COST BASED DECISION MAKING:

Many business decisions require a firm knowledge of several cost concepts. Different
types of costs have differing characteristics. Consequently, when reviewing a business
case to determine which path to take, it is useful to understand the following cost
concepts:

Fixed, Variable, and Mixed Costs

A fixed cost, such as rent, does not change in lock step with the level of activity.
Conversely, a variable cost, such as direct materials, will change as the level of activity
changes. Those few costs that change somewhat with activity are considered mixed
costs. It is important to understand the distinction, since a decision to alter an activity
may or may not alter costs. For example, shuttering a facility may not terminate the
associated building lease payments, which are fixed for the duration of the lease.

By-Product Costs

A product may be an incidental by-product of a production process (such as sawdust at a

lumber mill). If so, it does not really have any cost, since its cost would have been
incurred anyways as a result of the production of the main product. Thus, selling a by-
product at any price is profitable; no price is too low.
Allocated Costs

Overhead costs are allocated to manufactured goods only because it is required by the
accounting standards (for the production of financial statements ). There is no cause-and-
effect between the creation of one additional unit of production and the incurrence of
additional overhead. Thus, there is no reason to include allocated overhead in the
decision to set a price for one additional unit.

Discretionary Costs

Only a few costs can actually be dropped without causing any short-term harm to an
organization. Examples of these discretionary costs are employee training and facility
maintenance. Over the long-term, delaying these expenditures will eventually have a
negative effect. Thus, managers need to understand the impact of their decisions over a
period of time when determining which costs to cut back.
Step Costs

Though some costs are essentially fixed, it may be necessary to make a large investment
in them when the activity level increases past a certain point. Adding a production shift
is an example of a step cost . Management should understand the activity volumes at
which step costs can be incurred, so that it can manage around them - perhaps delaying
sales or outsourcing work, rather than incurring step costs.

All of the cost concepts noted here are critical elements of many types of management
decisions.

Break-Even Analysis
A break-even analysis is an economic tool that is used to determine the cost structure of a
company or the number of units that need to be sold to cover the cost. Break-even is a
circumstance where a company neither makes a profit nor loss but recovers all the money
spent.
The break-even analysis is used to examine the relation between the fixed cost, variable cost,
and revenue. Usually, an organisation with a low fixed cost will have a low break-even point
of sale.

Importance of Break-Even Analysis

 Manages the size of units to be sold: With the help of break-even analysis, the company or
the owner comes to know how many units need to be sold to cover the cost. The variable
cost and the selling price of an individual product and the total cost are required to evaluate
the break-even analysis.
 Budgeting and setting targets: Since the company or the owner knows at which point a
company can break-even, it is easy for them to fix a goal and set a budget for the firm
accordingly. This analysis can also be practised in establishing a realistic target for a company.
 Manage the margin of safety: In a financial breakdown, the sales of a company tend to
decrease. The break-even analysis helps the company to decide the least number of sales
required to make profits. With the margin of safety reports, the management can execute a
high business decision.
 Monitors and controls cost: Companies’ profit margin can be affected by the fixed and
variable cost. Therefore, with break-even analysis, the management can detect if any effects
are changing the cost.
 Helps to design pricing strategy: The break-even point can be affected if there is any change
in the pricing of a product. For example, if the selling price is raised, then the quantity of the
product to be sold to break-even will be reduced. Similarly, if the selling price is reduced,
then a company needs to sell extra to break-even.

Components of Break-Even Analysis

 Fixed costs: These costs are also known as overhead costs. These costs materialise once the
financial activity of a business starts. The fixed prices include taxes, salaries, rents,
depreciation cost, labour cost, interests, energy cost, etc.
 Variable costs: These costs fluctuate and will decrease or increase according to the volume
of the production. These costs include packaging cost, cost of raw material, fuel, and other
materials related to production.

Uses of Break-Even Analysis

 New business: For a new venture, a break-even analysis is essential. It guides the
management with pricing strategy and is practical about the cost. This analysis also gives an
idea if the new business is productive.
 Manufacture new products: If an existing company is going to launch a new product, then
they still have to focus on a break-even analysis before starting and see if the product adds
necessary expenditure to the company.
 Change in business model: The break-even analysis works even if there is a change in any
business model like shifting from retail business to wholesale business. This analysis will help
the company to determine if the selling price of a product needs to change.
Break-Even Analysis Formula
Break-even point = Fixed cost/-Price per cost – Variable cost

Example of break-even analysis

Company X sells a pen. The company first determined the fixed costs, which include a lease,
property tax, and salaries. They sum up to ₹1,00,000. The variable cost linked with
manufacturing one pen is ₹2 per unit. So, the pen is sold at a premium price of ₹10.
Therefore, to determine the break-even point of Company X, the premium pen will be:
Break-even point = Fixed cost/Price per cost – Variable cost
= ₹1,00,000/(₹12 – ₹2)
= 1,oo,000/10
= 10,000
Therefore, given the variable costs, fixed costs, and selling price of the pen, company X
would need to sell 10,000 units of pens to break-even.
The above-mentioned is the concept of ‘Break-Even Analysis’.

Cost-Volume-Profit (CVP) Analysis: What It Is and the

Formula for Calculating It
What Is Cost-Volume-Profit (CVP) Analysis?
Cost-volume-profit (CVP) analysis is a method of cost accounting that
looks at the impact that varying levels of costs and volume have on
operating profit.

KEY TAKEAWAYS

 Cost-volume-profit (CVP) analysis is a way to find out how changes

in variable and fixed costs affect a firm's profit.
 Companies can use CVP to see how many units they need to sell to
break even (cover all costs) or reach a certain minimum profit
margin.
 CVP analysis makes several assumptions, including that the sales
price, fixed, and variable costs per unit are constant. 
Understanding Cost-Volume-Profit (CVP) Analysis
The cost-volume-profit analysis, also commonly known as breakeven
analysis, looks to determine the breakeven point for
different sales volumes and cost structures, which can be useful for
managers making short-term business decisions. CVP analysis makes
several assumptions, including that the sales price, fixed and variable
costs per unit are constant. Running a CVP analysis involves using several
equations for price, cost, and other variables, which it then plots out on an
economic graph.

