CGST: Central Goods and Services Tax

The Central Goods and Services Tax (CGST) is an important part of India’s GST system, introduced on July 1, 2017. The GST law replaced several old indirect taxes from the central and state governments with one unified system. Let’s take a closer look at CGST, its key features, benefits, and calculation. 

What is CGST?

Beginning with the full form, CGST refers to Central Goods and Services Tax and is a type of indirect tax under Goods and Services Tax (GST) in India. 

CGST Applicability

CGST applies on intrastate transactions, i.e. on goods and services that are traded within the same state. On such transactions, the government collects both CGST and SGST (State Goods and Services Tax). The CGST revenues go to the Central Government, while the SGST revenues goes to the respective state government. 

CGST Rate Structure

Note: You can find all the latest changes along with a detailed list here.

Features of CGST

1. When you buy or sell something within the same state, CGST is the central government's part of the indirect tax applied to that transaction.
2. The GST system lets you deduct the tax you have paid on purchases from the tax you owe on sales, preventing double taxation and lowering costs for everyone.
3. The CGST law works on a self-assessment basis, where taxpayers determine the amount of tax liable to be paid to the government.
4. However, the law contains provisions for CGST audits where necessary to ensure that businesses abide by the regulations in place.
5. In cases of defaults, the CGST law allows the government to recover taxes through demand and recovery provisions.
6. Fines and penalties are imposed on the delayed filing of returns or the late deposit of taxes, to name a few cases, to maintain strictness in the system.

CGST Rules 

Now that the features of CGST have been understood, we recommend that you also go through the CGST rules. These rules can be accessed from the official CBIC website: CGST Rules. 

The following table contains some of the important CGST rules. 

How to Calculate CGST

Here is the formula to calculate CGST:

CGST = (Taxable value of goods or services × CGST rate) ÷ 100

• Taxable value of goods or services: The base price on which tax is levied.
• CGST rate: The percentage rate applicable for the goods/services.

Suppose you sell a product with a base price of ₹10,000, and the applicable GST rate is 18% (split into 9% CGST and 9% SGST).

1. Taxable value: ₹10,000
2. CGST = (₹10,000 × 9) ÷ 100 = ₹900
3. SGST = (₹10,000 × 9) ÷ 100 = ₹900

Total Price = ₹10,000 + ₹900 (CGST) + ₹900 (SGST) = ₹11,800

Benefits of CGST

CGST has multiple benefits, such as: 

• CGST replaces multiple central taxes with one, making compliance easier for businesses.
• With the concept of input tax credit, you can deduct the taxes paid on purchases from the taxes owed on sales.
• The completely digitised network under the GST law ensures that tax filing is simple and transparent for everyone.
• Standardised rates across states create a level playing field for businesses.
• A streamlined tax structure encourages compliance and supports national economic growth.

How Can Businesses Claim ITC on CGST Paid

The concept of Input Tax Credit (ITC) under the GST law helps reduce the tax liability of businesses. It involves the claiming of credit for the CGST paid on purchases at the time of discharging the tax liability on sales. Here’s a concise guide:

Eligibility for Input Tax Credit 

1. GST registration: A valid GSTIN is required.
2. Valid documents: The taxpayer must have a tax invoice or debit note.
3. Eligibility conditions: The recipient must meet all input tax credit eligibility conditions under Section 16 of the CGST Act.
4. Supplier compliance: The supplier must file their returns and pay remit the taxes collected to the government.
5. Business use: The goods/services must be used for business purposes by the recipient.
6. Excluded items: ITC cannot be claimed on personal expenses or blocked credits as per Section 17(5) of the CGST Act.

Steps to Claim ITC

1. Reconcile ITC as per books with the GSTR-2B: Match purchase records as per books of accounts with the auto-generated GSTR-2B statement.
2. File GSTR-3B: Declare eligible ITC for the tax period in the GSTR-3B return.
3. Offset CGST liability: Use the ITC available for the tax period to reduce the CGST owed, and remit the remaining liability in cash.
4. Maintain records: Keep all purchase invoices and proof of payments for audits.

Key Restrictions

• Time limit: Claim ITC for a tax period before 30th November or the annual return filing date, whichever is earlier.
• Proportionate credit: For mixed use (taxable and exempt supplies), claim ITC proportionally.

CGST Example

Let’s take the case of a retailer purchasing goods worth ₹1,00,000 and selling the same goods for ₹1,50,000 to a customer within the same state. Let’s understand how CGST works on this transaction.

• Purchase price of goods: ₹1,00,000 (CGST @9% = ₹9,000).
• Sale price of goods: ₹1,50,000 (CGST @9% = ₹13,500).
• Input tax credit set off: ₹9,000 
• Balance CGST liability payable in cash: ₹13,500 (output tax) - ₹9,000 (input tax) = ₹4,500.