The Goods and Services Tax (GST) is an indirect tax system implemented in India to streamline taxation by replacing multiple indirect taxes such as VAT, service tax, and excise duty. While GST itself is a consumption-based tax and does not directly impact income tax calculations. It does have significant implications on business income, deductions, and compliance requirements, which can, in turn, affect your income tax liabilities.
Understanding the Basics of GST and Income Tax
GST is levied on the supply of goods and services, while income tax is charged on the earnings of individuals, businesses, and other entities. The two operate independently, yet their interaction can influence how taxpayers, especially companies and self-employed individuals, calculate their taxable income.
Income tax is governed by the Income Tax Act, of 1961, whereas GST is administered under the GST Act, of 2017. Despite their distinct nature. GST payments, Input Tax Credit (ITC), and compliance play a role in determining taxable income under the Income Tax Act.
GST and Business Income
For businesses, revenue is often subject to GST before determining the net profit, which is taxable under the Income Tax Act. Here’s how GST affects business income:
- Revenue Recognition: Businesses must recognize revenue net of GST since GST collected on sales is a liability and not income.
- Claiming ITC: Businesses can claim ITC on GST paid on purchases, reducing their overall expense. This affects profit calculations and subsequently income tax.
- GST Liability and Profit Calculation: Higher GST payments may reflect increased sales, which could lead to higher taxable profits under income tax.
GST Input Tax Credit and Its Impact on Taxable Income
Under GST, registered businesses can claim ITC on tax paid on purchases of goods and services used for business purposes. This reduces costs and enhances profitability.
- Impact on Deductions: Since ITC reduces the cost of expenses, businesses cannot claim GST-inclusive amounts as deductions under income tax.
- Capital Goods and Depreciation: When businesses claim ITC on capital goods, they calculate depreciation under the Income Tax Act on the GST-exclusive amount. If they do not claim ITC, depreciation is calculated on the total cost, including GST.
GST Compliance and Its Effect on Income Tax Filing
Businesses must comply with GST regulations, including regular filing of GST returns. Non-compliance can have consequences for income tax assessments:
- GST Returns vs. Income Tax Returns: Discrepancies between GST returns (GSTR-1, GSTR-3B) and income tax returns may trigger scrutiny by tax authorities.
- TDS and TCS Under GST: Businesses deducting TDS under GST must report it properly, ensuring it aligns with income tax records to avoid mismatches.
- GST Penalties and Interest: Any GST-related penalties or interest paid are not allowable as deductions under income tax.
GST Impact on Professionals and Freelancers
Self-employed professionals and freelancers also need to consider GST while calculating their taxable income:
- GST on Professional Fees: If their turnover exceeds the prescribed limit (₹20 lakh for services, ₹40 lakh for goods in most states), they must register for GST and charge GST on invoices.
- ITC on Business Expenses: Professionals registered under GST can claim ITC on business-related purchases, reducing overall taxable income.
- Reconciliation with Income Tax: Income from GST invoices must match with reported income in tax filings to avoid discrepancies and potential scrutiny.
GST and Corporate Income Tax
For corporations, GST has a significant impact on financial statements, which in turn influences corporate tax liabilities.
- Effect on Profit and Loss Statements: Businesses record GST separately from revenue, ensuring the correct determination of taxable income.
- Exempted vs. Taxable Supplies: Businesses dealing with exempted supplies cannot claim ITC, which may increase costs and reduce net profit.
- GST Refunds and Taxable Income: The Income Tax Act does not consider GST refunds as income, preventing them from inflating taxable income.
GST and Presumptive Taxation Scheme
Small businesses opting for the presumptive taxation scheme under Section 44AD, 44ADA, or 44AE should consider GST implications:
- GST on Turnover: The GST amount is excluded from the turnover threshold for presumptive taxation, ensuring that income tax applies only to business receipts, not the GST collected.
- ITC Consideration: Businesses may lose the benefit of claiming expenses related to GST since presumptive taxation does not separately account for ITC.
GST Exemptions and Their Effect on Taxable Income
Certain businesses and individuals enjoy GST exemptions, affecting their income tax calculations.
- Exempted Supplies: Businesses dealing exclusively in GST-exempt goods or services cannot claim ITC, leading to higher expenses and lower taxable profit.
- Composition Scheme: Businesses under the composition scheme pay GST at a lower rate but cannot claim ITC. This may affect expense management and profit calculation.
Final Thought
While GST and income tax are distinct, their interplay significantly affects tax calculations for businesses, professionals, and corporations. Proper compliance, accurate record-keeping, and understanding the implications of ITC and GST liabilities are crucial for optimizing income tax liabilities. Businesses and professionals must ensure that their GST filings align with their income tax returns to avoid scrutiny and maximize tax efficiency.