The CVP formula can also calculate the breakeven point. The breakeven
point is the number of units that need to be sold or the amount of sales
revenue that has to be generated in order to cover the costs required to
make the product. The CVP breakeven sales volume formula is:

Breakeven Sales Volume=CMFCwhere:FC=Fixed 
costsCM=Contribution margin=Sales−Variable Costs
To use the above formula to find a company's target sales volume, simply
add a target profit amount per unit to the fixed-cost component of the
formula. This allows you to solve for the target volume based on the
assumptions used in the model.

CVP analysis also manages product contribution margin. The contribution

margin is the difference between total sales and total variable costs. For a
business to be profitable, the contribution margin must exceed total fixed
costs. The contribution margin may also be calculated per unit. The unit
contribution margin is simply the remainder after the unit variable cost is
subtracted from the unit sales price. The contribution margin ratio is
determined by dividing the contribution margin by total sales.
The contribution margin is used to determine the breakeven point of sales.
By dividing the total fixed costs by the contribution margin ratio, the
breakeven point of sales in terms of total dollars may be calculated. For
example, a company with $100,000 of fixed costs and a contribution
margin of 40% must earn revenue of $250,000 to break even.

Profit may be added to the fixed costs to perform CVP analysis on the
desired outcome. For example, if the previous company desired a profit of
$50,000, the necessary total sales revenue is found by dividing $150,000
(the sum of fixed costs and desired profit) by the contribution margin of
40%. This example yields a required sales revenue of $375,000.

Special Considerations
CVP analysis is only reliable if costs are fixed within a specified production
level. All units produced are assumed to be sold, and all fixed costs must
be stable in CVP analysis. Another assumption is all changes in expenses
occur because of changes in activity level. Semi-variable expenses must
be split between expense classifications using the high-low method,
scatter plot, or statistical regression.

How Is Cost-Volume-Profit (CVP) Analysis Used?

Cost-volume-profit analysis is used to determine whether there is an
economic justification for a product to be manufactured. A target profit
margin is added to the breakeven sales volume, which is the number of
units that need to be sold in order to cover the costs required to make the
product and arrive at the target sales volume needed to generate the
desired profit. The decision maker could then compare the product's sales
projections to the target sales volume to see if it is worth manufacturing.

What Assumptions Does Cost-Volume-Profit (CVP) Analysis Make?

The reliability of CVP lies in the assumptions it makes, including that the
sales price and the fixed and variable cost per unit are constant. The costs
are fixed within a specified production level. All units produced are
assumed to be sold, and all fixed costs must be stable. Another
assumption is all changes in expenses occur because of changes in
activity level. Semi-variable expenses must be split between expense
classifications using the high-low method, scatter plot, or statistical
regression.

What Is Contribution Margin?

The contribution margin can be stated on a gross or per-unit basis. It
represents the incremental money generated for each product/unit sold
after deducting the variable portion of the firm's costs. Basically, it shows
the portion of sales that helps to cover the company's fixed costs. Any
remaining revenue left after covering fixed costs is the profit generated.
So, for a business to be profitable, the contribution margin must exceed
total fixed costs.

Goods and Services Tax (GST): Definition, Types, and How

It's Calculated
What Is the Goods and Services Tax (GST)?
The goods and services tax (GST) is a value-added tax (VAT) levied on
most goods and services sold for domestic consumption. The GST is paid
by consumers, but it is remitted to the government by the businesses
selling the goods and services.

Critics point out, however, that the GST may disproportionately burden
people whose self-reported income are in the lowest and middle income
brackets, making it a regressive tax.1 These critics argue that GST can
therefore exacerbate income inequality and contribute to social and
economic disparities. In order to address these concerns, some countries
have introduced GST exemptions or reduced GST rates on essential
goods and services, such as food and healthcare. Others have
implemented GST credits or rebates to help offset the impact of GST on
lower-income households.

Goods and services tax should not be confused with the generation-

skipping trust, also abbreviated GST (and its related taxation, GSTT).

KEY TAKEAWAYS

 The goods and services tax (GST) is a tax on goods and services
sold domestically for consumption.
 The tax is included in the final price and paid by consumers at point
of sale and passed to the government by the seller.
 The GST is usually taxed as a single rate across a nation.
 Governments prefer GST as it simplifies the taxation system and
reduces tax avoidance.
 Critics of GST say it burdens lower income earners more than higher
income earners.
Understanding the Goods and Services Tax (GST)
The goods and services tax (GST) is an indirect federal sales tax that is
applied to the cost of certain goods and services. The business adds the
GST to the price of the product, and a customer who buys the product
pays the sales price inclusive of the GST. The GST portion is collected by
the business or seller and forwarded to the government. It is also referred
to as Value-Added Tax (VAT) in some countries.

Most countries with a GST have a single unified GST system, which
means that a single tax rate is applied throughout the country. A country
with a unified GST platform merges central taxes (e.g., sales tax, excise
duty tax, and service tax) with state-level taxes (e.g., entertainment tax,
entry tax, transfer tax, sin tax, and luxury tax) and collects them as one
single tax. These countries tax virtually everything at a single rate.
Dual Goods and Services Tax Structures
Only a handful of countries, such as Canada and Brazil, have a dual GST
structure.4

 Compared to a unified GST economy where tax is collected by the federal government and then
distributed to the states, in a dual system, the federal GST is applied in addition to the state sales tax.
In Canada, for example, the federal government levies a 5% tax and some provinces/states also levy a
provincial state tax (PST), which varies from 8% to 10%.56 In this case, a consumer's receipt will
clearly have the GST and PST rate that was applied to their purchase value.

