GST

GST, the goods and services tax, is the tax that India charges on almost every sale of goods and services. From 1 July 2017, it replaced most of the separate taxes that the central and state governments charged before, such as excise duty, service tax and VAT. Because registered businesses must issue GST invoices and file GST returns, a whole industry of software has grown up to do this work.

Here is how GST works in general. A business registers and gets a GST number, called a GSTIN. When it sells, it adds GST to the price and shows it on the invoice. Most goods and services are taxed at 5% or 18%. For a sale within one state, the tax is split equally between the centre (CGST) and the state (SGST). For a sale to another state, one tax, IGST, is charged. The business pays the government the GST it collected, minus the GST it paid on its own purchases. That deduction is called input tax credit. So the tax is paid at each step of the chain, but each business pays only on the value it added.

The credit comes with a condition. A business can claim it only if its supplier has reported the same invoice in the supplier's own return. So every month the business must match its purchase invoices against what its suppliers reported. A registered business files returns on the government's GST portal. GSTR-1 lists its sales, and GSTR-3B sums up the tax and pays it. A small business with a turnover of up to ₹5 crore a year may file these returns every quarter instead. It still pays the tax every month.

Take, for example, a sweet shop that bills its customers on a phone. Its small business accounting app adds the right GST to each bill and prepares the GST return.

Consider a car-parts maker that buys from 400 suppliers. GST reconciliation software matches each purchase invoice to the supplier's filing, so that no credit is lost because of a missing entry.

Say a business with a turnover above ₹5 crore a year raises an invoice to another business. Through e-invoicing, the invoice is first sent to the government's invoice registration portal, which returns an invoice reference number and a QR code to print on it.

How is GST different from income tax? GST is an indirect tax: it is charged on each sale, and the final buyer pays it as part of the price. Income tax is a direct tax on the income or profit of a person or a business. Other countries have similar taxes on sales, called VAT or sales tax. A company that sells in many countries uses indirect tax software to file them all. At month-end, the tax figures come from the books closed by financial close software.