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Goods & Service Tax or GST is an Indirect Tax levied on the supply of goods and services. It has replaced various indirect taxes and brought them under one umbrella to make compliance easier. This article will help you understand the taxes under GST regime.

GST has replaced the following taxes:

SGST CGST & IGST

(i) Taxes previously levied and collected by the Centre:

  1.  Central Excise duty
  2.  Additional Duties of Customs (commonly known as CVD)
  3.  Special Additional Duty of Customs (SAD)
  4.  Service Tax

AND

(ii) Taxes previously levied and collected by the State:

  1. State VAT
  2. Central Sales Tax
  3. Entertainment and Amusement Tax (except when levied by the local bodies)
  4. Taxes on lotteries, betting, and gambling
  5. Luxury Tax
  6. Octroi

What is SGST/CGST/IGST?

The GST levied on the intra-State supply of goods or services by the Centre is Central GST (CGST) and that by the States is State GST (SGST).

On inter-state supply of goods and services, Integrated GST (IGST) is collected by Centre. IGST is also applicable on imports.

GST is a consumption based tax i.e. 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. IGST is designed to ensure seamless flow of input tax credit from one state to another. Every state has to deal only with the Central government to settle the tax amounts and not with every other state, thus making the process easier.

For e.g.: – Rajesh, a dealer in Maharashtra 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 and Rs. 900 will go to the central government and Rs. 900 will go to the Maharashtra government.

SGST CGST & IGST

Now, if Rajesh in Maharashtra had sold goods to Anand in Gujarat worth Rs. 1,00,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%. In such case the dealer has to charge Rs. 18,000 as IGST. This IGST will go to the Centre.

SGST CGST & IGST

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Why are we getting 3 taxes -SGST, CGST, 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 levels of Government have distinct responsibilities to perform, as per the Constitution, for which they need to raise resources.

The Centre and States are simultaneously levying GST.

3 types tax structure is implemented to help taxpayers take the credit against each other thus ensuring “One nation one tax”.

 

SGST CGST & IGST

 

How is input tax credits adjusted between states and centre?

Suppose goods worth Rs. 10,000 are sold by manufacturer A in Maharashtra to Dealer B in Maharashtra. 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 CGST= 9%, SGST=9%. Therefore, IGST=9+9=18%

Since A is selling this to B in Maharashtra itself, it is an intra-state sale and both CGST @9% and SGST@9% will apply.

B (Maharashtra) is selling to C (Rajasthan). Since it is an interstate sale, IGST@18% will apply.

C (Rajasthan) is selling to D also in Rajasthan. Once again it is an intra-state sale and both CGST @9% and SGST@9% will apply.

How SGST, CGST and IGST will be collected?
How SGST, CGST and IGST will be collected?

SGST, CGSL, IGST

*** Any IGST credit will first be applied to set off IGST then CGST. Balance will be applied to setoff SGST.

The tax payers work is done till step III. However, GST is a consumption based tax, i.e., the state where the goods were consumed will collect GST. By that logic, Maharashtra (where goods were sold) should not get any taxes. Rajasthan and Central both should have got (30,000*9%) = 2,700 each instead of only 2,250.

Maharashtra (exporting state) will transfer to the Centre the credit of SGST of Rs. 900 used in payment of IGST.

The Centre will transfer to Rajasthan (importing state) Rs. 450 IGST credit used.

Adjustment of CGST, SGST, IGST between state and centre
Adjustment of CGST, SGST, IGST between state and centre

The above example shows the need for 3 taxes- SGST, CGST and IGST. All 3 together will serve the purposes of GST namely-

  1. One nation one tax- so all taxes on all purchases are available as credits.
  2. 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. GST is applicable in the state where the goods/services are consumed i.e., it is a consumption based tax. This can create confusion with taxpayers can end up paying the wrong type of GST such as paying IGST when they have to pay CGST & SGST. So, the GST law has provisions to address these scenarios. 

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? 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.

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