More recently, the GST and PST have been combined in some provinces
into a single tax known as the Harmonized Sales Tax (HST). Prince
Edward Island was the first to adopt the HST in 2013, combining its federal
and provincial sales taxes into a single tax.7 Since then, several other
provinces have followed suit, including New Brunswick, Newfoundland and
Labrador, Nova Scotia, and Ontario.5 

Critiques of the GST

A GST is generally considered to be a regressive tax, meaning that it takes
a relatively larger percentage of income from lower-income households
compared to higher-income households.8 This is because GST is levied
uniformly on the consumption of goods and services, rather than on
income or wealth.

Lower-income households tend to spend a larger proportion of their

income on consumables, such as food and household goods, which are
subject to GST. As a result, GST can disproportionately burden lower-
income households.

Because of this. some countries with GST are discussing possible

adjustments that might make the tax more progressive, which takes a
larger percentage from higher-income earners.9  

Example: India's Adoption of the GST

India established a dual GST structure in 2017, which was the biggest
reform in the country's tax structure in decades.10 The main objective of
incorporating the GST was to eliminate tax on tax, or double taxation,
which cascades from the manufacturing level to the consumption level.11

For example, a manufacturer that makes notebooks obtains the raw

materials for, say, Rs. 10, which includes a 10% tax. This means that they
pay Rs. 1 in tax for Rs. 9 worth of materials. In the process of
manufacturing the notebook, the manufacturer adds value to the original
materials of Rs. 5, for a total value of Rs. 10 + Rs. 5 = Rs. 15. The 10% tax
due on the finished good will be Rs. 1.50. Under a GST system, the
previous tax paid can be applied against this additional tax to bring the
effective tax rate to Rs. 1.50 – Rs. 1.00 = Rs. 0.50.

In turn, the wholesaler purchases the notebook for Rs. 15 and sells it to
the retailer at a Rs. 2.50 markup value for Rs. 17.50. The 10% tax on the
gross value of the good will be Rs. 1.75, which the wholesaler can apply
against the tax on the original cost price from the manufacturer (i.e., Rs.
15). The wholesaler's effective tax rate will, thus, be Rs. 1.75 – Rs. 1.50 =
Rs. 0.25.

Similarly, if the retailer's margin is Rs. 1.50, his effective tax rate will be
(10% x Rs. 19) – Rs. 1.75 = Rs. 0.15. Total tax that cascades from
manufacturer to retailer will be Rs. 1 + Rs. 0.50 + Rs. 0.25 + Rs. 0.15 =
Rs. 1.90.

India has, since launching the GST on July 1, 2017, implemented the
following tax rates:12 

 A 0% tax rate applied to certain foods, books, newspapers,

homespun cotton cloth, and hotel services.
 A rate of 0.25% applied to cut and semi-polished stones.
 A 5% tax on household necessities such as sugar, spices, tea, and
coffee.
 A 12% tax on computers and processed food.
 An 18% tax on hair oil, toothpaste, soap, and industrial
intermediaries.
 The final bracket, taxing goods at 28%, applies to luxury products,
including refrigerators, ceramic tiles, cigarettes, cars, and
motorcycles.

The previous system, with no GST, implies that tax is paid on the value of
goods and margin at every stage of the production process. This would
translate to a higher amount of total taxes paid, which is carried down to
the end consumer in the form of higher costs for goods and services. The
implementation of the GST system in India is, therefore, a measure that is
used to reduce inflation in the long run, as prices for goods will be lower.

Goods and Services Tax vs. Generation-Skipping Transfer Tax

The goods and services tax (GST) should not be confused with
the generation-skipping transfer tax (GSTT Tax), and they are not at all
related to one another.

The former is a sort of VAT tax added to the purchase of goods or serves.
Meanwhile, the generation skipping transfer tax (GST Tax) is a flat 40%
federal tax on the transfer of inheritances from one's estate to a
beneficiary who is at least 37½ years younger than the donor. The GST
Tax prevents wealthy individuals from avoiding estate taxes through
naming younger beneficiaries (e.g., grandchildren).

Who Has to Pay GST?

In general, goods and services tax (GST) is paid by the consumers or
buyers of goods or services. Some products, such as from the agricultural
or healthcare sectors, may be exempt from GST depending on the
jurisdiction.

How Is GST Calculated?

The goods and services tax (GST) is computed by simply multiplying the
price of a good or service by the GST tax rate. For instance, if the GST is
5%, a $1.00 candy bar would cost $1.05.

What Are the Benefits of the GST?

The GST can be beneficial as it simplifies taxation, reducing several
different taxes into one straightforward system. It also is thought to cut
down on tax avoidance among businesses and reduces corruption.

Are VAT and GST the Same?

Value-added tax (VAT) and goods and services tax (GST) are similar
taxes that are levied on the sale of goods and services. Both VAT and
GST are also indirect taxes, which means that they are collected by
businesses and then passed on to the government as part of the price of
the goods or services.

However, there are some key differences between the two. VAT is
primarily used in European countries and is collected at each stage of the
production and distribution process, while GST is used in countries around
the world and is collected only at the final point of sale to the consumer.
VAT is generally applied to a wider range of goods and services than GST,
and the rate of VAT and GST can vary depending on the type of goods or
services being sold and the country in which they are sold.

The Bottom Line

The goods and services tax (GST) is a type of tax levied on most goods
and services sold for domestic consumption in many countries. It is paid by
consumers and remitted to the government by the businesses selling the
goods and services. Some countries have introduced GST exemptions or
reduced GST rates on essential goods and services or have implemented
GST credits or rebates to help offset the impact of GST on lower-income
households. The GST is often a single rate tax applied throughout a
country and is preferred by governments because it simplifies the taxation
system and reduces tax avoidance. In dual GST systems, such as those in
Canada and Brazil, the federal GST is applied in addition to a state sales
tax. The GST has been identified by critics as regressive and can
potentially place a relatively higher burden on lower-income households.

What are the functions of GST council?

