Complete GST lifecycle on one platform Complete GST lifecycle on one platform
Hyper-automation Hyper-automation
Smart reports & recon Smart reports & recon
Accurate filing Accurate filing

What is a consumption-based tax under GST?

By Annapoorna

|

Updated on: Aug 3rd, 2022

|

3 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.

About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

Public Discussion

Get involved!

Share your thoughts!

summary-logo

Quick Summary

Goods and Services Tax (GST) in India is a consumption-based tax levied on the supply of goods and services. It is based on value addition at each stage, with taxes collected at the point of consumption. origin-based tax is levied at production, while destination-based is at consumption. GST is destination-based; taxes collected where goods/services are used. Questions: Why is GST considered a consumption-based tax? How is a destination-based tax different from an origin-based tax? How does GST impact exports in India?

Was this summary helpful?
liked-feedbackliked-feedback

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption