Goods and Services Tax (GST) is major tax reform in India’s indirect tax structure. It is a consumption-based tax imposed on the supply of goods and services. This tax merges a host of indirect taxes into a comprehensive single tax both at the Central and State level. Moreover, the implementation of such a tax introduced a set-off relief mechanism for the smooth flow of input credit across the chain.
Pre GST Indirect Tax Structure
Under the post-independence indirect tax regime, separate Central and State laws were formulated to govern the taxation of goods and services. Therefore, both Central and State governments imposed and collected taxes on goods or services at different points of the supply chain. For instance, the Central Government had powers to levy a tax on the manufacture of goods except for alcoholic liquor, narcotics, etc. Central Excise, Customs, and Service Tax were the major taxes for the Central Government. On the other hand, the states had powers to charge tax on the sale of goods.
A dual GST model was implemented in India. Both the Centre and States have defined functions and responsibilities to implement GST. Furthermore, the dual GST model incorporates two GST components.
1) One imposed by the Central Government
2) The other levied by the State Government. And, depending upon the place and nature of supply, there are four GST components:
- Central GST (CGST)
- State GST (SGST)
- Integrated GST (IGST)
- Union Territory GST (UTGST)
Taxes Subsumed Under GST
The main objective of GST is to consolidate multiple indirect taxes charged under the previous indirect tax structure. Thus, the essence of such a tax regime is to remove the surging effect of multiple taxes. Therefore, Goods and Services Tax (GST) is a well-designed VAT that aims to eliminate distortions existing in the previous indirect tax structure.
Accordingly, the following indirect taxes have been subsumed under GST:
- Countervailing Duty (CVD) of Customs
- Central Excise Duty
- Special Additional Duty of Customs
- Service Tax
- Duties of Excise under Medicinal and Toilet Preparations Act
- Additional Duties of Excise
- Cesses and Surcharges
- Central Sales Tax
- State VAT
- Purchase Tax
- Luxury Tax
- Entry Tax
- Taxes on Lotteries, Betting, and Gambling
- Entertainment Tax
- Taxes on Advertisements
- State Cesses and Surcharges
Applicability of CGST, SGST, IGST
There are 4 components of GST, namely, (i) CGST, (ii) SGST, (iii) IGST and (iv) UTGST. So, the kind of tax to be paid under GST depends on the nature of supply. There can be two types of supply – Inter-State and Intra-State.
1. Intra-State Supply
Any supply where the place of the supplier and the place to supply are in the same State or Union Territory. In case of such a supply of goods and services, a seller has to collect both CGST and SGST. Thereafter, the CGST part gets deposited with the Central Government. And the SGST portion gets deposited with the respective State Government.
2. Inter-State Supply
Any supply where the place of the supplier and the place of supply are in:
- Two different States
- 2 Different Union Territories
- A State and a Union Territory
The following supplies are also treated as Inter-State supplies:
- Supplies to or by Special Economic Zones (SEZs)
- Goods or services imported to India
- Services or goods exported outside India
- Supply of goods or services to international tourists
Thus, on the Inter-State supply of goods or services, only IGST is imposed and collected by the Central Government.
What is CGST, IGST, SGST, and UTGST?
Central Goods and Services Tax (CGST) levy is governed by the Central Goods and Services Act, 2017. This tax is charged on the transaction value of the goods or services supplied. The transaction value is the price actually paid or payable for the supply of goods or services.
Integrated GST is an indirect tax imposed and collected by the Central Government on the inter-state supply of goods or services. Such supplies do not include alcoholic liquor for human consumption.
State Goods and Services Tax (SGST) is levied on the transaction value of the goods or services supplied as per section 15 of the SGST Act. The transaction value is the price actually paid or payable for the said supply of goods or services
This tax levy is governed by the Union Territory Goods and Services Act (UTGST), 2017. And such a tax is charged on the transaction value of goods or services supplied. The transaction value is the price actually paid or payable for the said supply of goods or services.
Claim Input Tax Credit
Let’s understand how Input Tax Credit is claimed under CGST, SGST and IGST, we need to consider the following example:
Say, for instance, Manish a manufacturer in Punjab Supplies goods to Mahesh, a wholesaler in Punjab for Rs 1 Lakh at 18% GST. Mahesh further supplies these goods to Girish, a retailer in Maharashtra, for Rs 1.75 Lakhs at 18% GST. Finally, Girish sells the goods to Ashok, a consumer in Maharashtra for Rs 3 Lakhs, at 18% GST.
Since Manish is selling the goods to Mahesh in Punjab itself, it is an intra-state supply. And for intra-state supplies, both CGST and SGST are charged. Therefore, GST at 18% is equally divided between CGST and SGST. Where CGST imposed is 9% and SGST is 9%.
Then, Mahesh after adding some value sells the goods to Girish in Maharashtra for Rs 1.75 Lakhs at 18% GST. Since this is an inter-state supply, only IGST is levied and collected by the Central Government. Therefore, the entire 18% GST is levied as IGST and gets deposited with the Central Government.
Input Tax Credit (ITC) is credited to a taxpayer’s electronic ledger. The taxpayer may use the ITC to pay the output tax liability. The below table describes the manner of utilization of ITC according to Section 49(5) of the CGST Act, 2017.
|CGST Liability||SGST Liability||IGST Liability|
|First, ITC standing under CGST||First, ITC standing under SGST||First, ITC standing under IGST|
|First, ITC standing under IGST||Then, ITC standing under IGST||Then, ITC standing under CGST|
|Finally, ITC standing under SGST|
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You can also read about impact of GST on Personal Loan.