Goods & Services Tax Council (GST Council) is a constitutional body for making
recommendations to the Union and State Government on issues related to Goods and Service
Tax. As per Article 279A (4), the functions of the GST Council include making
recommendations to the Union and the States on important issues like:

 The goods and services that may be subjected or exempted from GST, 
 Model GST Laws, 
 Principles that govern the place of supply, 
 Threshold limits, 
 GST rates including the floor rates with bands, 
 Special rates for raising additional resources during natural calamities/disasters, 
 Special provisions for certain States, etc.

GST Registration Steps

STEP-1: Application at GST Common Portal

The applicant declare his Permanent Account Number, mobile number, e-mail
address and place of registration in Part A of Form GST REG-01 at the GST common
portal.

 The Permanent Account Number shall be validated online by the common

portal from the database maintained by the Central Board of Direct Taxes.

 The mobile number shall be verified through a one-time password sent to the
said mobile number; an

 The e-mail address declared shall be verified through a separate one-time

password sent to the said e-mail address.

On successful verification of PAN, Mobile Number and E-mail address, a Temporary

Reference Number (TRN) shall be generated and communicated to the applicant on
mobile number and e-mail address.

STEP-2: Submission of Documents at GST Common Portal

Using the Temporary Reference Number (TRN), the applicant has to submit an
application in Part B of Form GST REG-01 with required documents at the common
portal duly signed and verified with Digital Signature

STEP-3: Acknowledgement of Application

On receipt of an application an acknowledgement shall be issued electronically to

the applicant in Form GST REG-02.

STEP-4: Verification of the application and approval

The proper officer shall examine the application and the submitted documents within
three days application and if the same are found to be in order, shall approve the
grant of registration to the applicant.

The timeline may vary from time to time. However the result of processing will be
generally available in 7-10 working days of application.

If there is any deficiency in the application or if the officer requires any clarification
on any information provided in the application or documents furnished, he may issue
a notice to the applicant electronically in FORM GST REG-03
The Applicant has to file required details and clarification documents electronically,
in FORM GST REG-04 within a period of 7 working days from the date of receipt of
such notice.

If there no reply is furnished by the applicant within the stipulated time or where the
proper officer is not satisfied with the clarification, the application shall be rejected
by the officer and the same will be communicated to the applicant electronically in
Form GST REG-05.

STEP-5: Issue of GST Registration certificate

After verification of the application by the officer and if the application has been
approved, a certificate of registration in Form GST REG-06 shall be issued to the
applicant on the common portal and a Goods and Services Tax Identification
Number (GSTIN) shall be assigned to the applicant.

Certificate of GST Registration shall be duly signed or verified through electronic

verification code by the officer under the Act. There will not be any physical
certificate issued by the GST Department.

Certificate of GST Registration shall be duly signed or verified through electronic

verification code by the officer under the Act.  There will not be any physical
certificate issued by the GST Department.

Components of GSTIN

GSTIN is a 15 digit alphanumerical number. The Components of GSTIN is as follows:

 First two characters for the State code

 Next Ten characters for the Permanent Account Number or the Tax Deduction
and Collection Account Number of Applicant

 Next two characters for the entity code;

 Last one a checksum character.\

Framework of GST in India:
As India has adopted a Dual GST model as followed in Canada & Brazil.
Centre & States simultaneously levy GST on taxable supply of Goods and Services
which takes place within a State/UT.
Now, Centre has power to tax Intra-State Sales & States have power to tax
services.
GST in India:
GST in India comprises of Intra State Supply and Inter State Supply.
Intra State Supply:
Under Intra State Supply GST is divided into CGST, SGST, and UTGST.
CGST is governed by CGST Act, 2017 in which taxes are levied & collected by
Central Government.
SGST is governed by SGST Act, 2017 in which taxes are levied & collected by SGs
or UTs with State Legislatures.
UTGST is governed by UTGST Act, 2017 in which taxes are levied & collected by
UTs without State Legislatures.
Inter State Supply:
IGST is governed by ITGST Act, 2017 in which taxes Levied & collected by CG on all
inter-State supplies.
IGST will be apportioned between CG & SG in manner provided by Parliament as
per recommendation of GST Council.
IGST = CGST + SGST/UTGST.
GST ACTS:
There are 35 GST Acts in India which are as follows:
1.One Central Goods & Services Tax Act, 2017
2.Thirty-one State Goods & Services Tax Act, 2017
3.One Union Territory Goods & Services Tax Act, 2017
4.One Integrated Goods & Services Tax Act, 2017
5.One The GST (Compensation to States) Act, 2017.
Though there are multiple SGST legislations, basic features of law i.e.
Chargeability,
Definition of taxable event & taxable person, classification & valuation of Goods
and Services, procedure for collection & levy of tax etc. are uniform in all SGST
legislations.
GST Rates:
CGST & SGST would be levied at rates to be jointly decided by Central
Government and State Government on recommendations of GST Council.
Rates of IGST shall be decided by the Centre on the recommendations of the GST
Council.
Highest (Peak) rates of CGST & IGST have been provided in the law @ 20% and
40%.
Tax rates have been fixed at 5%, 12%, 18% and 28%.
Other rates are 0%, 0.25% and 3%.
The rates of GST commodity wise are as follows –
Essential Goods           -           5%
Basic Necessities         -           12%
Revenue Neutral Rate -          18%
Luxury Goods              -           28%    

Difference Between Mixed Supply

and Composite Supply Under GST

Mixed supply under GST refers to the situation where goods and services are
provided at a time. Composite supply under GST refers to the situation where
goods and services are provided separately.

