft seller with Rs 30 lakh turnover who sells on Amazon across India.
3. A sweet shop with Rs 1 crore turnover, all sales within Uttarakhand.
4. A wholesale grain trader with Rs 2 crore turnover.

Exercise 4: Decode the GSTIN

Given this GSTIN: 05AABCB9876M1Z3

• What state is this business registered in?
• What is the PAN?
• Is this the first registration under this PAN?

Fun Fact

Did you know? Before GST, India's truck drivers spent about 60% of their transit time waiting at state border checkpoints for tax inspections. After GST removed inter-state entry taxes, a study found that trucks could cover 300-400 km more per day. That's like driving from Haldwani to Delhi and back in the time that used to be wasted just waiting! GST didn't just simplify taxes — it literally made India's roads faster.