GST vs Income Tax

Understanding taxes is essential. There are two main types: direct and indirect. Direct taxes, like income tax, are taken from your earnings. Indirect taxes, such as GST, are added to goods and services. Knowing this helps taxpayers in India. It simplifies filing taxes, avoiding mistakes and penalties. In our blog, we explain the differences between GST and income tax, and how to file returns for each. It's crucial for individuals and small businesses to grasp these concepts, ensuring compliance and timely payments

What is GST, and how does it work?

GST, or Goods and Services Tax, revolutionized India's tax system by consolidating multiple indirect taxes into one framework. Implemented on July 1, 2017, it simplifies taxation by levying on goods and services at each stage, ensuring efficiency. This unified approach eliminates tax cascading and fosters a seamless market. By replacing taxes like VAT and Central Excise, GST enhances business operations and individual tax compliance. It brings benefits such as uniform tax rates, simplified administration, and access to services via the GST portal. Overall, GST promotes transparency, reduces tax burdens, and formalizes businesses, fostering economic growth.

What is income tax & how does it work?

Income tax, a direct tax, applies to all earners in India, regardless of residency. These taxes cannot be transferred, and the burden falls on the earner. Taxable entities include individuals, HUFs, BOIs, AOPs, local authorities, and corporations. It's calculated as a percentage of taxable income and paid annually. Currently, India has two tax regimes: the new, introduced in the 2020 Union Budget, and the old. Individuals and HUFs have the option to select between these two regimes based on their preference and financial situation.

Types of GST returns

There are several types of GST returns with different due dates:

GSTR-1: Filed by all normal taxpayers, it reports outward supplies of goods and services. Monthly by the 11th for turnover over Rs.5 crore, or quarterly by the 13th for QRMP scheme participants.

GSTR-2A: A view-only return for recipients, showing inward supplies auto-populated from suppliers' GSTR-1. Used for claiming Input Tax Credit (ITC).

GSTR-2B: Similar to GSTR-2A, but static, providing ITC data for each month. Available on the 12th every month.

GSTR-3B: A self-declaration filed monthly or quarterly, summarizing outward supplies, ITC claimed, and taxes paid. Due on the 20th for turnover over Rs.5 crore or quarterly for QRMP scheme participants.

GSTR-4: An annual return for composition taxpayers, replaced GSTR-9A from FY 2019-20 onwards. Due by April 30 of the following year.

GSTR-5: Filed monthly by non-resident foreign taxpayers detailing inward and outward supplies.

GSTR-6: Monthly return filed by Input Service Distributors (ISD) detailing input tax credit received and distributed.

GSTR-7: Filed monthly by persons deducting TDS under GST, detailing TDS deducted and claimed.

GSTR-8: Monthly return filed by e-commerce operators collecting TCS, detailing supplies and TCS collected.

GSTR-9: An annual return for all taxpayers except some exceptions, consolidating monthly or quarterly returns. Due by December 31 of the following year.

GSTR-9C: A reconciliation statement filed by taxpayers with turnover over Rs.5 crore, due by December 31 of the following year.

GSTR-10: Filed by those whose registration is cancelled or surrendered, within three months of cancellation.

GSTR-11: Filed by those issued a Unique Identity Number (UIN) for refund purposes, detailing inward supplies and refund claimed.
 

Types of income tax returns

Understanding income tax involves awareness of its types, each influencing tax liabilities differently:

A. Individual Income Tax: Levied on individuals' annual earnings, varying based on resident status and income source. Tax rates are determined by income brackets. A new default taxation mode, introduced in 2021, awaits individuals who don't choose between old and new regimes.

B. Business Income Tax: Imposed on businesses' annual income, calculated through normal provisions or presumptive taxation. Under normal provisions, deductions from total sales determine taxable income. Presumptive taxation applies to businesses with turnovers exceeding Rs. 2.00 crores.

C. State and Local Income Tax: State government levies taxes like agricultural income tax, state excise duty, and stamp duty. Local bodies collect property taxes and service usage fees like water and drainage supply taxes.

Additionally, the Income Tax Act identifies five types of income for taxation:
    Income from Salary
    Income from House Property
    Profits or Gains from Business or Profession
    Income from Capital Gains
    Income from Other Sources
 

Difference between GST and Income tax

Understanding India's tax system is crucial for business operations, focusing on two key elements: Income Tax and GST. The difference between these lies in their purpose, compliance, and tax burden. While Income Tax directly targets earnings, GST, an indirect tax, applies to goods and services transactions, shifting the burden to consumers. The table below simplifies their comparison:

Here are the prominent differences between GST and the Income Tax Act:
 

Conclusion

Understanding the difference between GST and Income Tax is vital for informed financial decisions, compliance, and tax optimization. GST, an indirect tax, alters supply chain dynamics with its multi-tiered rate structure, while Income Tax, a direct tax, follows a progressive system based on varying income levels. Navigating these distinctions fosters a robust and equitable economic ecosystem. As taxpayers, knowing the basics of direct and indirect taxes is beneficial, enabling eligibility for input tax credits, exemptions, and deductions. Timely and honest tax payments contribute to responsible citizenship and aid the government in maintaining records of individuals' and businesses' earnings and spending. This knowledge equips individuals to meet their tax responsibilities diligently.