The GST council has decided to levy a 5% tax on the composite supply of goods
and services. This means that the composite supply will be taxed at 5%. The
decision was taken after a lot of discussion about whether to classify it as a mixed
supply or not.
The GST Council in its meeting held in November has finalized the following
provisions for mixed and composite supplies:

1. A composite supply is a supply of goods or services consisting of two or

more supplies that are packaged together for sale to the customer. The
goods and services can be supplied together with or separately.
2. A mixed supply is a supply of goods or services where at least one of the
supplies is zero-rated and at least one other is taxable. The goods and
services can be supplied together with or separately. For example, if a
company sells both taxable and zero-rated food items, it will have to
charge GST on both types of items based on the GST Registration
Process but cannot claim an input tax credit (ITC) on any part of the sale
because all parts are taxable under GST.
Mixed Supply & Composite Supply under GST
The Supply of goods and services is broadly classified into two categories:

1. Mixed Supply
2. Composite Supply
1.  Mixed Supply:
A mixed supply is a supply that includes both taxable and non-taxable goods. A
mixed supply is subject to GST if the value of taxable goods exceeds the value of
non-taxable goods.
Mixed supply is the sale of goods and services together, while composite supply is
a single service rendered to a customer.

Now under GST, composite supplies are subsumed in the definition of mixed
supplies. This means that composite supplies will be taxed at the same rate as
mixed supplies.

Services or works that have been agreed to be done after supply of goods; –
Services or works that have been agreed to be done concurrently with the provision
of goods; – Services or works that are incidental to, necessary for, or
complementary to those being supplied.

2. Composite Supply:
A composite supply is a single unitary transaction that includes both taxable and
non-taxable supplies. Composite supplies are subject to GST if the total value of
taxable supplies exceeds the total value of non-taxable supplies.
The GST Council has decided to levy a tax of 18% on all goods and services,
which are currently taxed at different rates. This would mean that goods and
services will be taxed at a uniform rate of 18%.

There is an exception to this rule. For example, if you purchase a product for
₹1,000 and the product consists of both goods and services, then you would be
charged 18% GST on the total value of the product (₹1,000). However, if you
purchase a service worth ₹500 from a company that is registered under GST with
an 18% tax rate (composite supply), then you would only be charged 18% GST on
the service worth ₹500 (composite supply).
GST: https://www.gst.gov.in/ is a consumption tax. It is applicable to the supply
of goods and services. The GST Council has divided the supply of goods and
services into two categories

GST Registration
GST Composition Scheme
While the introduction of GST has led a large number of businesses to register under the
GST Act 2017, alternative tax registrations such as the composition scheme are also
available for the benefit of smaller businesses. The GST composition scheme, however, does
feature some key changes when compared to the earlier composition scheme that operated
under the earlier VAT regime. The composition scheme under GST is currently applicable to
businesses with aggregate turnover of Rs. 1.5 crores or less (lower limit is applicable in case
of special category states). In the following sections, we will discuss some key features of the
composition scheme under GST.

Composition Scheme Limit

Originally, the composition scheme featured a limit of Rs. 1 crore i.e. only business with an
annual turnover of less than Rs. 1 crore could opt for composition levy registration. The GST
composition scheme turnover limit for north eastern states and hill states such as Sikkim
and Himachal Pradesh was kept lower at Rs. 75 lakhs annually as they have a smaller tax
base as compared to other states in India.

At the 32nd GST Council Meeting held on 10th January 2019, the GST composition scheme
limit for states was increased to Rs. 1.5 crore i.e. businesses/individuals with annual
turnover of up to Rs. 1.5 crore can opt for registration under the GST composition scheme
(applicable from 1st April 2019 onwards). A lower limit for GST composition scheme
turnover limit will be applicable to the North Eastern States and hill states such as Sikkim or
Himachal Pradesh which is yet to be confirmed. This change to the existing composition
scheme will come into effect from the 1st April 2019 onwards.

GST Composition Scheme Rules

Under the provisions of the GST Act, a range of businesses in the manufacturing and
services sectors including restaurants as well as traders are allowed to register under the
composition scheme. However, the GST composition scheme is not applicable to the
following persons/entities*:

         Non-resident taxable person or a casual taxable person

         Businesses/persons supplying goods through an e-commerce portal
operator that collects tax at source (u/s 52).
          Businesses/persons engaged in inter-state supply of goods
         Manufacturer of ice cream and other edible ice with/without cocoa as
additive
         Manufacturer of tobacco products, tobacco substitutes and pan masala
         Businesses/persons who have purchased goods from unregistered
supplier (allowed if GST is paid on such goods on reverse charge basis)
         Suppliers involved in the supply of goods that are exempt under GST Act.

 t should be noted that under existing rules though composition scheme registered
entities/individuals are not allowed to engage in interstate supply of goods/services,
such businesses are allowed to procure goods/services from suppliers that are
allowed to carry out interstate operations under the GST Act. Thus
businesses/individuals registered under the composition scheme can purchase
goods/services from outside the state but cannot sell goods/services to
consumers/businesses outside the state.

Originally services providers other than restaurant services were not allowed to
register under the GST composition scheme. This changed in January 2019 when the
32nd GST Council Meeting announced that services sector businesses (apart from
restaurant services) would also be allowed to register under the composition
scheme.

 Composition Scheme GST Rate

 Businesses/individuals registered under the composition scheme are required to pay
GST at 1% to 6% depending on the type of business activity conducted by the
registered person/business entity. The applicable composition scheme GST rate
features equal SGST/UGST and CGST split i.e. 1% GST = 0.5% CGST + 0.5%
SGST/UGST, 6% GST = 3% SGST/UGST + 3% CGST. The composition levy rates under
GST are as follows:

         1% of the turnover for traders and other suppliers eligible for
composition scheme registration
         2% of the turnover for manufacturers apart from manufacturers of
products not eligible for GST composition scheme
         5% of the turnover for restaurant services  
         6% of the turnover for businesses providing services/mixed services
(other than restaurant services). This is applicable from 1st April 2019
onwards.

The composition levy on services sector businesses other than restaurants is a recent
addition to this list after the 32nd GST Council Meeting announced the composition scheme
for services and mixed services. This composition scheme under GST Act will be applicable
 from 1st April 2019 onwards. Prior to this announcement, services/mixed services
businesses and individuals were not allowed to register under the GST composition scheme.

