Since GST is a destination based tax, an end user consuming any goods or services is liable to pay the Goods and Services Tax. The tax is received by the State in which the goods or services are consumed and not by the state in which such goods are manufactured. In cases of exports, the seller of the goods or services is exempted from paying the tax.
1. What are the taxes that got replaced by GST?
Unlike earlier when there were multiple taxes such as Central Excise, Service Tax and State VAT etc., under GST, there is just one tax. GST is categorized into CGST, SGST or IGST depending on whether the transaction is Intra-State or Inter-State.
2. What determines if CGST, SGST or IGST is applicable?
To determine whether Central Goods & Services Tax (CGST), State Goods & Services Tax (SGST) or Integrated Goods & Services Tax (IGST) will be applicable in a taxable transaction, it is important to first know if the transaction is an Intra State or an Inter-State supply.
- Intra-State supply of goods or services is when the location of the supplier and the place of supply i.e., location of the buyer are in the same state. In Intra-State transactions, a seller has to collect both CGST and SGST from the buyer. The CGST gets deposited with Central Government and SGST gets deposited with State Government.
- Inter-State supply of goods or services is when the location of the supplier and the place of supply are in different states. Also, in cases of export or import of goods or services or when the supply of goods or services is made to or by a SEZ unit, the transaction is assumed to be Inter-State. In an Inter-State transaction, a seller has to collect IGST from the buyer.
3. What is Central Goods and Services Tax (CGST)?
Under GST, CGST is a tax levied on Intra State supplies of both goods and services by the Central Government and will be governed by the CGST Act. SGST will also be levied on the same Intra State supply but will be governed by the State Government.
This implies that both the Central and the State governments will agree on combining their levies with an appropriate proportion for revenue sharing between them. However, it is clearly mentioned in Section 8 of the GST Act that the taxes be levied on all Intra-State supplies of goods and/or services but the rate of tax shall not be exceeding 14%, each.
4. What is State Goods and Services Tax (SGST)?
Under GST, SGST is a tax levied on Intra State supplies of both goods and services by the State Government and will be governed by the SGST Act. As explained above, CGST will also be levied on the same Intra State supply but will be governed by the Central Government.
Note: Any tax liability obtained under SGST can be set off against SGST or IGST input tax credit only.
An example for CGST and SGST:
Let’s suppose Rajesh is a dealer in Maharashtra who sold goods to Anand in Maharashtra worth Rs. 10,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%. In such case, the dealer collects Rs. 1800 of which Rs. 900 will go to the Central Government and Rs. 900 will go to the Maharashtra Government.
5. What is Integrated Goods and Services Tax (IGST)?
Under GST, IGST is a tax levied on all Inter-State supplies of goods and/or services and will be governed by the IGST Act. IGST will be applicable on any supply of goods and/or services in both cases of import into India and export from India.
Note: Under IGST,
- Exports would be zero-rated.
- Tax will be shared between the Central and State Government.
An example for IGST:
Consider that a businessman Rajesh from Maharashtra had sold goods to Anand from Gujarat worth Rs. 1,00,000. The GST rate is 18% comprised of 18% IGST. In such case, the dealer has to charge Rs. 18,000 as IGST. This IGST will go to the Centre.
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6. Why the split into SGST, CGST, and IGST?
India is a federal country where both the Centre and the States have been assigned the powers to levy and collect taxes. Both the Governments have distinct responsibilities to perform, as per the Constitution, for which they need to raise tax revenue.
The Centre and States are simultaneously levying GST.
The three types tax structure is implemented to help taxpayers take the credit against each other, thus ensuring “One Nation, One Tax”.
7. How is input tax credits adjusted?Offset liability in GST
Let us consider that goods worth Rs. 10,000 are sold by manufacturer A from Maharashtra to Dealer B in Maharashtra.
Dealer B resells them to Trader C in Rajasthan for Rs. 17,500.
Trader C finally sells to end user D in Rajasthan for Rs. 30,000.
Suppose the applicable tax rates for the goods sold are CGST= 9%, SGST=9%, and IGST=9+9=18%
Since A is selling this to B in Maharashtra itself, it is an intra-state sale and so, CGST@9% and SGST@9% will apply.
Dealer B (Maharashtra) is selling to Trader C (Rajasthan). Hence, this is an interstate sale, with IGST@18%.
Trader C (Rajasthan) is selling to end user D also in Rajasthan. Once again it is an intra-state sale and hence, CGST@9% and SGST@9% will apply.
How SGST, CGST and IGST will be collected?
*** Any IGST credit will first be applied to set off in this order:
- First set off against IGST liability.
- Then either set off with CGST or SGST liability, at your preference.
Know further about how ITC optimisation works by reading our article about ITC optimisation under GST.
GST being a consumption-based tax the state where the goods were consumed(Rajasthan) will receive GST. By that logic, Maharashtra (where goods were sold) should not get any taxes. State Rajasthan and Central Government should have got (30,000*9%) = 2,700 each.
Thus, Maharashtra (exporting state) will have to transfer credit of SGST of Rs. 900 (used in payment of IGST) to the Centre.
In turn, Central Government will transfer to state Rajasthan (importing state) Rs. 450 IGST.
The above example shows the need for 3 taxes: SGST, CGST, and IGST. All 3 together will serve the two purposes of GST :
- One Nation, One Tax – so all taxes on all purchases are available as credits.
- Dual tax system – both Centre and states have their revenue.
GST is a completely new tax with new concepts like ‘place of supply’ and new tax structures. This creates confusion with taxpayers who may end up paying the wrong type of GST.
Do you wish to register for GST? Or would you like to know about the input tax credit provisions and the transition provisions under GST? If you’re looking for the right HSN codes for the goods you deal with, we will be glad to help you find one on our ClearTax HSN lookup tool.
We have many articles covering all aspects of GST including impact analysis. We also have an All-In-One GST kit for CAs. Check out our YouTube channel for GST tutorials.