Goods & Service Tax or GST will be levied on goods and services. It will replace all the various taxes and bring them under one umbrella to make compliance easier. It will replace the following taxes:
(i) Taxes currently levied and collected by the Centre:
- Central Excise duty
- Additional Duties of Customs (commonly known as CVD)
- Special Additional Duty of Customs (SAD)
- Service Tax
(ii) Taxes currently levied and collected by the State:
- State VAT
- Central Sales Tax
- Entertainment and Amusement Tax (except when levied by the local bodies)
- Taxes on lotteries, betting and gambling
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. A dual GST will, therefore, be keeping with the Constitutional requirement of fiscal federalism.
The Centre and States will be simultaneously levying GST.
3 taxes will be implemented to help tax-payers to take credit against each other thus ensuring “One nation one tax”.
What is SGST/CGST/IGST?
The GST to be levied by the Centre on intra-State supply of goods and/or services is Central GST (CGST) and that by the States is State GST (SGST).
On inter-state supply of goods and services, Integrated GST (IGST) will be collected by Centre. IGST will also apply on imports.
GST is a consumption based tax i.e. the tax should be 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. One state has to deal only with the Centre government to settle the tax amounts and not with every other state, thus making the process easier.
For e.g.: – A dealer in Maharashtra sold goods to the consumer 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.
Now, if the dealer in Maharashtra had sold goods to a dealer 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.
How will input tax credits be 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.
*** 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.
The above example shows the need for 3 taxes- SGST, CGST and IGST. All 3 together will serve the purposes of GST namely-
- 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. 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.