GST Composition Scheme Return

As per currently applicable GST composition scheme rules, electronic returns on the Official
GST Portal will have to be filed quarterly by the registered businesses/individuals by “the
18th of the month succeeding the last month of the previous quarter”. This in effect means
that for the quarter that ended in December, the GST composition scheme return will have
to be filed online on the 18th of January next month. For composition registered
individuals/businesses, the returns have to be filed using the GSTR-4 Form. You can use
the GSTR-4 Offline Tool to prepare your returns prior to online submission.

Composition Scheme Forms under GST

The following are some of the key forms that composition scheme registered
businesses/individuals are required to fill out for various purposes under current GST
rules*:

Form
Purpose of Form
Number/Name

Intimation for tax payment under composition scheme (for provisionally registered
GST CMP-01
business entity/individual)

GST CMP-02 To opt for composition scheme (unregistered entity/persons)

GST CMP-03 To provide details of stock/inward supply from unregistered business/person

GST CMP-04 To withdraw from GST composition scheme

GST CMP-05 Show cause notice issued by appropriate tax official on contravention of GST Act rules

GST CMP-06 Reply to show cause notice issued in Form GST CMP-05

Order indicating acceptance/rejection of show cause notice reply provided in Form GST
GST CMP-07
CMP-06

GST REG-01 To register under composition scheme

Details of inputs available with the composition registered supplier in the form of raw
GST ITC-01
materials, semi-finished and finished goods

*The list of forms is indicative and other forms may be required in order to apply
for/operate under the GST composition scheme.
GST Composition Scheme Bill Format
Businesses/individuals registered under the composition scheme are not allowed to issue
tax invoices or GST invoices as they cannot charge GST on outward supplies of
goods/services. Thus, a composition dealer has to issue a Bill of Supply in case of outward
supply of goods/services. This bill of supply is mandatorily required to feature the words –
“Composition Taxable Person, Not Eligible to Collect Tax on Supplies” on it. Key details that
need to be included in a Bill of Supply are:

 Supplier name, GST Identification Number (GSTIN) and Address

 Unique serial number termed as bill of supply number
 Date of issue of bill of supply
 Recipient details such as name, address and GSTIN (if registered)
 HSN code of goods being supplied
 Description/quantity of Goods/services (as applicable)
 Total value of supplies (adjusted for applicable discounts)
 Signature/digital signature of the supplier

GST Payments by Composition Registered

Business/Individual
Businesses/individuals registered under the GST composition scheme are not allowed to
claim input tax credit, hence such suppliers have to make GST payments out of pocket.
Some of the key instances where GST payments need to be made by composition scheme
registered dealers include:

 Tax payments on goods received from unregistered dealers

 Tax payments in lieu of goods supplied under reverse charge mechanism
 Tax incurred for import of services

Benefits of GST Composition Scheme Registration

 Reduced compliance requirements, hence suitable for small businesses with
limited resources
 Limited liability in terms of tax payable in lieu of composition levy         
 Higher liquidity for small businesses as tax rates are lower
Limitations of the GST Composition Scheme
Registration
 Limited area of operation as composition dealer cannot engage in inter-state
sales transactions (outward supplies)
 Unavailability of input tax credit mechanism to offset GST payments
 Composition registered businesses cannot supply goods through an e-
commerce portal

Constitutional amendments for Goods and Services Tax 
Constitution (101st Amendment) Act, 2016 was introduced to make
amendments in the Constitution of India for GST. Since the tax was to be
levied on both a central and state basis, it was necessary to introduce
constitutional amendments to maintain consistency across the centre and
state.

Certain articles were amended and altered in order to suit the provisions of
GST legislation.  The applicability and scope of GST laws were introduced,
along with the delineation of powers to make GST laws. The constitution
defined the powers and duties of the GST Council of India. The following
were the major changes as per the Amendment Act.

Special provisions under Article 246A 

Insertion of Article 246A of the Constitution of India gave powers to the
State and Union Legislatures, along with Parliament, to make and amend
GST laws as imposed by them. Parliament is given a special power over the
states to make laws as per inter-state supplies. The IGST Act deals with the
inter-state supplies of the country. Petroleum crude, high-speed diesel,
motor spirit, natural gas, and aviation turbine fuel were excluded from the
article till the time recommended by the GST Council.

Levy and collection of GST under Article 269A 

Article 269A of the Constitution of India describes the manner of revenue
distribution from  inter-state supplies between the centre and state. The GST
Council is empowered to frame the rules in this regard. IGST is levied on
import transactions. With the help of IGST, taxpayers are enabled to avail of
the IGST credit which is paid on imports through the supply chain. This was
not possible before the enactment of GST laws.
Threshold Exemption under GST
Threshold Exemption:
Threshold Exemption means Exemption which allows the person to do
business without obtaining registration under GST.

 In terms of Section 24 read with Section 22, following persons are required
to be compulsorily registered under CGST Act:
1. Every supplier shall be liable to be registered under the CGST
Act in the State from where he makes a taxable supply of goods
and/or services if his aggregate turnover in    a financial year
exceeds Rs. 20 lakh. However, in respect of Special Category
States, the aforesaid threshold registration limit has been
reduced to Rs. 10 lakhs.
2. Person making any inter-state taxable supply (no threshold limit).
3. Causal Taxable Persons (No threshold limit).
4. Persons liable to pay GST under reverse charge (no threshold
limit).
5. Electronic Commerce Operator in respect of specified categories
of services if such services are supplied through it.
6. Non-Resident Taxable Persons.
7. Persons who are required to deduct tax at  source
8. Persons who are required to collect tax at  source
9. Persons who supply goods and/or services on behalf of other
taxable persons whether as an agent or otherwise (no threshold
limit).
10. Input Service Distributor.
11. Persons who supply goods and/or services through Electronic
Commerce Operator who is required to collect tax at source (No
threshold limit).
12. Every Electronic Commerce Operator (No threshold limit).
13. Every person supplying Online Information and Database
Access or Retrieval Services (OIDAR Services) from a place outside
India to a person in India, other  than  a  registered taxable person.
14. Such other person or class of persons as may be notified by
the Government on the recommendation of the Council.
What is a non-taxable supply?
“Non-taxable supply” means a supply of goods or services or both which is
not leviable to tax under the CGST Act or under the IGST Act. A
transaction must be a ‘supply’ as defined under the GST law to qualify as a
non-taxable supply under the GST.

