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What is a consumption-based tax under GST?

Updated on :  

08 min read.

Goods and Service Tax (GST) is levied in India on the supply of goods and services. It is levied on value addition done at every stage. This article discusses how GST is a consumption-based tax system with meaning and examples.

What is meant by consumption/destination-based tax?

A consumption/ destination-based tax is based on the consumption of goods or services. It is a tax we pay for using goods or services. It is levied at the time of consumption of goods or services. It is like an indirect tax paid at the time of consumption.

Example: Mr A produces goods in West Bengal but sells them in the state of Karnataka. In the consumption-based tax system, the tax would be levied in the state of Karnataka and not West Bengal. Thus, the state where such goods are consumed has the right to collect GST.

In a destination-based taxation system, exports are allowed at zero taxes and imports are taxed at par with domestic production.

Meaning of origin based taxation

Origin based tax is levied at the production of goods or services and not when they are consumed.

Example: Mr X produces goods in West Bengal but sells them in the state of Karnataka. In an origin-based tax system, the tax would be levied in the state of West Bengal and not Karnataka. Thus, the state where goods are produced has the right to collect GST.

In an origin-based taxation system, exports are taxed at par with domestic production, and imports are exempt.

How is GST a destination-based or consumption-based tax system with examples?

In GST, goods and services are taxed for consumption and not production. GST is implemented on the supply of goods or services for consideration. GST is collected in the state where goods or services are consumed and not in the state where they are produced. The State charges State Goods and Service Tax (SGST), and the Centre charges CGST (Central Goods and Service Tax) on the supply of all goods and services within a state. Integrated Goods and Services Tax (IGST) is charged during the inter-state supply of goods or services. It is then transferred to the consuming state, which is the destination state. 

Example:

1. A limited produces cars in the state of Maharashtra and sells them in Gujarat. In GST, IGST would be charged on such supply as an interstate supply. This tax amount will then be transferred to the state of Gujarat as the goods are sold in that state (consuming state).

2. A limited produces cars in Maharashtra and sells them within Maharashtra. In this case, SGST and CGST will be charged in Maharashtra as the consumption took place in Maharashtra.

3. A limited produces cars in Maharashtra and exports the same to other countries. In this case, as the consumption has not taken place in India, such exports will be exempt.