Note: Only those supplies that are excluded from the scope of taxation
under GST are covered by this definition – i.e., alcoholic liquor for human
consumption, articles listed in section 9(2) or in schedule III.

It must also be noted that the following items are not out of the scope of
GST. However, the GST rate has not yet been announced or notified to
them.

 petroleum crude

 high-speed diesel

 motor spirit (commonly known as petrol)

 natural gas and

 aviation turbine fuel

Time of supply means the point in time when

goods/services are considered supplied'. When the
seller knows the 'time', it helps him identify due date
for payment of taxes. Place of supply is required for
determining the right tax to be charged on the invoice,
whether IGST or CGST/SGST will apply.
GST Return Form
Filing Period Due Date in April 2023
Name

GSTR 07 Monthly (March 2023) 10th April

GSTR 08 Monthly (March 2023) 10th April

GSTR 01 (T.O.
more than 1.5 Monthly (March 2023) 11th April
Crore)

GSTR 01 (T.O. upto Quarterly (January 2023- March

13th April
1.5 Crore) 2023)

IFF Optional Monthly (March 2023) 13th April

GSTR 06 Monthly (March 2023) 13th April

Quarterly (January 2023- March

CMP-08 18th April
2023)

GSTR 3B More Annual Turnover of more than INR

20th April
than INR 5cr 5cr in Previous FY – March 2023

Annual Turnover of up to INR 5cr in

GSTR 3B Upto
Previous FY Monthly Filing – March 20th April
than INR 5cr
2023

GSTR 5 Monthly (March 2023) 20th April

GSTR 5A Monthly (March 2023) 20th April

Quarterly (January 2023- March

GSTR-3B G1 22nd April
2023)

Quarterly (January 2023- March

GSTR-3B G2 24th April
2023)
 GSTR-4 Annually 30th April 2023

GSTR 9 & 9C FY 2022-23 31st December 2023

Taxpayers will be eligible to claim the GST

GST RFD-10 Form End of 18 Months refund at the end of 18 months of the
particular quarter

GST RFD-11 Form FY 2023-24 31st March 2024

What is input tax credit?

Input credit means at the time of paying tax on output, you can reduce the
tax you have already paid on inputs and pay the balance amount.

Here’s how:

When you buy a product/service from a registered dealer you pay taxes on
the purchase. On selling, you collect the tax. You adjust the taxes paid at
the time of purchase with the amount of output tax (tax on sales) and
balance liability of tax (tax on sales minus tax on purchase) has to be paid
to the government. This mechanism is called utilization of input tax credit.

For example- you are a manufacturer: a. Tax payable on output (FINAL

PRODUCT) is Rs 450 b. Tax paid on input (PURCHASES) is Rs 300 c.
You can claim INPUT CREDIT of Rs 300 and you only need to deposit Rs
150 in taxes.
 APPLICATIONS OF MARGINAL COSTING
Marginal costing is a technique of ascertaining cost used in any method of
costing. According to this technique, variable costs are charged to cost units
and the fixed cost attributable to the relevant period is written off in full against
the contribution for that period. Contribution is the difference between sales
value and variable cost. The following are the Applications of Marginal
Costing:

1. FIXATION OF SELLING PRICE:

Price is one of the most significant factor that determines the market for the
products as well as the volume of profit for the organization. Under, normal
circumstances, the price of a product must cover the total costs of the product
plus a margin of profit. However, under certain special circumstances, price
has to be fixed even below the total cost.

For instance, when there is a general trade depression (or) exploring new
markets (or) accepting additional orders, the producer has to cut the price
even below the total costs of the concerned product.

Under these special circumstances, the concept of marginal cost is usefully

applied to fit the prices.

2. ACCEPTING BULK ORDERS (OR) FOREIGN MARKET ORDERS

Some bulk orders may be received from local dealers (or) foreign dealers
asking for a price which is below the market price. This calls for a decision to
accept (or) reject the order. The order from a local dealer should not be
accepted at a price below the market price because it will affect the normal
market and goodwill of the company on the other hand, the order from the
foreign dealer should be accepted because it will give additional contribution,
as the fixed costs have already been met.
3. MAKE (OR) BUY DECISION

When the management is confronted with the problem whether it would be

economical to purchase a component or a product from outside sources, or to
manufacture it internally, marginal cost analysis renders useful assistance in
the matter. Under such circumstances, a misleading decision would be taken
on the basis of the total cost analysis. In case the proposal is to buy from
outside then, what is already being made, and the price quoted by the outsider
should be lower than the marginal cost.

If the proposal is to make something what is being purchased outside, the cost
of making should include all additional costs like depreciation on new plant,
interest on capital involved and that cost should be compared with the
purchase price.

4. SELECTION OF SUITABLE PRODUCT MIX

When a factory manufacturers more than one product, a problem is faced by

the management as to which product will give maximum profits. The solution
is the products which give the maximum contribution are to be retained and
their production should be increased.
5. KEY FACTOR

APPLICATIONS OF MARGINAL COSTING

It is also known as limiting factor (or) governing factor or scarce factor. A key
factor is one which restricts production and profit of a business. It may arise
due to the shortage of material, labour, capital

plant capacity (or) sales. Normally, when there is no limiting factor, the
selection of the product will be on the basis of the highest P/V ratio. But, when
there are limiting factors, selection of the product will be on the basis of the
highest contribution per unit of the key factor.

6. MAINTAINING A DESIRED LEVEL OF PROFIT

A company has to cut prices of its products from time to time because of
competition, Government regulations and other compelling reasons. The
contribution per unit on account of such cutting is reduced while the industry is
interested in maintaining a minimum level of its profits. In case the demand for
the company’s product is elastic, the maximum level of profits can be
maintained by pushing up the sales. The volume of such sales can be found
out by marginal costing techniques.
7. ALTERNATIVE METHODS OF PRODUCTION

Marginal costing is helpful in comparing the alternative methods of production

i.e., machine work (or) hand work. The method which gives maximum
contribution is to be adopted keeping in mind the limiting factor.

8. DETERMINATION OF OPTIMUM LEVEL OF ACTIVITY

The technique of marginal costing helps the management in determination the

optimum level of activity. To make such a decision, contribution at different
levels of activity can be found. The level of activity which gives the highest
contribution will be the optimum level. The level of production can be raised till
the marginal cost does not exceed the selling price.

9. EVALUATION OF PERFORMANCE

Evaluation of performance efficiency of various departments or product lines

can be made with the help of marginal costing. The management has to

discontinue the production of non-profitable products or department so as to

maximize the profits. In such cases, decision to discontinue will be on the
basis of the lowest contribution or P/V Ratio.

10. COST CONTROL

The two types of costs-variable and fixed are controllable and non-controllable
respectively. The variable cost is controlled by production department and the
fixed cost is controlled by the management.

11. CLOSURE OF A DEPARTMENT OR DISCONTINUING A PRODUCT

Marginal costing technique shows the contribution of each product to fixed

costs and profit. If a department or a product contributes the least amount,
then the department can be closed (or) its production can be discontinued. It
means the product which gives a higher amount of contribution may be
chosen and the rest should be discontinued.

12. PROFIT PLANNING

here are four ways in which profit performance of a business can be improved:

 (a) by increasing volume;

 (b) by increasing selling price;

 (c) by decreasing variable costs; and

 (d) by decreasing fixed costs.

Profit planning is the planning of future operations to attain maximum profit or

to maintain a specified level of profit. The contribution ratio (which is the ratio
of marginal contribution to sales) indicates the relative profitability of the
different

ectors of the business whenever there is a change in selling price, variable

costs or product mix. Due to the merging together of fixed and variable costs,
absorption costs fail to bring out correctly the effect of any such change on the
profit of the concern.

13. INTRODUCTION OF A NEW PRODUCT

A production firm may add additional products with the available facility. The
new product is sold in the market at a reasonable price, in order to sell it in
large quantities. It may become popular. If favorable, the sales can be
increased. Thus, the total cost comes down and contributes some amount
towards fixed costs and profits.

14. CHOICE OF TECHNIQUE

Every management wishes to manufacture the products at the most

economical way. For this, the marginal costing is a good guide as to the
products at different stages of production, that is to say whether the
management has to adopt hand operated system (or) semi-automatic system
or complete automatic system. When operations are done manually, fixed cost
will be lower than the fixed cost incurred by machines and in complete
automatic system, fixed costs are more

than variable cost.

15. DECISION MAKING

Price must not be less than total cost under normal conditions, Marginal
costing acts as a price fixer and a high margin will contribute to the fixed cost
and profit. But this principle cannot be followed every time. Price should be
equal to marginal cost plus a reasonable amount, which depends upon
demand and supply, competition, policy of pricing etc.
If the price is equal to marginal cost, then there is a loss equal to fixed costs.
Sometimes, the businessman has to face loss when

 There is cut-threat competition

 There is the fear of future market
 That goods are of perishable nature d) the employees cannot be
removed
 A new product is introduced in the market
 Competitors cannot be driven out etc.

16. OFFERING QUOTATIONS

 One of the best ways for sales promotion is to offer quotations at low
rates. A company is producing 80,000 units (80% of capacity) and
making a profit of 2,40,000. Suppose the Punjab Government has given
a tender notice for 20,000 units. It is expected that the units taken by
the Government will not affect the sale of 80,000 units which the
company is already selling and the company also wishes to submit the
lowest possible quotation. The company may quote any amount above
marginal cost, because it will give an additional marginal contribution
and hence profit.
Product Mix Strategy
What is a Product Mix Strategy?
A successful product mix strategy enables a company to
focus efforts and resources on the products and product
lines within its offerings that have the greatest potential
for growth, market share, and revenue.
Product Line vs. Product Mix?
First, it’s important to note how the product line and the
product mix differ.
A product line refers to a product category or brand
marketed by a company. Products within a product line
all perform a similar function, offer similar benefits,
target similar customers, are similarly priced, and
follow similar distribution channels. Important product
line attributes include line stretching, line filling, line
modernization, and line featuring.
A product mix is the total number of product lines and
individual products or services offered by a company.
Additionally referred to as product
assortment or product portfolio. Product mixes vary
from company to company. Some have multiple
product lines with lots of products in each line. But
others are much more limited.
A product mix strategy has four dimensions:
Width Total number of product lines a company
 offers.
Total number of products in a company’s
Length
product mix.
Total number of product variations in a
Depth
product line.
Indicates how product lines relate to one
Consistency ___
another.

A company can have multiple product lines with lots of

products in each line, but it can only have one product
mix.
Key Product Mix Strategies
There are four key product mix strategies:
1. Expansion: A company increases the number of product
lines or depth (i.e., product variations) within lines.
2. Contraction: A company narrows its product mix to
eliminate lower-performing products or lines or to
simplify remaining products or lines.
3. Change an Existing Product: A company improves a
current product rather than creating a completely new
product.
4. Product Differentiation: Without modifying the product
in any way, a company positions it as a superior choice
to a competitive product.

Additional product mix strategies include:

 Deepening Depth: A company keeps existing lines but
expands them.
 Developing New Uses for Existing Products: A company
finds and communicates new uses for current products
without disturbing lines or products.
 Trading Up: A company adds a higher-cost product to an
existing line to improve brand image and increase
demand for its lower-cost products.
 Trading Down: A company adds a lower-cost product to
an existing line of higher-cost products.